ITEM 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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FORWARD LOOKING STATEMENTS
This report
contains forward-looking statements within the meaning of the securities laws, for which we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. In some
cases, forward-looking statements can be identified by terminology such as expect, anticipate, intend, may, plan, will, should, could, would,
assume, believe, estimate, predict, potential, project, continue, seek and similar expressions, as well as statements in the future tense. We have based
these forward-looking statements on our current expectations and projections about future events, based on information currently available to us. Forward-looking statements should not be read as a guarantee of future performance or results, and will
not necessarily be accurate indications of the times at, or means by, which such performance or results will be achieved.
Forward-looking
statements are subject to risks, uncertainties and assumptions, including those described in the section entitled Risk Factors and elsewhere in this Annual Report on
Form 10-K.
Unforeseen
developments could cause actual performance or results to differ substantially from those expressed in or suggested by the forward-looking statements. Management does not assume responsibility for the accuracy or completeness of these
forward-looking
statements. There is no regulation requiring an update of any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our
expectations.
Our business activities are affected by many factors, including, without limitation, redemptions by mutual fund
shareholders, general economic and financial conditions, movement of interest rates, competitive conditions, industry regulation, and fluctuations in the stock market, many of which are beyond the control of our management. Further, the business and
regulatory environments in which we operate remain complex, uncertain, and subject to change. We expect that regulatory requirements and developments will cause us to incur additional administrative and compliance costs. In addition, while domestic
economic conditions are relatively stable, further increases in short-term interest rates and developments in international financial markets could influence economic and financial conditions significantly. Notwithstanding the variability in our
economic and regulatory environments, we remain focused on the investment performance of the Hennessy Funds and on providing high quality customer service to investors.
Our business strategy centers on (1) the identification, completion and integration of future acquisitions and (2) organic growth,
through both the retention of the mutual fund assets we currently manage and the generation of inflows into the mutual funds we manage. The success of our business strategy may be influenced by the factors discussed in Item 1A, Risk
Factors, above. All statements regarding our business strategy, as well as statements regarding markets trends and risks and assumptions about changes in the marketplace, are
forward-looking
by their
nature.
OVERVIEW
Our primary
operating activity is providing investment advisory services to 16 open-end mutual funds branded as the Hennessy Funds. With respect to each
sub-advised
fund, a
sub-advisor
acts as portfolio manager for the fund, subject to our oversight. We oversee the selection and continued employment of each
sub-advisor,
review each
sub-advisors
investment performance, and monitor each
sub-advisors
adherence to the applicable funds investment objectives, policies, and restrictions. In
addition, we conduct ongoing reviews of the compliance programs of
sub-advisors
and make
on-site
visits to
sub-advisors.
Our
secondary operating activity is providing shareholder services to Investor Class shares of each of the Hennessy Funds, although we have only earned shareholder service fees from Investor Class shares of all of (versus only some of) the Hennessy
Funds since March 1, 2015.
We derive our operating revenue from investment advisory fees and shareholder service fees paid to us by
the Hennessy Funds. These fees are calculated as a percentage of the average daily net assets in each of the Hennessy Funds. The percentage amount of the investment advisory fees vary from fund to fund, but the percentage amount of the shareholder
service fees is consistent across all funds. The dollar amount of the fees we receive fluctuates with changes in the average net asset value of each of the Hennessy Funds, which is affected by each funds investment performance, purchases and
redemptions of shares, general market conditions and the success of our marketing, sales, and public relations efforts.
28
U.S. equity markets continued to be fairly volatile during the twelve months ended
September 30, 2016, but nonetheless succeeded in posting creditable returns. Investor thinking appeared to be dominated by the future course of U.S.
short-term
interest rates throughout the period. A
small rise in
short-term
interest rates in December 2015, together with fears of a slowdown in the Chinese economy, contributed to a sharp decline in equity indices in January of this year. Nevertheless, U.S.
equities rallied over the balance of the year, encouraged by evidence of continued economic growth at home, corporate merger activity, a firm labor market and no further changes in
short-term
interest rates.
U.S. bond prices rose over the period despite the decision by the Federal Reserve to raise
short-term
interest rates at its meeting in December 2015. U.S. bond yields are higher than those in most
developed countries and, over the period, investors worked to address this disparity. A moderate pace of growth in domestic economic activity and no indication of inflationary pressure also helped keep bond yields low.
The Japanese market posted a small negative return over the twelve months ended September 30, 2016. During the year, investors witnessed
the first significant appreciation of the yen since 2012 and were quick to discount the negative effects of a stronger currency on export-sensitive corporate profits growth. Japanese equity markets were also disappointed with the slow pace of
structural reform, an important plank of the current governments policy mix, and also recurring signs of deflation.
We seek to
provide positive annualized returns to investors in the Hennessy Funds on average over a market cycle and to generate net inflows into the Hennessy Funds. During fiscal year 2016, we maintained strong and consistent marketing and sales efforts.
We regularly target over 120,000 financial advisors through our marketing and sales program, and currently serve approximately 18,600 advisors who utilize the Hennessy Funds for their clients. Approximately one in five of those advisors owns two or
more of the Hennessy Funds. We continue to expand our team of sales professionals to serve our advisor community and to assist us with providing services to our over 367,000 mutual fund accounts across the country. In addition, we have a rigorous
public relations effort with the Hennessy brand name appearing on TV, radio, print or online media on average once every two days.
Fourteen of the sixteen Hennessy Funds posted positive performance over the
1-year
period ended
September 30, 2016, and all sixteen Funds achieved positive annualized returns for the
3-year,
5-year,
10-year
and since
inception periods ended September 30, 2016. Total assets under management as of September 30, 2016, were $6.7 billion, an increase of 11.9%, or $711 million, from $6.0 billion as of September 30, 2015 (the end of the prior
comparable period). The increase in total assets is attributable to market appreciation of $525 million and the purchase of assets related to the management of The Westport Funds of $435 million, and was offset by net outflows from the Hennessy
Funds of $249 million. The following table illustrates the changes year by year in our assets under management since the beginning of fiscal year 2012:
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|
|
|
|
|
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Assets Under Management
At Each Fiscal Year Ended 2012-2016
|
|
|
|
9/30/2016
|
|
|
9/30/2015
|
|
|
9/30/2014
|
|
|
9/30/2013
|
|
|
9/30/2012
|
|
|
|
(In thousands)
|
|
Beginning assets under management
|
|
$
|
5,987,985
|
|
|
$
|
5,520,802
|
|
|
$
|
4,034,181
|
|
|
$
|
919,262
|
|
|
$
|
749,310
|
|
Acquisition inflows
|
|
|
434,530
|
|
|
|
|
|
|
|
|
|
|
|
2,222,961
|
|
|
|
|
|
Organic inflows
|
|
|
2,168,840
|
|
|
|
2,603,428
|
|
|
|
2,052,286
|
|
|
|
1,441,677
|
|
|
|
219,654
|
|
Redemptions
|
|
|
(2,417,384
|
)
|
|
|
(1,961,186
|
)
|
|
|
(1,215,493
|
)
|
|
|
(1,198,521
|
)
|
|
|
(235,262
|
)
|
Market appreciation (depreciation)
|
|
|
524,548
|
|
|
|
(175,059
|
)
|
|
|
649,828
|
|
|
|
648,802
|
|
|
|
185,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending assets under management
|
|
$
|
6,698,519
|
|
|
$
|
5,987,985
|
|
|
$
|
5,520,802
|
|
|
$
|
4,034,181
|
|
|
$
|
919,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The principal asset on our balance sheet, management contracts, represents the capitalized costs incurred in
connection with the purchase of assets related to the management of mutual funds. As of September 30, 2016, this asset had a net balance of $74.4 million, compared to $62.7 million at the end of the prior comparable period. The
current period increase is mainly due to payments relating to the purchase of assets related to the management of The Westport Funds, and also to a much lesser extent, the result of costs relating to the proxy vote to seek shareholder approval for a
12b-1 plan for the Hennessy Funds that did not previously have a
12b-1
plan.
The principal
liability on our balance sheet is the bank debt incurred in connection with the purchase of assets related to the management of mutual funds and the repurchase of 1 million shares of the Companys common stock pursuant to the completion of
its self-tender offer in September 2015. As of September 30, 2016, this liability had a balance of $30.6 million.
29
RESULTS OF OPERATIONS
The following table sets forth items in our statements of income and comprehensive income as dollar amounts and as percentages of total revenue
for the periods shown:
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|
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|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
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|
|
|
2016
|
|
|
2015
|
|
|
|
Amounts
|
|
|
Percent
of Total
Revenue
|
|
|
Amounts
|
|
|
Percent
of Total
Revenue
|
|
|
|
(In thousands, except percentages)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
46,391
|
|
|
|
90.2
|
%
|
|
$
|
41,177
|
|
|
|
92.0
|
%
|
Shareholder service fees
|
|
|
5,019
|
|
|
|
9.8
|
|
|
|
3,562
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
51,410
|
|
|
|
100.0
|
|
|
|
44,739
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
11,943
|
|
|
|
23.2
|
|
|
|
9,750
|
|
|
|
21.8
|
|
General and administrative
|
|
|
5,806
|
|
|
|
11.3
|
|
|
|
5,223
|
|
|
|
11.7
|
|
Mutual fund distribution
|
|
|
775
|
|
|
|
1.5
|
|
|
|
2,403
|
|
|
|
5.4
|
|
Sub-advisor fees
|
|
|
8,743
|
|
|
|
17.0
|
|
|
|
7,284
|
|
|
|
16.3
|
|
Amortization and depreciation
|
|
|
353
|
|
|
|
0.7
|
|
|
|
265
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,620
|
|
|
|
53.7
|
|
|
|
24,925
|
|
|
|
55.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,790
|
|
|
|
46.3
|
|
|
|
19,814
|
|
|
|
44.3
|
|
|
|
|
|
|
Interest expense
|
|
|
1,232
|
|
|
|
2.4
|
|
|
|
1,012
|
|
|
|
2.3
|
|
Other income
|
|
|
(2
|
)
|
|
|
(0.0
|
)
|
|
|
(1
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
22,560
|
|
|
|
43.9
|
|
|
|
18,803
|
|
|
|
42.0
|
|
|
|
|
|
|
Income tax expense
|
|
|
8,193
|
|
|
|
16.0
|
|
|
|
7,414
|
|
|
|
16.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,367
|
|
|
|
27.9
|
%
|
|
$
|
11,389
|
|
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues Investment Advisory Fees and Shareholder Service Fees
Total revenue increased 14.9% to $51.4 million in the fiscal year ended September 30, 2016, compared to the prior comparable period.
Investment advisory fees increased 12.7% to $46.4 million in the fiscal year ended September 30, 2016, compared to the prior comparable period. The increase in investment advisory fees is due to increased average daily net assets of the
Hennessy Funds. Average daily net assets of the Hennessy Funds for the fiscal year ended September 30, 2016, increased by $319 million, or 5.3%, to $6.3 billion, versus the prior comparable period. Shareholder service fees increased 40.9% to
$5.0 million in the fiscal year ended September 30, 2016, compared to the prior comparable period. The increase in shareholder service fees is due both to increased average daily net assets of the Hennessy Funds and earning shareholder
service fees from all of the Hennessy Funds as of March 1, 2015, instead of only some of the Hennessy Funds in the prior comparable period.
The Company collects investment advisory fees from each of the Hennessy Funds at differing rates. These annual rates previously ranged between
0.40% to 1.20% of average daily net assets, but now range between 0.40% and 0.90% of average daily net assets because the annual rate of the investment advisory fees for the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund were reduced to
0.80% effective as of March 1, 2016.
The Hennessy Fund with the largest average daily net assets for the fiscal year ended
September 30, 2016, was the Hennessy Focus Fund, with $2.26 billion. The Company collects an investment advisory fee from the Hennessy Focus Fund at an annual rate of 0.90% of average daily net assets. However, the Company pays a
sub-advisor
fee at an annual rate of 0.29% to the Funds sub-advisor, which reduces the net operating profit contribution of the Fund to the Companys financial operations. The Hennessy Fund with the
second largest average daily assets for the fiscal year ended September 30, 2016, was the Hennessy Gas Utility Fund, with $1.47 billion. The Company collects an investment advisory fee from the Hennessy Gas Utility Fund at an annual rate of
0.40% of average daily net assets.
30
Total assets under management as of September 30, 2016, were $6.7 billion, an increase of 11.9% or $711
million, compared with $6.0 billion as of September 30, 2016. The increase in total assets is attributable to market appreciation of $525 million and the purchase of assets related to the management of The Westport Funds of
$435 million, and was offset by net outflows from the Hennessy Funds of $249 million. The Hennessy Funds with the three largest amounts of net inflows for the fiscal year ended September 30, 2016, were as follows:
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|
|
Hennessy Focus Fund: $398 million
|
|
|
|
Hennessy Total Return Fund: $14 million
|
|
|
|
Hennessy Japan Small Cap Fund: $4 million
|
The Hennessy Funds with the three largest amounts of net
outflows for the fiscal year ended September 30, 2016, were as follows:
|
|
|
Hennessy Gas Utility Fund:
-$311
million
|
|
|
|
Hennessy Equity & Income Fund:
-$126
million
|
|
|
|
Hennessy Small Cap Financial Fund:
-$65
million
|
Redemptions as a
percentage of assets under management increased from an average of 2.7% per month during the fiscal year ended September 30, 2015, to 3.2% per month during the fiscal year ended September 30, 2016.
Before February 28, 2015, we waived fees to comply with contractual expense ratio limitations. We waived no fees during the fiscal year
ended September 30, 2016, and we waived total fees of $0.02 million for the fiscal year ended September 30, 2015. The decrease is due to the expiration of all contractual expense ratio limitations as of February 28, 2015.
Operating Expenses
Total operating
expenses increased 10.8% to $27.6 million in the fiscal year ended September 30, 2016, from $24.9 million in the prior comparable period. The increase is due primarily to increases in employee expense and marketing and sales expense
resulting from increased assets under management. As a percentage of total revenue, total operating expenses decreased 2.0 percentage points to 53.7% in the fiscal year ended September 30, 2016, as compared to 55.7% in the prior comparable
period.
Compensation and Benefits Expense
: Compensation and benefits expense increased 22.5% to $11.9 million in the
fiscal year ended September 30, 2016, from $9.8 million in the prior comparable period. The increase is primarily due to increased employment in marketing and sales necessary to support the increase in the Companys assets under
management, as well as an increase in the Companys discretionary bonus pool related to the Companys increased profitability. As a percentage of total revenue, compensation and benefits expense increased 1.4 percentage points to 23.2% for
the fiscal year ended September 30, 2016, compared to 21.8% in the prior comparable period.
General and Administrative
Expense
: General and administrative expense increased 11.2% to $5.8 million in the fiscal year ended September 30, 2016, from $5.2 million in the prior comparable period. The increase resulted primarily from an increase in
outside vendor support, including legal and tax work and cybersecurity consulting, in the current period. As a percentage of total revenue, general and administrative expense decreased 0.4 percentage points to 11.3% in the fiscal year ended
September 30, 2016, from 11.7% in the prior comparable period.
Mutual Fund Distribution Expense
: Mutual fund
distribution expense decreased 67.7% to $0.8 million in the fiscal year ended September 30, 2016, from $2.4 million in the prior comparable period. As a percentage of total revenue, mutual fund distribution expense decreased 3.9 percentage
points to 1.5% for the fiscal year ended September 30, 2016, compared to 5.4% in the prior comparable period.
Mutual fund distribution expense
consists of fees paid to various financial institutions that offer the Hennessy Funds as potential investments to their clients. When the Hennessy Funds are purchased through one of these financial institutions, the institution typically charges an
asset-based
fee, which is recorded in mutual fund distribution expense in our statement of operations to the extent paid by us. When the Hennessy Funds are purchased directly, we do not incur any such
expense. These fees generally increase or decrease in line with the net assets of the Hennessy Funds held through these financial institutions, which are affected by inflows, outflows and fund performance.
31
The decrease in mutual fund distribution expense for the fiscal year ended September 30, 2016, is due to the
implementation of a Distribution
(Rule 12b-1)
Plan for the following Hennessy Funds as of the given dates:
|
|
|
March 1, 2015:
|
|
Hennessy Gas Utility Fund
|
|
|
November 1, 2015:
|
|
Hennessy Cornerstone Growth Fund
|
|
|
Hennessy Cornerstone Mid Cap 30 Fund
Hennessy Cornerstone Large Growth Fund
|
|
|
Hennessy Cornerstone Value Fund
|
|
|
Hennessy Large Value Fund
|
|
|
March 1, 2016:
|
|
Hennessy Japan Fund
Hennessy Japan Small Cap
Fund
|
These distribution plans charge their respective Funds an annual rate of 0.15% (though 0.25% is the maximum allowable) of
average daily net assets to pay for sales, distribution and other expenses. Each distribution plan therefore allows its Fund to use its distribution plan fees to offset fees charged by financial institutions that offer the Hennessy Funds as
potential investments to their clients. Therefore, as of the dates listed above, a portion of the mutual fund distribution expense previously paid by the Company began to be offset by payments made by the respective Funds pursuant to their
distribution plans.
Sub-Advisor Fee Expense
: Sub-advisor fee expense increased 20.0% to $8.7 million in the fiscal year ended
September 30, 2016, from $7.3 million in the prior comparable period. The increase is a result of the increase in average assets under management due to market appreciation in the portfolio securities held by the sub-advised Hennessy Funds
and net inflows into certain sub-advised Hennessy Funds. As a percentage of total revenue, sub-advisor fee expense increased 0.7 percentage points to 17.0% for the fiscal year ended September 30, 2016, compared to 16.3% in the prior comparable
period.
Amortization and Depreciation Expense
: Amortization and depreciation expense increased 33.2% to $0.4 million in
the fiscal year ended September 30, 2016, from $0.3 million in the prior comparable period. The increase is mainly a result of a higher fixed asset base for the twelve months ended September 30, 2016, compared to the prior comparable
period. As a percentage of total revenue, amortization and depreciation expense increased 0.2 percentage points to 0.7% for the fiscal year ended September 30, 2016, compared to 0.5% in the prior comparable period.
Interest Expense
: Interest expense increased 21.7% to $1.2 million in the fiscal year ended September 30, 2016, from
$1.0 million in the prior comparable period. The increase is due primarily to an increase to the Companys principal loan balance that occurred September 17, 2015, and was used to fund in part the Companys
self-tender
offer. As a percentage of total revenue, interest expense increased 0.1 percentage points to 2.4% for the fiscal year ended September 30, 2016, compared to 2.3% in the prior comparable period.
Income Tax Expense
: Income tax expense increased 10.5% to $8.2 million in the fiscal year ended September 30, 2016, from
$7.4 million in the prior comparable period. This change is due to increased income before income tax expense in the current period and was partially offset by changes in state apportionment factors. As a percentage of total revenue, income tax
expense decreased 0.5 percentage points to 16.0% for the fiscal year ended September 30, 2016, compared to 16.5% in the prior comparable period.
Net Income
Net income increased by 26.1%
to $14.4 million in the fiscal year ended September 30, 2016, from $11.4 million in the prior comparable period, as a result of the factors discussed above.
OFF-BALANCE SHEET ARRANGEMENTS
We do not
have and have not had any off-balance sheet arrangements.
LIQUIDITY AND CAPITAL RESOURCES
We continually review our capital requirements to ensure that we have sufficient funding available to support our growth strategies. Management
anticipates that cash and other liquid assets on hand as of September 30, 2016, will be sufficient to meet our short-term capital requirements. To the extent that liquid resources and cash provided by operations are not adequate to meet
long-term capital requirements, management plans to raise additional capital by either, or both of, seeking to increase our borrowing capacity or accessing the capital markets. There can be no assurance that we will be able to raise additional
capital.
32
Total assets under management as of September 30, 2016, were $6.7 billion, which was an
increase of $711 million, or 11.9%, from September 30, 2015. The primary source of our revenue, liquidity and cash flow are our investment advisory fees and shareholder service fees, which are based on and generated by our average assets under
management. Property and equipment and management contracts purchased totaled $74.7 million as of September 30, 2016. As of September 30, 2016, we had cash and cash equivalents of $3.5 million.
The following table summarizes key financial data relating to our liquidity and use of cash for the years ended September 30, 2016 and
2015:
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|
|
|
|
|
|
|
|
|
For the Fiscal Year
Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
$
|
18,187
|
|
|
$
|
14,456
|
|
Investing cash flows
|
|
|
(11,862
|
)
|
|
|
(450
|
)
|
Financing cash flows
|
|
|
(5,876
|
)
|
|
|
(18,565
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
449
|
|
|
$
|
(4,559
|
)
|
|
|
|
|
|
|
|
|
|
The increase in cash provided by operating activities of $3.7 million is mainly due to an increase in net
income from the prior year.
The increase in cash used for investing activities is due to costs associated with purchasing the assets
related to the management of The Westport Funds in the current year.
The decrease in cash used by financing activities is due to the
repurchase of 1,000,000 shares of our common stock at $25 per share pursuant to our self-tender offer in the prior year.
Dividend
Payments
. A quarterly cash dividend of $0.06 per share was paid on December 9, 2015, to shareholders of record as of November 16, 2015. Additionally, quarterly cash dividends of $0.08 per share were paid on March 7, 2016, to
shareholders of record as of February 12, 2016; on June 13, 2016, to shareholders of record as of May 19, 2016; and on September 12, 2016, to shareholders of record as of August 18, 2016. The total payment from cash on hand
was $1.5 million.
Our Bank Loan
. We have an outstanding bank loan with U.S. Bank National Association, as administrative
agent (in such capacity, Agent) and as a lender, and California Bank & Trust, as syndication agent and as a lender, which replaced and refinanced our bank loan previously entered into by Hennessy Advisors and U.S. Bank on
October 26, 2012 and amended on November 1, 2013. Immediately prior to September 17, 2015, our bank loan had an outstanding principal balance of $23.0 million. On September 17, 2015, in anticipation of the repurchase of up
to 1,000,000 shares of our common stock at $25 per share pursuant to our
self-tender
offer, we entered into a new term loan agreement to fund in part our
self-tender,
thereby increasing our total loan balance to $35.0 million. Then, on September 19, 2016, we entered into an amendment to our term loan agreement with the Agent and the lenders to allow us to consummate the purchase of assets related to the
management of the Westport Fund and the Westport Select Cap Fund. In addition, the amendment revised one of the financial covenants in the term loan agreement.
Our current term loan agreement requires 48 monthly payments in the amount of $364,583 plus interest, at our option, at either:
(1) LIBOR plus a margin that ranges from 2.75% to 3.25%, depending on our ratio of consolidated debt to consolidated earnings before
interest, taxes, depreciation and amortization (excluding, among other things, certain non-cash gains and losses) (EBITDA), or
(2) the sum of (a) the highest of the prime rate set by U.S. Bank from time to time, the Federal Funds Rate plus 0.50%, or one-month
LIBOR plus 1.00%, and (b) a margin that ranges from 0.25% to 0.75%, depending on our ratio of consolidated debt to consolidated EBITDA.
33
From the effective date of our current term loan agreement through February 29, 2016, the
interest rate in effect was U.S. Banks prime rate plus a margin. The applicable margin was initially 0.75% and then decreased to 0.5% as of January 21, 2016, based on the Companys ratio of consolidated debt to consolidated EBITDA as
of December 31, 2015. This margin decrease reduced the effective interest rate on the term loan from 4.25% to 4.0%. Effective March 1, 2016, the Company converted $32.8 million of its principal loan balance to a 1-month LIBOR
contract, which has been renewed each subsequent month. As of September 30, 2016, the effective rate is 3.52322%, which is comprised of the LIBOR rate of 0.52322% as of September 1, 2016, plus a margin of 3.0% based on the Companys
ratio of consolidated debt to consolidated EBITDA as of June 30, 2016. The Company intends to renew the
1-month
LIBOR contract on a monthly basis provided that the
LIBOR-based
interest rate remains favorable to the prime
rate-based
interest rate.
All borrowings under the term loan agreement are secured by substantially all of our assets. The final installment of the
then-outstanding
principal and interest is due September 17, 2019.
Our current term loan agreement
includes certain reporting requirements and loan covenants requiring the maintenance of certain financial ratios. We are in compliance with our loan covenants as of September 30, 2016. As of September 30, 2016, we had $30.6 million
currently outstanding under our bank loan.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of September 30, 2016, consisting of loan payments, including the related
interest payments due, and operating lease payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
More Than
5 Years
|
|
|
|
(In thousands)
|
|
Principal on bank loan
|
|
$
|
30,625
|
|
|
$
|
4,010
|
|
|
$
|
26,615
|
|
|
$
|
|
|
|
$
|
|
|
Interest on bank loan (1)
|
|
|
2,510
|
|
|
|
932
|
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
Operating lease (2)
|
|
|
1,852
|
|
|
|
185
|
|
|
|
883
|
|
|
|
784
|
|
|
|
|
|
Operating lease (3)
|
|
|
88
|
|
|
|
69
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Operating lease (4)
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,084
|
|
|
$
|
5,205
|
|
|
$
|
29,095
|
|
|
$
|
784
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The interest payable on the bank loan is calculated at the current effective rate as of September 30, 2016, of 3.52322%, which is based on the one-month LIBOR rate of 0.52322% plus 3.00%.
|
(2)
|
This lease is for our principal executive office located at 7250 Redwood Boulevard, Suite 200, Novato, California 94945.
|
(3)
|
This lease is for the lease of office space located at 101 Federal Street, Suite 1900, Boston, Massachusetts, 02110.
|
(4)
|
This lease is for the lease of office space located at 1340 Environ Way, #305, Chapel Hill, North Carolina, 27517.
|
CRITICAL ACCOUNTING POLICIES
Our
financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments, and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These accounting policies, methods, and estimates are an integral part of the financial statements
prepared by management and are based upon managements current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies,
methods, and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from managements current judgment. Described below
are the accounting policies that we believe are most critical to understanding our results of operations and financial position.
Our
operating revenues consist of contractual investment advisory and shareholder service fees. We earn our investment advisory fees through portfolio management of the Hennessy Funds, and we earn our shareholder service fees by assisting investors
in purchases, sales, distribution and customer service. These fee revenues are earned and calculated daily by the Hennessy Funds accountants. In accordance with the Financial Accounting Standards Board (FASB) guidance on
revenue recognition, we recognize fee revenues monthly. Our 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.
34
The management contracts we have purchased are considered intangible assets with an indefinite
life. In July 2012, the FASB issued amendments to Accounting Standards Update (ASU) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendments is to reduce the cost and
complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The
amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative
impairment test in accordance with Subtopic 350-30, IntangiblesGoodwill and OtherGeneral Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If an
entity determines that it is more likely than not that an
indefinite-lived
intangible asset is impaired, then it must conduct an impairment analysis. Previously, an entity was required to conduct an impairment
analysis at least annually. The guidance provided by this update was effective for fiscal years beginning after September 15, 2012 (the Companys fiscal year 2013). The standard was adopted October 1, 2012, and allows the Company to
forego the annual impairment analysis as the more-likely-than-not threshold is met as of September 30, 2016.
The costs related to
our purchase of assets related to the management of mutual funds are capitalized as incurred. The costs are defined as an intangible asset per FASB standard Intangibles Goodwill and Other. The acquisition costs include
legal fees, fees for soliciting shareholder approval and a percent of asset costs to purchase the management contracts. The amounts are included in the management contract asset totaling $74.4 million as of September 30, 2016.
Recent Accounting Standards
In August
2015, the FASB issued Accounting Standards Update No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line-of-Credit Arrangements that simplifies the
presentation of debt issuance costs. Under the new guidance, debt issuance costs related to term loans should be presented as a direct deduction from the carrying amount of the associated debt liability. The new standard is effective for fiscal
years beginning after December 15, 2015, and interim periods within those fiscal years (our fiscal year 2017). The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or cash
flows.
In November 2015, the FASB issued Accounting Standards Update
No. 2015-17
Balance Sheet Classifications of Deferred Taxes. The standard simplifies the presentation of deferred income taxes under U.S. GAAP by requiring that all deferred tax assets and liabilities be classified as
non-current.
The effective date for the new standard is for annual periods beginning after December 15, 2016, including interim periods within that reporting period (our fiscal year 2018). The adoption of
this standard is not expected to have a material impact on our financial condition, results of operations or cash flows.
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments under this pronouncement will change the way all leases with duration of one year of more are treated. Under this guidance, lessees will be required to
capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. This update is effective for annual reporting periods, and interim periods within those reporting
periods, beginning after December 15, 2018 (our fiscal year 2020). We are currently evaluating the impact this standard will have on our policies and procedures pertaining to our existing and future lease arrangements, disclosure requirements
and on our financial statements.
In March 2016, the FASB issued Accounting Standards Update
No. 2016-09
CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard simplifies several aspects of the accounting for
share-based payment award transactions, including: (1) income tax consequences; (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The effective date for the new
standard is for annual periods beginning after December 15, 2016, including interim periods within that reporting period (our fiscal year 2018). The adoption of this standard is not expected to have a material impact on our financial
condition, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), a
consensus of the FASBs Emerging Issues Task Force, which provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for fiscal years
beginning after December 15, 2016 and interim periods within those fiscal years (our fiscal year 2018). The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or cash flows.
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
37
Managements Annual Report on Internal Control over Financial
Reporting
Management of Hennessy Advisors, Inc. (the Company) is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of
September 30, 2016, using the criteria set forth in 2013 Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Companys management
concluded that, as of September 30, 2016, the Companys internal control over financial reporting was effective based on those criteria.
Our independent registered public accounting firm, Marcum LLP, audited the effectiveness of our internal control over financial reporting.
Marcum LLPs attestation report appears in Part II Item 8. Financial Statements and Supplementary Data.
38
Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting
To the Audit Committee of the Board of Directors and Shareholders of Hennessy Advisors, Inc.:
We have audited Hennessy Advisors, Inc.s internal control over financial reporting as of September 30, 2016, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Hennessy Advisors, Inc.s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Hennessy Advisors, Inc.s internal control over financial reporting based on our audit.
We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies
or procedures may deteriorate.
In our opinion, Hennessy Advisors, Inc. maintained, in all material aspects, effective internal control
over financial reporting as of September 30, 2016, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as
of September 30, 2016 and 2015, and the related statements of income, changes in stockholders equity, and cash flows for the years then ended of Hennessy Advisors, Inc. and our report dated December 1, 2016, expressed an unqualified
opinion on those financial statements.
/s/ Marcum LLP
San
Francisco, California
December 1, 2016
39
Report of Independent Registered Public Accounting Firm
To the Audit Committee of the Board of Directors and Shareholders of Hennessy Advisors, Inc.:
We have audited the accompanying balance sheets of Hennessy Advisors, Inc. as of September 30, 2016 and 2015, and the related statements
of income, changes in stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of Hennessy Advisors, Inc.s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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 also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide 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, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Hennessy Advisors, Inc.s internal control over financial reporting as of September 30, 2016, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013) and our report dated December 1, 2016, expressed an unqualified opinion on the effectiveness of Hennessy Advisors, Inc.s internal control over financial reporting.
/s/ Marcum LLP
San Francisco, California
December 1, 2016
40
Hennessy Advisors, Inc.
Balance Sheets
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,535
|
|
|
$
|
3,086
|
|
Investments in marketable securities, at fair value
|
|
|
8
|
|
|
|
7
|
|
Investment fee income receivable
|
|
|
4,230
|
|
|
|
4,052
|
|
Prepaid expenses
|
|
|
1,175
|
|
|
|
1,049
|
|
Deferred income tax asset
|
|
|
607
|
|
|
|
683
|
|
Other current assets
|
|
|
580
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,135
|
|
|
|
9,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $940 and $733, respectively
|
|
|
296
|
|
|
|
319
|
|
Management contracts
|
|
|
74,359
|
|
|
|
62,681
|
|
Deferred offering costs
|
|
|
13
|
|
|
|
12
|
|
Other assets, net of accumulated amortization of $475 and $328, respectively
|
|
|
577
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
85,380
|
|
|
$
|
73,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities and accounts payable
|
|
$
|
6,578
|
|
|
$
|
4,699
|
|
Income taxes payable
|
|
|
383
|
|
|
|
1,097
|
|
Deferred rent
|
|
|
32
|
|
|
|
94
|
|
Current portion of long-term debt
|
|
|
4,375
|
|
|
|
4,375
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,368
|
|
|
|
10,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
26,250
|
|
|
|
30,625
|
|
Deferred income tax liability
|
|
|
10,431
|
|
|
|
9,148
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
48,049
|
|
|
|
50,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Adjustable rate preferred stock, $25 stated value, 5,000,000 shares authorized: zero shares issued
and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value, 15,000,000 shares authorized: 5,107,979 shares issued and outstanding
at September 30, 2016 and 5,046,628 at September 30, 2015
|
|
|
13,279
|
|
|
|
11,654
|
|
Retained earnings
|
|
|
24,052
|
|
|
|
11,441
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
37,331
|
|
|
|
23,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
85,380
|
|
|
$
|
73,133
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
41
Hennessy Advisors, Inc.
Statements of Income
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
46,391
|
|
|
$
|
41,177
|
|
Shareholder service fees
|
|
|
5,019
|
|
|
|
3,562
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
51,410
|
|
|
|
44,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
11,943
|
|
|
|
9,750
|
|
General and administrative
|
|
|
5,806
|
|
|
|
5,223
|
|
Mutual fund distribution
|
|
|
775
|
|
|
|
2,403
|
|
Sub-advisor fees
|
|
|
8,743
|
|
|
|
7,284
|
|
Amortization and depreciation
|
|
|
353
|
|
|
|
265
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,620
|
|
|
|
24,925
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,790
|
|
|
|
19,814
|
|
|
|
|
Interest expense
|
|
|
1,232
|
|
|
|
1,012
|
|
Other income, net
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
22,560
|
|
|
|
18,803
|
|
|
|
|
Income tax expense
|
|
|
8,193
|
|
|
|
7,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,367
|
|
|
$
|
11,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.84
|
|
|
$
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.79
|
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,067,055
|
|
|
|
5,887,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,145,310
|
|
|
|
5,960,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share:
|
|
$
|
0.30
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
42
Hennessy Advisors, Inc.
Statements of Changes in Stockholders Equity
Years Ended September 30, 2016 and 2015
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Retained
Earnings
|
|
|
Total
Stockholders
Equity
|
|
Balance at September 30, 2014
|
|
|
6,019,276
|
|
|
$
|
10,852
|
|
|
$
|
26,562
|
|
|
$
|
37,414
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
11,389
|
|
|
|
11,389
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(1,383
|
)
|
|
|
(1,383
|
)
|
Shares issued for dividend reinvestment pursuant to the 2015 Dividend Reinvestment and Stock
Purchase Plan
|
|
|
118
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
Shares issued for auto-investments pursuant to the 2015 Dividend Reinvestment and Stock Purchase
Plan
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock pursuant to self-tender offer, including costs of $55,655
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
(25,056
|
)
|
|
|
(25,056
|
)
|
Employee and director restricted stock vested
|
|
|
34,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of vested employee restricted stock for tax withholding
|
|
|
(6,853
|
)
|
|
|
(71
|
)
|
|
|
(68
|
)
|
|
|
(139
|
)
|
Deferred restricted stock unit compensation
|
|
|
|
|
|
|
692
|
|
|
|
|
|
|
|
692
|
|
Tax effect of restricted stock unit vesting
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
|
5,046,628
|
|
|
$
|
11,654
|
|
|
$
|
11,441
|
|
|
$
|
23,095
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
14,367
|
|
|
|
14,367
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
(1,500
|
)
|
Shares issued for dividend reinvestment pursuant to the 2015 Dividend Reinvestment and Stock
Purchase Plan
|
|
|
609
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
|
|
Shares issued for auto-investments pursuant to the 2015 Dividend Reinvestment and Stock Purchase
Plan
|
|
|
490
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Employee and director restricted stock vested
|
|
|
79,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of vested employee restricted stock for tax withholding
|
|
|
(19,248
|
)
|
|
|
(282
|
)
|
|
|
(236
|
)
|
|
|
(518
|
)
|
Deferred restricted stock unit compensation
|
|
|
|
|
|
|
1,416
|
|
|
|
|
|
|
|
1,416
|
|
Tax effect of restricted stock unit vesting
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
|
5,107,979
|
|
|
$
|
13,279
|
|
|
$
|
24,052
|
|
|
$
|
37,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
43
Hennessy Advisors, Inc.
Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,367
|
|
|
$
|
11,389
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
353
|
|
|
|
265
|
|
Deferred income taxes
|
|
|
1,359
|
|
|
|
1,308
|
|
Tax effect from restricted stock units
|
|
|
456
|
|
|
|
178
|
|
Restricted stock units repurchased for employee tax withholding
|
|
|
(518
|
)
|
|
|
(139
|
)
|
Deferred restricted stock unit compensation
|
|
|
1,416
|
|
|
|
692
|
|
Unrealized gains on marketable securities
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Investment fee income receivable
|
|
|
(178
|
)
|
|
|
(910
|
)
|
Prepaid expenses
|
|
|
(126
|
)
|
|
|
(448
|
)
|
Other current assets
|
|
|
(45
|
)
|
|
|
(91
|
)
|
Other assets
|
|
|
1
|
|
|
|
2
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities and accounts payable
|
|
|
1,879
|
|
|
|
1,161
|
|
Income taxes payable
|
|
|
(714
|
)
|
|
|
1,097
|
|
Current portion of deferred rent
|
|
|
(62
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
18,187
|
|
|
|
14,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(184
|
)
|
|
|
(258
|
)
|
Payments related to acquisition of management contracts
|
|
|
(11,678
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,862
|
)
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on bank loan
|
|
|
(4,375
|
)
|
|
|
(3,750
|
)
|
Payoff of previous bank loan
|
|
|
|
|
|
|
(22,972
|
)
|
Proceeds from new bank loan
|
|
|
|
|
|
|
35,000
|
|
Loan fee payments on bank loan
|
|
|
(15
|
)
|
|
|
(392
|
)
|
Deferred offering costs
|
|
|
(1
|
)
|
|
|
(12
|
)
|
Proceeds from shares issued for auto-investments pursuant to the 2015 Dividend Reinvestment and
Stock Repurchase Plan
|
|
|
15
|
|
|
|
|
|
Dividend payments
|
|
|
(1,500
|
)
|
|
|
(1,383
|
)
|
Repurchase of common stock pursuant to self-tender offer, including costs of $55,655
|
|
|
|
|
|
|
(25,056
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,876
|
)
|
|
|
(18,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
449
|
|
|
|
(4,559
|
)
|
|
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
3,086
|
|
|
|
7,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
3,535
|
|
|
$
|
3,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
6,960
|
|
|
$
|
5,194
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,190
|
|
|
$
|
1,004
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
44
Notes to Financial Statements Fiscal Years Ended
September 30, 2016 and 2015
(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 Companys 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 Companys 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
acting as portfolio manager for the fund, which includes managing the composition of the funds
portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with the funds investment objectives, policies, and restrictions), seeking best execution for the funds portfolio, managing the use of
soft dollars for the fund, and managing proxy voting for the fund;
|
|
|
|
performing a daily reconciliation of portfolio positions and cash for the fund;
|
|
|
|
monitoring the funds 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 funds service providers (including its
sub-advisor,
as applicable), conducting
on-site
visits to the funds service providers (including its
sub-advisor,
as
applicable), monitoring incidents of abusive trading practices, reviewing fund expense accruals, payments, and fixed expense ratios, evaluating insurance providers for fidelity bond coverage, D&O/E&O insurance coverage, and cybersecurity
insurance coverage, conducting employee compliance training, reviewing reports provided by service providers, maintaining books and records, and preparing an annual compliance report to the Board of Trustees of Hennessy Funds Trust (the
Funds Board of Trustees);
|
|
|
|
overseeing the selection and continued employment of the funds
sub-advisor,
if applicable, monitoring such sub-advisors adherence to the funds investment
objectives, policies, and restrictions, and reviewing the funds investment performance;
|
|
|
|
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
marketing and distribution departments on behalf of the fund;
|
|
|
|
being actively involved with preparing all regulatory filings for the fund, including writing and annually updating the funds prospectus and related documents;
|
|
|
|
preparing or reviewing a written summary of the funds performance for the most recent
twelve-month
period for each annual report of the fund;
|
|
|
|
monitoring and overseeing the accessibility of the fund on third party platforms;
|
|
|
|
paying the incentive compensation of the funds 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.
|
45
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 Companys 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.
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
investments. A table of
investments is included in Footnote 4.
Marketable securities classified as
available-for-sale
are reported at fair value, with net unrealized gains or losses recorded in accumulated other comprehensive income (loss), a separate component of stockholders equity, until realized.
Realized gains and losses on investments are computed based upon specific identification and are included in interest and other income (expense), net. Investments designated as trading securities are stated at fair value, with gains or losses
resulting from changes in fair value recognized in the income statement.
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
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)
|
Management Contracts Purchased
|
The Company has purchased assets related to the
management of
open-end
mutual funds from time to time throughout its history. Prior to September 30, 2014, the Company had completed several purchases of assets related to the management of 23 different
mutual funds, some of which were reorganized into already existing Hennessy Funds. In accordance with guidance issued by the Financial Accounting Standards Board, 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 are 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 Companys management that there was no impairment as of September 30, 2016 or 2015.
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.
46
|
(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 Companys 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.
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 companys 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 Companys 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.
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.
47
|
(i)
|
Stock-Based Compensation
|
Effective January 17, 2013, the Company
established, and the Companys 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 Companys 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 Companys common stock on the date specified in the recipients 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 Companys 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.
|
48
|
|
|
|
|
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 RSUs 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.
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.
(2)
|
Investment Advisory Agreements
|
The Company has management contracts with
Hennessy Funds Trust, under which it provides investment advisory services to all classes of the 16 Hennessy Funds.
The
management contracts must be renewed annually (except in limited circumstances) by (i) the Funds Board of Trustees or by the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (2) by the vote of a
majority of the trustees of Hennessy Funds Trust who are not interested persons of the Hennessy Funds (the disinterested trustees). If the management contracts are not renewed annually as described above, they will terminate
automatically. In addition, there are two other circumstances in which the management contracts would terminate. First, the management contracts would automatically terminate if the Company assigned them to another advisor (assignment includes
indirect assignment, which is the transfer of the Companys common stock in sufficient quantities deemed to constitute a controlling block). Additionally, each management contract may be terminated prior to its expiration upon 60
days notice by either the Company or the applicable Hennessy Fund.
As provided in the management contracts with the
16 Hennessy Funds, the Company receives investment advisory fees monthly based on a percentage of the respective funds average daily net assets.
The Company has entered into sub-advisory agreements for the Hennessy Focus Fund, the Hennessy Large Value Fund, the Hennessy
Equity and Income Fund, the Hennessy Core Bond Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund. Under each of these sub-advisory agreements, the sub-advisor is responsible for the investment and re-investment of the assets of
the applicable Hennessy Fund in accordance with the terms of such agreement and the applicable Hennessy Funds Prospectus and Statement of Additional Information. The
sub-advisors
are subject to the
direction, supervision and control of the Company and the Funds Board of Trustees. The
sub-advisory
agreements must be renewed annually in the same manner and are subject to the same termination
provisions as the management contracts.
In exchange for the sub-advisory services, the Company (not the Hennessy Funds)
pays sub-advisor fees to the sub-advisors, which are based on the amount of each applicable Hennessy Funds average daily net assets.
(3)
|
Fair Value Measurement
|
The Company applies the FASB standard Fair Value
Measurements for all financial assets and liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy consisting of the following three levels that prioritize the
inputs to the valuation techniques used to measure fair value:
|
|
|
Level 1 Unadjusted, quoted prices in active markets for identical assets or liabilities that an entity has the ability to access at the measurement date.
|
|
|
|
Level 2 Other significant observable inputs (including, but not limited to, quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar
assets or liabilities, and
model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets).
|
|
|
|
Level 3 Significant unobservable inputs (including the entitys own assumptions about what market participants would use to price the asset or liability based on the best available information) when
observable inputs are not available.
|
49
Based on the definitions, the following table represents the Companys
assets categorized in the Level 1 to 3 hierarchies as of September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Money market fund deposits
|
|
$
|
320
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
320
|
|
Mutual fund investments
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
328
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
320
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
320
|
|
Investments in marketable securities
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
328
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
Money market fund deposits
|
|
$
|
1,592
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,592
|
|
Mutual fund investments
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,599
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,592
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,592
|
|
Investments in marketable securities
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,599
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost, gross unrealized gains, gross unrealized losses, and
fair market value of the Companys trading investments at the fiscal years ended September 30, 2016 and 2015, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Total
|
|
|
|
(in thousands)
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund investments
|
|
$
|
4
|
|
|
$
|
18
|
|
|
$
|
(14
|
)
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
|
18
|
|
|
|
(14
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund investments
|
|
|
4
|
|
|
|
16
|
|
|
|
(13
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4
|
|
|
$
|
16
|
|
|
$
|
(13
|
)
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The mutual fund investments are included as a separate line item in current assets on the
Companys balance sheets.
50
(5)
|
Property and Equipment
|
Property and equipment were comprised of the following
at the fiscal years ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
|
|
|
Equipment
|
|
$
|
343
|
|
|
$
|
318
|
|
Leasehold improvements
|
|
|
123
|
|
|
|
123
|
|
Furniture and fixtures
|
|
|
349
|
|
|
|
289
|
|
IT Infrastructure
|
|
|
61
|
|
|
|
61
|
|
Software
|
|
|
360
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,236
|
|
|
|
1,052
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(940
|
)
|
|
|
(733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
296
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
During the fiscal years ended September 30, 2016 and 2015, depreciation expense was $0.21
million and $0.18 million, respectively.
The costs related to the Companys purchase of
assets related to management contracts are capitalized as incurred. The management contract asset was $74.4 million as of September 30, 2016, compared to $62.7 million at the end of the prior comparable period. The costs are defined
as an intangible asset per FASB standard Intangibles Goodwill and Other. The management contract purchase costs include legal fees, shareholder vote fees and percent of asset costs to purchase the assets related to
management contracts.
The Company has an outstanding bank loan with U.S. Bank National
Association, as administrative agent (in such capacity, Agent) and as a lender, and California Bank & Trust, as syndication agent and as a lender, which replaced and refinanced the bank loan previously entered into by the
Company and U.S. Bank on October 26, 2012, and amended on November 1, 2013. Immediately prior to September 17, 2015, the Companys outstanding bank loan with U.S. Bank National Association had a principal balance of
$23.0 million. On September 17, 2015, in anticipation of the repurchase of up to 1,000,000 shares of the Companys common stock at $25 per share pursuant to its
self-tender
offer, the Company
entered into the new term loan agreement to fund in part its
self-tender
offer, thereby increasing its total loan balance to $35.0 million (consisting of a $20.0 million promissory note to U.S. Bank
National Association and a $15.0 million promissory note to California Bank & Trust). Then, on September 19, 2016, the Company entered into an amendment to its term loan agreement with the Agent and the lenders to allow it to
consummate the purchase of assets related to the management of the Westport Fund and the Westport Select Cap Fund. In addition, the amendment revised one of the financial covenants in the term loan agreement.
The current term loan agreement requires 48 monthly payments in the amount of $364,583 plus interest, at our option, at either:
(1) LIBOR plus a margin that ranges from 2.75% to 3.25%, depending on Hennessy Advisors ratio of consolidated
debt to consolidated earnings before interest, taxes, depreciation and amortization (excluding, among other things, certain non-cash gains and losses) (EBITDA), or
(2) the sum of (a) the highest of the prime rate set by U.S. Bank from time to time, the Federal Funds Rate plus 0.50%, or
one-month LIBOR plus 1.00%, and (b) a margin that ranges from 0.25% to 0.75%, depending on the Companys ratio of consolidated debt to consolidated EBITDA.
From the effective date of the current term loan agreement through February 29, 2016, the interest rate in effect was U.S.
Banks prime rate plus a margin. The applicable margin was initially 0.75% and then decreased to 0.5% as of January 21, 2016, based on the Companys ratio of consolidated debt to consolidated EBITDA as of December 31, 2015. This
margin decrease reduced the effective interest rate on the term loan from 4.25% to 4.0%. Effective March 1, 2016, the Company converted $32.8 million of its principal loan balance to a 1-month LIBOR contract, which has been renewed each
subsequent month. As of September 30, 2016, the effective rate is 3.52322%, which is comprised of the LIBOR rate of 0.52322% as of September 1, 2016, plus a margin of 3.0% based on the Companys ratio of consolidated debt to
consolidated EBITDA as of June 30, 2016. The Company intends to renew the 1-month LIBOR contract on a monthly basis provided that the LIBOR based interest rate remains favorable to the prime rate based interest rate.
51
All borrowings under the term loan agreement are secured by substantially all of
the Companys assets. The final installment of the
then-outstanding
principal and interest is due September 17, 2019. The note maturity schedule is as follows:
|
|
|
|
|
Years ended September 30:
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
$
|
4,375
|
|
2018
|
|
|
4,375
|
|
2019
|
|
|
21,875
|
|
|
|
|
|
|
Total
|
|
$
|
30,625
|
|
|
|
|
|
|
The previous amended loan agreement included, and the current term loan agreement includes,
certain reporting requirements and loan covenants requiring the maintenance of certain financial ratios. The Company was in compliance for the fiscal years ended September 30, 2016 and 2015.
The Company did an evaluation of the debt modification and determined that the portion of the loan refinanced with the same
creditor (the $20.0 million with U.S. Bank National Association) is not considered substantially different from the original loan with U.S. Bank National Association per the conditions set forth in ASC 470-50 Debt; Modifications
and Extinguishments. Furthermore, due to the variable nature of the interest rate, this feature of the loan was examined for potential bifurcation as an embedded derivative, and it was determined that the feature does not require bifurcation from
the host contract.
In connection with securing the financings discussed above, the Company incurred loan costs in the
amount of $0.41 million. These costs are included in other assets and the balance is being amortized on a straight-line basis over 48 months. Amortization expense during the fiscal year ended September 30, 2016 was $0.15 million
compared to $0.09 million for the prior comparable period. Future amortization expense is as follows:
|
|
|
|
|
Years ended September 30:
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
$
|
147
|
|
2018
|
|
|
147
|
|
2019
|
|
|
146
|
|
|
|
|
|
|
Total
|
|
$
|
440
|
|
|
|
|
|
|
As of both September 30, 2016 and 2015, the Companys
gross liability for unrecognized tax benefits related to uncertain tax positions was $0.5 million, of which $0.3 million would decrease the Companys effective income tax rate if the tax benefits were recognized. A reconciliation of the
activity related to the liability for gross unrecognized tax benefits during the fiscal year ended September 30, 2016, are as follows:
|
|
|
|
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Beginning year balance
|
|
$
|
493
|
|
Increase related to prior year tax positions
|
|
|
|
|
Increase related to current year tax positions
|
|
|
|
|
Settlements
|
|
|
|
|
Lapse of statutes of limitations
|
|
|
|
|
|
|
|
|
|
Ending year balance
|
|
$
|
493
|
|
|
|
|
|
|
The Companys net liability for accrued interest and penalties was $0.17 million as of
September 30, 2016. The Company has elected to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.
The total amount of unrecognized tax benefits can change due to final regulations, audit settlements, tax examinations
activities, lapse of applicable statutes of limitations and the recognition and measurement criteria under the guidance related to accounting for uncertainly in income taxes. The Company is unable to estimate what this change could be within the
next twelve months, but does not believe it would be material to its financial statements.
52
The provision for income taxes was comprised of the following for the fiscal
years ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,324
|
|
|
$
|
5,017
|
|
State
|
|
|
511
|
|
|
|
1,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,835
|
|
|
|
6,106
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,539
|
|
|
|
1,444
|
|
State
|
|
|
(181
|
)
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,358
|
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,193
|
|
|
$
|
7,414
|
|
|
|
|
|
|
|
|
|
|
The principal reasons for the differences from the federal statutory rate are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Federal tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
True-up of prior years tax provision
|
|
|
-1.8
|
|
|
|
-2.1
|
|
State tax at statutory rate
|
|
|
2.6
|
|
|
|
3.9
|
|
Permanent and other differences
|
|
|
0.3
|
|
|
|
0.2
|
|
Uncertain tax position allowance
|
|
|
0.2
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate
|
|
|
36.3
|
%
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and liabilities as of September 30, 2016 and 2015, are presented below:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
61
|
|
|
$
|
69
|
|
Stock Compensation
|
|
|
138
|
|
|
|
137
|
|
State taxes
|
|
|
408
|
|
|
|
476
|
|
Capital loss carryforward
|
|
|
10
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
617
|
|
|
|
693
|
|
Less: disallowed capital loss
|
|
|
(10
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
607
|
|
|
|
683
|
|
|
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(50
|
)
|
|
|
(55
|
)
|
Management contracts
|
|
|
(10,381
|
)
|
|
|
(9,093
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(10,431
|
)
|
|
|
(9,148
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(9,824
|
)
|
|
$
|
(8,465
|
)
|
|
|
|
|
|
|
|
|
|
The tax benefits in 2016 and 2015 for share based compensation awards that will result in
future tax deductions are included in deferred tax assets. The Company accounts for Additional Paid in Capital (APIC) adjustments related to tax deductions in excess of book deductions for stock based compensation using the with-and-without method,
recognizing a windfall benefit to APIC only after considering all other tax benefits presently available to it.
53
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 fiscal years ended September 30, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average common stock outstanding
|
|
|
5,067,055
|
|
|
|
5,887,396
|
|
Common stock equivalents - stock options and RSUs
|
|
|
78,255
|
|
|
|
73,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,145,310
|
|
|
|
5,960,689
|
|
|
|
|
|
|
|
|
|
|
There were no common stock equivalents excluded from the per share calculations for the fiscal
years ended September 30, 2016 and 2015, because they were
anti-dilutive.
(10)
|
Commitments and Contingencies
|
The Companys headquarters is located in
leased office space under a single
non-cancelable
operating lease at 7250 Redwood Blvd., Suite 200, in Novato, California. The current lease expires on March 31, 2017; however, a lease amendment was
executed as of August 30, 2016. The amended lease expires June 30, 2021, with one five-year extension available thereafter. The minimum future rental commitment as of September 30, 2016, is $1.8 million for the remaining term of the
current and amended leases. The straight-line rent expense is $31,787 per month for the remaining term of the current and amended leases.
The Company also has office space under a single
non-cancelable
operating lease at 101
Federal Street, Suite 1900, Boston, Massachusetts 02110. The initial term of our lease expired on November 30, 2015, but automatically renews for successive
one-year
periods unless either party terminates
the lease by providing at least three months notice of termination to the other party prior to the next renewal date. The future rental commitment under this lease as of September 30, 2016, is $12,610 for the remaining term of the most
recent automatic renewal, and $75,663 for the next automatic renewal. The
straight-line
rent expense is $6,305 per month for the remaining term of the most recent automatic renewal.
The Company also has office space under a single
non-cancelable
operating lease at 1340
Environ Way, #305, Chapel Hill, North Carolina 27517. The initial term of our lease expired on November 30, 2015, but automatically renews for successive
three-month
periods unless either party terminates
the lease by providing at least two months notice of termination to the other party prior to the next renewal date. The future rental commitment under this lease as of September 30, 2016, is $3,421 for the remaining term of the most
recent automatic renewal, and $5,131 for the next automatic renewal. The
straight-line
rent expense is $1,710 per month for the remaining term of the most recent automatic renewal.
The annual minimum future rental commitments under the foregoing leases as of September 30, 2016, are as follows:
|
|
|
|
|
Fiscal Year
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
$
|
466
|
|
2018
|
|
|
394
|
|
2019
|
|
|
381
|
|
2020
|
|
|
381
|
|
2021
|
|
|
286
|
|
|
|
|
|
|
Total
|
|
$
|
1,908
|
|
|
|
|
|
|
(11)
|
Concentration of Credit Risk
|
The Company maintains its cash accounts with
three commercial banks that, at times, may exceed federally insured limits. The amount on deposit at September 30, 2016, exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $3.5 million. In addition,
total cash and cash equivalents include $0.2 million held in the First American Retail Prime Obligation Money Market Fund that is not federally insured. The Company believes it is not exposed to any significant credit risk on cash and cash
equivalents.
54
(12)
|
New Accounting Standards
|
In August 2015, the FASB issued Accounting Standards
Update No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line-of-Credit Arrangements that simplifies the presentation of debt issuance costs. Under the
new guidance, debt issuance costs related to term loans should be presented as a direct deduction from the carrying amount of the associated debt liability. The new standard is effective for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years(our fiscal year 2017). The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or cash flows.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17 Balance Sheet Classifications of Deferred
Taxes. The standard simplifies the presentation of deferred income taxes under U.S. GAAP by requiring that all deferred tax assets and liabilities be classified as non-current. The effective date for the new standard is for annual periods
beginning after December 15, 2016, including interim periods within that reporting period (our fiscal year 2018). The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or cash
flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments under this
pronouncement will change the way all leases with duration of one year of more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing
lease liability or capital lease liability. This update is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2018(our fiscal year 2020). We are currently evaluating the
impact this standard will have on our policies and procedures pertaining to our existing and future lease arrangements, disclosure requirements and on our financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 CompensationStock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting. The standard simplifies several aspects of the accounting for share-based payment award transactions, including: (1) income tax consequences; (2) classification of awards
as either equity or liabilities, and (3) classification on the statement of cash flows. The effective date for the new standard is for annual periods beginning after December 15, 2016, including interim periods within that reporting period
(our fiscal year 2018). The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASBs Emerging
Issues Task Force, which provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 and
interim periods within those fiscal years (our fiscal year 2018). The adoption of this standard is not expected to have a material impact on our financial condition, results of operations or cash flows.
There have been no other significant changes in the Companys critical accounting policies and estimates during the fiscal
year ended September 30, 2016.
Management evaluated subsequent events through the date
these financial statements were issued, and determined the following to be subsequent events:
On October 10, 2016,
the Company entered into a Third Amended and Restated Employment Agreement (the Employment Agreement) with Neil J. Hennessy in connection with his service as the Chairman of the Board of Directors and Chief Executive Officer of the
Company and as Chief Investment Officer and Portfolio Manager for the mutual funds managed by the Company. The Employment Agreement amends and restates the Employment Agreement dated as of May 2, 2001, between Hennessy Advisors and
Mr. Hennessy, as amended from time to time.
The Employment Agreement, as so amended and restated, made the following
changes:
|
|
|
Updated the Employment Agreement to reflect the approval of Mr. Hennessys bonus arrangements by the Companys shareholders in 2014.
|
|
|
|
Added a requirement that Mr. Hennessy provide 30 days advance notice to the Company prior to resigning without good reason (as defined in the Employment Agreement).
|
55
|
|
|
Provided that, upon a termination of employment by the Company without cause (as defined in the Employment Agreement) or by Mr. Hennessy for good reason, he will receive a severance payment
equal to the sum of (i) (A) one years full base salary and an average bonus multiplied by (B) two and (ii) a
pro-rated
quarterly bonus for the quarter in which
Mr. Hennessys employment is terminated. He will also receive payment of any previously earned and deferred quarterly bonus following the end of the year in which his employment terminates.
|
|
|
|
To address the non-deductibility and excise taxes imposed by Internal Revenue Code Sections 280G and 4999 on excess parachute payments, added a better of provision pursuant to which, if the
amounts payable under the agreement and any other agreement plan or arrangement would constitute an excess parachute payment and result in an excise tax being imposed on Mr. Hennessy under Internal Revenue Code Section 4999,
Mr. Hennessy will receive either the full amount of such payments or a lesser amount such that no portion of the payments will be subject to the excise tax, whichever would result in a greater after-tax benefit to Mr. Hennessy.
|
|
|
|
Clarified that Mr. Hennessys rights to indemnification under the Employment Agreement are limited to litigation arising out of his employment under the Employment Agreement.
|
The Employment Agreement did not extend the existing term of Mr. Hennessys employment or increase his base salary or
other benefits while employed.
On October 10, 2016, the Company also entered into Amended and Restated Bonus
Agreements with Teresa M. Nilsen, its Executive Vice President, Chief Financial Officer, Chief Operating Officer, and Secretary, and Daniel B. Steadman, its Executive Vice President and Chief Compliance Officer. The sole change made in the amended
and restated agreements was to modify the approach taken in the agreements to the non-deductibility and excise taxes imposed by Internal Revenue Code Sections 280G and 4999 on excess parachute payments. Prior to the amendment and
restatement, the agreements included a provision under which benefits to be received by the executive in a change of control would be reduced to the extent necessary to avoid triggering such non-deductibility and excise taxes. The amendment and
restatement replaced this provision with a better of provision pursuant to which, if the amounts payable under the agreement and any other agreement plan or arrangement would constitute an excess parachute payment and result in an excise
tax being imposed on the executive under Internal Revenue Code Section 4999, the executive will receive either the full amount of such payments or a lesser amount such that no portion of the payments will be subject to the excise tax, whichever
would result in a greater after-tax benefit to the executive. The Amended and Restated Bonus Agreements otherwise were unchanged and continue to provide for the previously disclosed payment of a one-time cash bonus to Ms. Nilsen and
Mr. Steadman in the event of a change of control, as defined in the agreements.
On October 31, 2016,
the Company announced an additional cash dividend of $0.10 per share to be paid on December 8, 2016, to shareholders of record as of November 15, 2016. The declaration and payment of dividends to holders of our common stock by us, if any,
are subject to the discretion of our Board of Directors. Our Board of Directors will take into account such matters as general economic and business conditions, our strategic plans, our financial results and condition, contractual, legal and
regulatory restrictions on the payment of dividends by us, and such other factors as our Board of Directors may consider relevant.