Item 1:
|
Unaudited Condensed Financial Statements
|
Hennessy
Advisors, Inc.
Balance Sheets
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,646
|
|
|
$
|
15,700
|
|
Investments in marketable securities, at fair value
|
|
|
8
|
|
|
|
8
|
|
Investment fee income receivable
|
|
|
4,712
|
|
|
|
4,325
|
|
Prepaid expenses
|
|
|
478
|
|
|
|
1,614
|
|
Other accounts receivable
|
|
|
486
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,330
|
|
|
|
22,231
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $1,027 and $922, respectively
|
|
|
369
|
|
|
|
254
|
|
Management contracts
|
|
|
78,022
|
|
|
|
74,628
|
|
Other assets
|
|
|
188
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
100,909
|
|
|
$
|
97,258
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities and accounts payable
|
|
$
|
4,521
|
|
|
$
|
7,353
|
|
Income taxes payable
|
|
|
634
|
|
|
|
676
|
|
Deferred rent
|
|
|
187
|
|
|
|
202
|
|
Current portion of long-term debt, net of debt issuance costs
|
|
|
4,228
|
|
|
|
4,228
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,570
|
|
|
|
12,459
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of debt issuance costs and current portion
|
|
|
19,614
|
|
|
|
21,728
|
|
Deferred income tax liability, net of deferred tax asset
|
|
|
7,693
|
|
|
|
11,541
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,877
|
|
|
|
45,728
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value, 22,500,000 shares authorized:
7,807,594 shares issued and
outstanding at March 31, 2018, and 7,776,563 at September 30, 2017
|
|
|
16,125
|
|
|
|
14,943
|
|
Retained earnings
|
|
|
47,907
|
|
|
|
36,587
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
64,032
|
|
|
|
51,530
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
100,909
|
|
|
$
|
97,258
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed financial statements
- 3 -
Hennessy Advisors, Inc.
Statements of Income
(In
thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
12,893
|
|
|
$
|
12,063
|
|
|
$
|
25,565
|
|
|
$
|
24,172
|
|
Shareholder service fees
|
|
|
1,113
|
|
|
|
1,173
|
|
|
|
2,254
|
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
14,006
|
|
|
|
13,236
|
|
|
|
27,819
|
|
|
|
26,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,487
|
|
|
|
3,275
|
|
|
|
6,653
|
|
|
|
6,489
|
|
General and administrative
|
|
|
1,430
|
|
|
|
1,395
|
|
|
|
2,945
|
|
|
|
2,790
|
|
Mutual fund distribution
|
|
|
123
|
|
|
|
72
|
|
|
|
243
|
|
|
|
133
|
|
Sub-advisor
fees
|
|
|
2,648
|
|
|
|
2,292
|
|
|
|
5,180
|
|
|
|
4,581
|
|
Amortization and depreciation
|
|
|
95
|
|
|
|
91
|
|
|
|
178
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,783
|
|
|
|
7,125
|
|
|
|
15,199
|
|
|
|
14,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
6,223
|
|
|
|
6,111
|
|
|
|
12,620
|
|
|
|
12,353
|
|
Interest expense
|
|
|
266
|
|
|
|
278
|
|
|
|
529
|
|
|
|
544
|
|
Other income
|
|
|
(22
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
5,979
|
|
|
|
5,833
|
|
|
|
12,126
|
|
|
|
11,809
|
|
Income tax expense (benefit)
|
|
|
1,424
|
|
|
|
2,205
|
|
|
|
(616
|
)
|
|
|
4,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,555
|
|
|
$
|
3,628
|
|
|
$
|
12,742
|
|
|
$
|
7,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
|
$
|
0.47
|
|
|
$
|
1.63
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.47
|
|
|
$
|
1.62
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(prior periods restated for stock split, see Note
6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,805,880
|
|
|
|
7,688,994
|
|
|
|
7,803,114
|
|
|
|
7,687,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
7,886,380
|
|
|
|
7,773,622
|
|
|
|
7,865,207
|
|
|
|
7,784,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed financial statements
- 4 -
Hennessy Advisors, Inc.
Statement of Changes in Stockholders Equity
Six Months Ended March 31, 2018
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
Total
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Equity
|
|
Balance at September 30, 2017
|
|
|
7,776,563
|
|
|
$
|
14,943
|
|
|
$
|
36,587
|
|
|
$
|
51,530
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
12,742
|
|
|
|
12,742
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
(1,365
|
)
|
|
|
(1,365
|
)
|
Employee and director restricted stock vested
|
|
|
38,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of vested employee restricted stock for tax withholding
|
|
|
(9,316
|
)
|
|
|
(94
|
)
|
|
|
(57
|
)
|
|
|
(151
|
)
|
Shares issued for auto-investments pursuant to the 2015 and 2018 Dividend Reinvestment and Stock
Purchase Plans
|
|
|
473
|
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
Shares issued for dividend reinvestment pursuant to the 2015 and 2018 Dividend Reinvestment and
Stock Purchase Plans
|
|
|
1,174
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
Stock-based compensation
|
|
|
|
|
|
|
1,247
|
|
|
|
|
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2018
|
|
|
7,807,594
|
|
|
$
|
16,125
|
|
|
$
|
47,907
|
|
|
$
|
64,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed financial statements
- 5 -
Hennessy Advisors, Inc.
Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,742
|
|
|
$
|
7,624
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
178
|
|
|
|
184
|
|
Deferred income taxes
|
|
|
(3,848
|
)
|
|
|
1,296
|
|
Stock-based compensation
|
|
|
1,247
|
|
|
|
1,057
|
|
Amortization of loan fee payments
|
|
|
(73
|
)
|
|
|
(73
|
)
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Investment fee income receivable
|
|
|
(387
|
)
|
|
|
(330
|
)
|
Prepaid expenses
|
|
|
1,136
|
|
|
|
620
|
|
Other accounts receivable
|
|
|
98
|
|
|
|
44
|
|
Other assets
|
|
|
(43
|
)
|
|
|
3
|
|
Accrued liabilities and accounts payable
|
|
|
(2,832
|
)
|
|
|
(2,019
|
)
|
Income taxes payable
|
|
|
(42
|
)
|
|
|
(383
|
)
|
Deferred rent
|
|
|
(15
|
)
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
8,161
|
|
|
|
8,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(220
|
)
|
|
|
(68
|
)
|
Payments related to management contracts
|
|
|
(3,394
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,614
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Principal payments on bank loan
|
|
|
(2,114
|
)
|
|
|
(2,114
|
)
|
Restricted stock units repurchased for employee tax withholding
|
|
|
(151
|
)
|
|
|
(168
|
)
|
Proceeds from shares issued pursuant to the 2015 and 2018 Dividend Reinvestment and Stock
Repurchase Plans
|
|
|
29
|
|
|
|
2
|
|
Dividend payments
|
|
|
(1,365
|
)
|
|
|
(1,074
|
)
|
Cash paid for fractional shares
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,601
|
)
|
|
|
(3,355
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
946
|
|
|
|
4,564
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
15,700
|
|
|
|
3,535
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
16,646
|
|
|
$
|
8,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,206
|
|
|
$
|
1,994
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
534
|
|
|
$
|
271
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed financial statements
- 6 -
HENNESSY ADVISORS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Financial Statement Presentation
The accompanying condensed balance sheet as of September 30, 2017, which has been derived from audited financial statements, and the
unaudited interim condensed financial statements as of and for the three and six months ended March 31, 2018 and 2017, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts
of Hennessy Advisors, Inc. (the Company, we, us, or our). Certain information and footnote disclosures in these unaudited interim condensed financial statements, normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission for Quarterly Reports on Form
10-Q.
In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments necessary for a fair presentation of the Companys financial position at March 31, 2018, the
Companys operating results for the three and six months ended March 31, 2018 and 2017, and the Companys cash flows for the six months ended March 31, 2018 and 2017. These unaudited interim condensed financial statements
and notes should be read in conjunction with the Companys audited financial statements and notes thereto for fiscal year 2017, which are included in the Companys Annual Report on
Form 10-K
for
the fiscal year ended September 30, 2017.
The preparation of financial statements requires management to make estimates and
assumptions. Making estimates requires management to exercise significant judgment. Accordingly, the actual results could differ substantially from those estimates.
The Companys operating activities consist primarily of providing investment advisory services to 14
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 Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced 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.
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;
|
- 7 -
|
|
|
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, D&O/E&O, 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, public relations, 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
12-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 legal, marketing, national accounts and distribution, sales, administrative, and trading oversight personnel, as
well as management executives;
|
|
|
|
providing a quarterly compliance certification to Hennessy Funds Trust; and
|
- 8 -
|
|
|
preparing or reviewing materials for the Funds Board of Trustees, presenting or leading discussions to or with the Funds Board of Trustees, preparing or reviewing meeting minutes, and arranging for training
and education of the Funds Board of Trustees.
|
The Company earns shareholder service fees from Investor
Class shares of the Hennessy Funds by, among other things, maintaining a
toll-free
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 and are subsequently
reviewed by management. The fees are computed and billed monthly, at which time they are recognized in accordance with Accounting Standard Codification 605 Revenue Recognition.
Effective February 28, 2017, the Company waives fees with respect to the Hennessy Technology Fund to comply with a contractual expense
ratio limitation. The fee waiver is calculated daily by the Hennessy Funds accountants at U.S. Bancorp Fund Services, LLC and subsequently reviewed by management, and is charged to expense monthly by the Company as an offset to revenue. The
waived fee is deducted from investment advisory fee income and reduces the aggregate amount of advisory fees received by the Company in the subsequent month. To date, the Company has only waived fees based on contractual obligations, but the Company
has the ability to waive fees at its discretion. If the Company elects to voluntarily waive fees, the decision to waive fees would not apply to previous periods, but would only apply on a going forward basis.
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 deemed probable as the fees are received from the Hennessy Funds in the month subsequent to the month in which the services are provided.
(2) Management Contracts Purchased
Throughout its history, the Company has completed nine purchases of assets related to the management of 28 different mutual funds, some of
which were reorganized into already existing Hennessy Funds. In accordance with guidance issued by the Financial Accounting Standards Board (FASB), 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 March 31, 2018, or September 30, 2017.
Under the FASB guidance on Intangibles Goodwill and Other, intangible assets that have indefinite useful lives are not
amortized but are tested at least annually for impairment. The Company reviews the life of the management contracts each reporting period to determine if they continue to have an indefinite useful life. The Company considers the mutual fund
management contracts to be intangible assets with an indefinite useful life and are not impaired as of March 31, 2018, or September 30, 2017.
- 9 -
Most recently, the Company purchased the assets related to the management of the Rainier Large
Cap Equity Fund, the Rainier Mid Cap Equity Fund, and the Rainier Small/Mid Cap Equity Fund (collectively, the Rainier U.S. Funds). In the aggregate, the Company paid $3.1 million for approximately $375 million of assets
related to management of the Rainier U.S. Funds. The transaction, which was completed in two stages, was consummated in accordance with the terms and conditions of the Transaction Agreement, dated as of May 10, 2017, as amended, between the
Company, Manning & Napier Group, LLC, and Rainier Investment Management, LLC.
The details of the first stage of the transaction,
which closed on December 1, 2017, are as follows:
|
|
|
The Company purchased the assets related to the management of (i) the Rainier Large Cap Equity Fund, which were reorganized into the Hennessy Cornerstone Large Growth Fund, and (ii) the Rainier Mid Cap Equity
Fund, which were reorganized into the Hennessy Cornerstone Mid Cap 30 Fund.
|
|
|
|
The purchase price of $1.0 million was funded with available cash and was based on the total net assets under management of the Rainier Large Cap Equity Fund and the Rainier Mid Cap Equity Fund as measured at the
close of business on November 30, 2017.
|
|
|
|
The amount of the purchased assets under management as of the closing date was approximately $122 million.
|
The details of the second stage of the transaction, which closed on January 12, 2018, are as follows:
|
|
|
The Company purchased the assets related to the management of the Rainier Small/Mid Cap Equity Fund and reorganized them into the Hennessy Cornerstone Mid Cap 30 Fund.
|
|
|
|
The purchase price of $2.1 million was funded with available cash and was based on the total net assets under management of the Rainier Small/Mid Cap Equity Fund as measured at the close of business on
January 11, 2018.
|
|
|
|
The amount of the purchased assets under management as of the closing date was approximately $253 million.
|
(3) Investment Advisory Agreements
The Company has management contracts with Hennessy Funds Trust, under which it provides investment advisory services to all classes of the 14
Hennessy Funds.
The management contracts must be renewed annually (except in limited circumstances) by (i) the Funds Board of
Trustees or the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (ii) the vote of a majority of the trustees of Hennessy Funds Trust who are not interested persons of the Hennessy Funds. If the management
contracts are not renewed annually as described above, they will terminate automatically. There are two additional 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,
- 10 -
which is the transfer of the Companys common stock in sufficient quantities deemed to constitute a controlling block). Second, 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 14 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 Equity
and Income 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 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 (except in limited circumstances) in the same manner as, and are subject to the same termination provisions as, the management contracts.
Effective February 28, 2018, the Company amended the
sub-advisory
agreement with SPARX Asset
Management Co., Ltd. (SPARX), the
sub-advisor
for the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund. The amendment increased the
sub-advisory
fee
payable to SPARX for each fund to 0.35% of the first $500 million of daily net assets of such fund, 0.40% of the next $500 million of daily net assets of such fund, and 0.42% of daily net assets of such fund over $1 billion.
Previously, the
sub-advisory
fee for the Hennessy Japan Fund was 0.35% and the
sub-advisory
fee for the Hennessy Japan Small Cap Fund was 0.20%. Each of these funds
currently has less than $500 million of daily net assets.
In exchange for the
sub-advisory
services, the Company (not the Hennessy Funds) pays
sub-advisory
fees to the
sub-advisors
out of its own assets.
Sub-advisory
fees are calculated as a percentage of the applicable
sub-advised
funds average daily net asset value.
(4) Bank Loan
The
Company has an outstanding bank loan with U.S. Bank National Association (U.S. Bank), as administrative agent and as a lender, and California Bank & Trust, as syndication agent and as a lender. On September 17, 2015, in
connection with the repurchase of up to 1,500,000 shares of the Companys common stock pursuant to its
self-tender
offer, the Company and its lenders entered into a term loan agreement with an original
principal amount of $35.0 million (consisting of a $20.0 million promissory note to U.S. Bank and a $15.0 million promissory note to California Bank & Trust). Then, on September 19, 2016, the Company and its lenders
entered into an amendment to the term loan agreement to allow the Company to purchase the assets related to the management of the Westport Fund and the Westport Select Cap Fund. On November 16, 2017, the Company and its lenders entered
into an amendment to the term loan agreement to revise the excess cash flow prepayment requirements. On November 30, 2017, the Company and its lenders entered into an amendment to the term loan agreement to allow the Company to purchase the
assets related to the management of the Rainier U.S. Funds.
- 11 -
The term loan agreement requires 48 monthly payments in the amount of $364,583 plus interest
calculated based on one of the following, at the Companys option:
(1)
the sum of
(a) a margin that ranges from
2.75% to 3.25%, depending on the Companys ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization (excluding, among other things, certain
non-cash
gains
and losses) (EBITDA),
plus
(b) the LIBOR rate; or
(2)
the sum of
(a) a margin that ranges from 0.25%
to 0.75%, depending on the Companys ratio of consolidated debt to consolidated EBITDA,
plus
(b) the highest rate out of the following three rates: (i) the prime rate set by U.S. Bank from time to time, (ii) the Federal
Funds Rate plus 0.50%, or (iii) the
one-month
LIBOR rate plus 1.00%.
The Company currently uses a
one-month
LIBOR rate contract, which must be renewed monthly. As of March 31, 2018, the effective rate is 4.414%, which is comprised of the
one-month
LIBOR rate of
1.664% as of March 1, 2018, plus a margin of 2.75% based on the Companys ratio of consolidated debt to consolidated EBITDA as of December 31, 2017. The Company intends to continue renewing the LIBOR rate 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 the Companys assets. The final installment of the
then-outstanding
principal plus accrued interest is due September 17, 2019. As of March 31, 2018, the Company had $24.1 million outstanding under its term loan ($23.8 million net of debt issuance
costs).
The term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of certain financial
ratios. The Company was in compliance for the periods ended March 31, 2018 and 2017.
In connection with securing the financings
discussed above, the Company incurred loan costs in the amount of $0.41 million. These costs were reclassified to offset debt liability per Accounting Standards Update (ASU)
2015-03
as of
March 31, 2017, and the balance is being amortized on a straight-line basis, which approximates the effective interest basis, over 48 months. Amortization expense during the six months ended March 31, 2018 and 2017, was
$0.07 million for each period.
- 12 -
The unamortized balance of the loan fees was $0.2 million as of March 31, 2018. The following is a reconciliation of the reclassification:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Debt at
at March 31, 2018
|
|
|
Debt
Issuance Cost
|
|
|
Debt, Net of Issuance Cost,
at March 31, 2018
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Current portion of debt
|
|
$
|
4,375
|
|
|
$
|
(147
|
)
|
|
$
|
4,228
|
|
Long-term portion of debt
|
|
|
19,687
|
|
|
|
(73
|
)
|
|
|
19,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
24,062
|
|
|
$
|
(220
|
)
|
|
$
|
23,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Debt at
September 30, 2017
|
|
|
Debt
Issuance Cost
|
|
|
Debt, Net of Issuance Cost,
at September 30, 2017
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Current portion of debt
|
|
$
|
4,375
|
|
|
$
|
(147
|
)
|
|
$
|
4,228
|
|
Long-term portion of debt
|
|
|
21,875
|
|
|
|
(147
|
)
|
|
|
21,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
26,250
|
|
|
$
|
(294
|
)
|
|
$
|
25,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) Income Taxes
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which
permits companies a period of one year from the enactment date of the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act) to account for the resulting tax effects. Any required adjustment would be included in net earnings from
continuing operations as an adjustment to income tax expense in the reporting period during which such adjustment is identified. In our first quarter, based on available information, we estimated the impact of the reduced corporate tax rate
and
re-measured
our deferred tax liability. This resulted in a reduction to income tax expense of approximately $4 million.
The Companys effective income tax rates for the three months ended March 31, 2018 and 2017, were 23.8% and 37.8%, respectively. The
effective income tax rate was lower for the three months ended March 31, 2018, due to the reduced federal tax rate resulting from the 2017 Tax Act, offset partially by state taxes.
The Companys effective income tax rates for the six months ended March 31, 2018 and 2017, were
-5.1%
and 35.4%, respectively. The effective income tax rate for the six months ended March 31, 2018, was a benefit due to the 2017 Tax Act, with a slight offset due to state taxes and increased income
before income tax expense. For the three months ended December 31, 2017, the Company was required to record a
one-time,
non-cash
benefit to income taxes of
approximately $4 million for the accounting
re-measurement
of its deferred tax liability to account for the future impact of a lower federal corporate income tax rate.
We are subject to income tax in the U.S. federal jurisdiction and multiple state jurisdictions. Our U.S. federal tax returns for 2014 and
subsequent years remain open to examination. Generally, we are no longer subject to state examinations by tax authorities for years prior to fiscal year 2014. For state tax jurisdictions with unfiled tax returns, the statute of limitations will
remain open indefinitely.
(6) Earnings per Share and Dividends per Share
Basic earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding, while
diluted earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents, which consist of restricted stock units
(RSUs).
- 13 -
All common stock equivalents were dilutive and therefore included in the diluted earnings per
share calculation for the three and six months ended March 31, 2018 and 2017.
On January 26, 2017, the Companys Board of
Directors declared a
3-for-2
stock split, which was effected on March 6, 2017, for shareholders of record as of February 10, 2017. All disclosures in this
report relating to shares of common stock, RSUs, and per share data have been adjusted to reflect this stock split.
A quarterly cash
dividend of $0.10 per share was paid on March 5, 2018, to shareholders of record as of February 9, 2018.
(7) Equity
Amended and Restated 2013 Omnibus Incentive Plan
The Company has adopted, and the Companys shareholders have approved, an Amended and Restated 2013 Omnibus Incentive Plan (the
Omnibus Plan). Under the Omnibus Plan, participants may be granted 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 Omnibus Plan vest over four years, at a rate of 25% per year. The Company recognizes
stock-based
compensation expense on a straight-line basis over the four-year vesting term of each award. There were no RSUs granted under the Omnibus Plan during the six months ended March 31, 2018 or
2017.
RSU activity for the six months ended March 31, 2018, was as follows:
|
|
|
|
|
|
|
|
|
|
|
RSU Activity
|
|
|
|
Six Months Ended March 31, 2018
|
|
|
|
Number of RSUs
|
|
|
Weighted Avg.
Fair Value
Per Share at
Each Date
|
|
Non-vested
balance at September 30, 2017
|
|
|
358,291
|
|
|
$
|
16.48
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested (1)
|
|
|
(78,901
|
)
|
|
|
15.78
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
balance at March 31, 2018
|
|
|
279,390
|
|
|
$
|
16.67
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The number of vested RSUs includes partially vested shares. Shares of common stock have not been issued for the partially vested shares, but the related compensation expense has been booked. There were 29,384 net shares
of common stock issued for vested and issued RSUs in the six months ended March 31, 2018.
|
- 14 -
|
|
|
|
|
RSU Compensation
Six Months Ended March 31, 2018
|
|
|
|
(In thousands)
|
|
Total expected compensation expense related to RSUs
|
|
$
|
12,490
|
|
Compensation expense recognized at reporting date
|
|
|
(7,831
|
)
|
|
|
|
|
|
Unrecognized compensation expense related to RSUs at reporting date
|
|
$
|
4,659
|
|
|
|
|
|
|
As of March 31, 2018, there was $4.7 million of total RSU compensation expense related to
non-vested
awards not yet recognized, which is expected to be recognized over a weighted-average vesting period of 2.5 years.
Dividend Reinvestment and Stock Purchase Plan
In January 2018, the Company adopted an updated Dividend Reinvestment and Stock Purchase Plan (the DRSPP), replacing the previous
Dividend Reinvestment and Stock Purchase Plan established in March 2015, to provide shareholders and new investors with a convenient and economical means of purchasing shares of the Companys common stock and reinvesting cash dividends paid on
the Companys common stock. Under the DRSPP and its predecessor, the Company issued 1,647 and 933 shares of common stock during the six months ended March 31, 2018 and 2017, respectively.
Stock Buyback Program
In
August 2010, the Company adopted a stock buyback program. The program provides that the Company may repurchase up to 1,500,000 shares of its common stock and has no expiration date. Share repurchases may be made in the open market, in
privately-negotiated
transactions, or otherwise. The Company did not repurchase any shares pursuant to the stock buyback program during the six months ended March 31, 2018 or 2017.
(8) Commitments and Contingencies
The Companys headquarters is located in leased office space under a single
non-cancelable
operating lease at 7250 Redwood Boulevard, Suite 200, Novato, California 94945. The lease expires June 30, 2021, with one
five-year
extension available thereafter.
The Company also has office space under a single
non-cancelable
operating lease at 101 Federal Street,
Suite 1900, Boston, Massachusetts
- 15 -
02110. The initial term of the 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 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 the lease expired on November 30, 2014, 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 Company also has office space under a single,
non-cancelable
operating
sub-lease
at 4800 Bee Caves Road, Suite 100, Austin, Texas 78746, where it occupies approximately 600 square feet and has the right to use
all common areas. The term of the
sub-lease
commenced on January 4, 2018, and expires on December 31, 2018, but will automatically renew for successive
six-month
periods unless either party gives at least 60 days notice of termination to the other party prior to the renewal date. The rent expense is $1,500 per month for the initial term of the
sub-lease.
As of March 31, 2018, there were no material changes in the leasing arrangements that
would have a significant effect on future minimum lease payments reported in the Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2017.
(9) Fair Value Measurements
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.
|
- 16 -
Based on the definitions, the following table represents the Companys assets categorized in
the Level 1 to 3 hierarchies as of March 31, 2018, and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Money market fund deposits
|
|
$
|
12,867
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,867
|
|
Mutual fund investments
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,875
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,867
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,867
|
|
Investments in marketable securities
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,875
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Money market fund deposits
|
|
$
|
13,832
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,832
|
|
Mutual fund investments
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,840
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,832
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,832
|
|
Investments in marketable securities
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,840
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between levels during the six months ended March 31, 2018, or the year ended
September 30, 2017.
(10) New Accounting Standards
In November 2015, the FASB issued
ASU 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 Company adopted this
standard in the current year and adjusted the prior period for consistency.
In March 2016, the FASB issued ASU
2016-09
CompensationStock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the recognition for
employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification within the statement of cash
flows for certain components of share-based awards. Early adoption is permitted for any interim or annual period. The changes in the new standard eliminate the recognition of excess tax benefits or tax deficiencies from the statement of
stockholders equity. Under the new guidance, all excess tax benefits and tax deficiencies
- 17 -
resulting from stock-based compensation awards vesting and exercises are recognized prospectively within income tax expense, and excess tax benefits are recognized regardless of whether they
reduce current taxes payable. This will increase the volatility of our effective tax rate.
We elected to early adopt ASU
2016-09,
using a modified retrospective approach. As a result of early adoption of ASU
2016-09,
an income tax benefit of approximately $0.2 million was recognized as a
discrete event in the quarterly period ended December 31, 2016.
In January 2017, the FASB issued
ASU 2017-04
IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update eliminates a step from impairment testing to simplify the process,
particularly for entities with a zero or negative carrying amount for an intangible asset. This update is effective for annual reporting periods beginning after December 15, 2019 (our fiscal year 2021). The adoption of this update is not
expected to have a material impact on our financial condition, results of operations or cash flows.
In February 2018, the FASB issued ASU
2018-02,
which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Act. This update is effective
for annual reporting periods beginning after December 15, 2018 (our fiscal year 2020). The adoption of this update is not expected to have a material impact on our financial condition, results of operations or cash flows.
(11) Subsequent Events
The Company has evaluated subsequent events through the date these financial statements were issued and has concluded that no material
subsequent events occurred during this period that would require recognition or disclosure.
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
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 our Annual Report on
Form 10-K
for the fiscal
year ended
- 18 -
September 30, 2017, filed with the Securities and Exchange Commission. 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, taxes, 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 currently are relatively favorable, further increases in short-term interest rates, policy changes from the administration in
Washington, D.C., 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 (i) the identification, completion, and integration of future acquisitions and (ii) 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 the section entitled
Risk Factors in our Annual Report on
Form 10-K
for the fiscal year ended September 30, 2017. All statements regarding our business strategy, as well as statements regarding market 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 14
open-end
mutual funds
branded as the Hennessy Funds. With respect to four of the funds,
sub-advisors
act as portfolio managers, 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.
We derive our operating revenues 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 varies 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.
- 19 -
U.S. equity markets rose modestly over the six months ended March 31, 2018. U.S.
equities rallied strongly over the first half of the period in response to the enactment of the 2017 Tax Act, which lowered corporate tax rates significantly. Investors were also encouraged by two consecutive quarters of real GDP growth above 3%.
However, equity prices gave up most of their gains in the second half of the period in reaction to the imposition of trade tariffs on steel and aluminum and fears that additional tariffs being proposed could provoke a trade war with Americas
largest trading partners. The Federal Reserve, which appeared to continue to feel confident about the strength of the economy and mindful of a tight labor market and the possibility of a slight acceleration in inflation in 2018, raised short-term
interest rates twice by a quarter point each time, in December and March.
Long-term U.S. bond yields rose sharply over the six months
ended March 31, 2018. Indications of an acceleration in domestic economic activity over the period, together with signals from the Federal Reserve that the pace of interest rate increases would be nudged higher, combined to send bond prices
lower.
The Japanese equity market retreated modestly in local currency terms over the six months ended March 31, 2018. Equities
rallied higher in the first half of the period, boosted by evidence of continued strong economic growth, an acceleration in inflation, and healthy corporate profits growth. However, equity prices dropped sharply in the second half of the period as
the imposition of trade tariffs by the U.S. set off fears of an international trade war. The yen also strengthened in response to the perception of higher risk globally, contributing to the decline in equities.
We seek to provide positive annualized returns to investors in the Hennessy Funds over a market cycle and to generate inflows into the
Hennessy Funds through our marketing and sales efforts. We use a database containing over 100,000 Registered Investment Advisors and Registered Representatives (Advisors) nationwide to whom we strategically target and regularly market,
and approximately 19,500 of these Advisors currently use the Hennessy Funds for their clients. More than one in five of those Advisors owns two or more of the Hennessy Funds. We continually seek to expand our sales and distribution efforts, to serve
our Advisor community, and to provide
high-quality
and personalized services to our over 330,000 mutual fund accounts across the country. In addition, we have an active public relations effort with the
Hennessy brand name appearing on television, radio, print, or online media on average once every two to three days.
Each of the 14
Hennessy Funds achieved positive annualized returns for the three-year,
five-year,
10-year,
and since inception periods ended March 31, 2018. All but one of the
Hennessy Funds achieved a positive return in the
one-year
period ended March 31, 2018.
Total assets under management as of March 31, 2018, was $6.58 billion, a decrease of 0.9%, or $58 million, from
$6.64 billion as of March 31, 2017. The decrease in total assets from March 31, 2017, to March 31, 2018, was attributable to net outflows from the Hennessy Funds, offset by market appreciation and the purchase of assets related
to the management of the Rainier U.S. Funds.
- 20 -
The following table illustrates the changes quarter by quarter in our assets under management
since March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Under Management
|
|
|
|
At Each Quarter End, March 31, 2017, through March 31, 2018
|
|
|
|
3/31/2017
|
|
|
6/30/2017
|
|
|
9/30/2017
|
|
|
12/31/2017
|
|
|
3/31/2018
|
|
|
|
(In thousands)
|
|
Beginning assets under management
|
|
$
|
6,592,589
|
|
|
$
|
6,635,802
|
|
|
$
|
6,526,756
|
|
|
$
|
6,612,812
|
|
|
$
|
6,923,993
|
|
Acquisition inflows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,831
|
|
|
|
252,530
|
|
Organic inflows
|
|
|
376,440
|
|
|
|
249,043
|
|
|
|
197,671
|
|
|
|
324,132
|
|
|
|
460,948
|
|
Redemptions
|
|
|
(554,606
|
)
|
|
|
(496,768
|
)
|
|
|
(393,988
|
)
|
|
|
(480,832
|
)
|
|
|
(700,679
|
)
|
Market appreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(depreciation)
|
|
|
221,379
|
|
|
|
138,679
|
|
|
|
282,373
|
|
|
|
346,050
|
|
|
|
(359,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending assets under management
|
|
$
|
6,635,802
|
|
|
$
|
6,526,756
|
|
|
$
|
6,612,812
|
|
|
$
|
6,923,993
|
|
|
$
|
6,577,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2018, this asset had a net balance of $78.0 million, compared to $74.6 million as of September 30, 2017. The current period
increase was mainly due to the purchase of assets related to the management of the Rainier U.S. Funds.
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 1,500,000 shares of the Companys common stock pursuant to the completion of its self-tender
offer in September 2015. As of March 31, 2018, this liability had a gross balance of $24.1 million, compared to $26.3
million as of September 30, 2017. The decrease was the result of making monthly loan payments on our
bank debt.
2017 Corporate Tax Reform
On December 22, 2017, the 2017 Tax Act was enacted into law, which changed various corporate income tax provisions within the existing
Internal Revenue Code. The law was required to be accounted for in the period of enactment, which was our first fiscal quarter of 2018. As a result, we recorded a
one-time,
non-cash
benefit to income taxes of approximately $4 million for the accounting
re-measurement
of our deferred tax liability based on the lower federal corporate
income tax rate.
Beginning January 1, 2018, the 2017 Tax Act reduced our corporate federal income tax rate, favorably impacting our
net income, earnings per share, and cash flows for our second fiscal quarter of 2018.
- 21 -
Results of Operations
The following tables set forth items in the statement of income as dollar amounts and as percentages of total revenue for the three and six
months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amounts
|
|
|
Percent
of Total
Revenue
|
|
|
Amounts
|
|
|
Percent
of Total
Revenue
|
|
|
|
(In thousands, except percentages)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
12,893
|
|
|
|
92.1
|
%
|
|
$
|
12,063
|
|
|
|
91.1
|
%
|
Shareholder service fees
|
|
|
1,113
|
|
|
|
7.9
|
|
|
|
1,173
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
14,006
|
|
|
|
100.0
|
|
|
|
13,236
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
3,487
|
|
|
|
24.9
|
|
|
|
3,275
|
|
|
|
24.8
|
|
General and administrative
|
|
|
1,430
|
|
|
|
10.2
|
|
|
|
1,395
|
|
|
|
10.5
|
|
Mutual fund distribution
|
|
|
123
|
|
|
|
0.9
|
|
|
|
72
|
|
|
|
0.5
|
|
Sub-advisor
fees
|
|
|
2,648
|
|
|
|
18.9
|
|
|
|
2,292
|
|
|
|
17.3
|
|
Amortization and depreciation
|
|
|
95
|
|
|
|
0.7
|
|
|
|
91
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,783
|
|
|
|
55.6
|
|
|
|
7,125
|
|
|
|
53.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
6,223
|
|
|
|
44.4
|
|
|
|
6,111
|
|
|
|
46.2
|
|
|
|
|
|
|
Interest expense
|
|
|
266
|
|
|
|
1.9
|
|
|
|
278
|
|
|
|
2.1
|
|
Other income
|
|
|
(22
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
5,979
|
|
|
|
42.7
|
|
|
|
5,833
|
|
|
|
44.1
|
|
|
|
|
|
|
Income tax expense
|
|
|
1,424
|
|
|
|
10.2
|
|
|
|
2,205
|
|
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,555
|
|
|
|
32.5
|
%
|
|
$
|
3,628
|
|
|
|
27.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 22 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amounts
|
|
|
Percent
of Total
Revenue
|
|
|
Amounts
|
|
|
Percent
of Total
Revenue
|
|
|
|
(In thousands, except percentages)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory fees
|
|
$
|
25,565
|
|
|
|
91.9
|
%
|
|
$
|
24,172
|
|
|
|
91.1
|
%
|
Shareholder service fees
|
|
|
2,254
|
|
|
|
8.1
|
|
|
|
2,358
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
27,819
|
|
|
|
100.0
|
|
|
|
26,530
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
6,653
|
|
|
|
23.9
|
|
|
|
6,489
|
|
|
|
24.5
|
|
General and administrative
|
|
|
2,945
|
|
|
|
10.6
|
|
|
|
2,790
|
|
|
|
10.5
|
|
Mutual fund distribution
|
|
|
243
|
|
|
|
0.9
|
|
|
|
133
|
|
|
|
0.5
|
|
Sub-advisor
fees
|
|
|
5,180
|
|
|
|
18.6
|
|
|
|
4,581
|
|
|
|
17.2
|
|
Amortization and depreciation
|
|
|
178
|
|
|
|
0.6
|
|
|
|
184
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,199
|
|
|
|
54.6
|
|
|
|
14,177
|
|
|
|
53.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
12,620
|
|
|
|
45.4
|
|
|
|
12,353
|
|
|
|
46.6
|
|
|
|
|
|
|
Interest expense
|
|
|
529
|
|
|
|
1.9
|
|
|
|
544
|
|
|
|
2.1
|
|
Other income
|
|
|
(35
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
12,126
|
|
|
|
43.6
|
|
|
|
11,809
|
|
|
|
44.5
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
|
(616
|
)
|
|
|
(2.2
|
)
|
|
|
4,185
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,742
|
|
|
|
45.8
|
%
|
|
$
|
7,624
|
|
|
|
28.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue is comprised of investment advisory fees and shareholder service fees. Comparing the three months ended March 31, 2017, to
the three months ended March 31, 2018, total revenue increased by 5.8%, from $13.2 million to $14.0 million, investment advisory fees increased by 6.9%, from $12.1 million to $12.9 million, and shareholder service fees
decreased by 5.1%, from $1.2 million to $1.1 million.
Comparing the six months ended March 31, 2017, to the six months
ended March 31, 2018, total revenue increased by 4.9%, from $26.5 million to $27.8 million, investment advisory fees increased by 5.8%, from $24.2 million to $25.6 million, and shareholder service fees decreased by 4.4%,
from $2.4 million $2.3 million.
The increase in investment advisory fees for each of the above periods was mainly due to
increased average daily net assets of the Hennessy Funds. Average daily net assets for the three months ended March 31, 2018, increased to $6.90 billion, which represents an increase of $270 million, or 4.1%, compared to the three
months ended March 31, 2017. Average daily net assets for the six months ended March 31, 2018, increased to $6.83 billion, which represents an increase of $243 million, or 3.7%, compared to the six months ended March 31,
2017. The decrease in shareholder service fees for each of
- 23 -
the above periods was due to an increase in the average daily net assets held in Institutional Class shares and a decrease in the average daily net assets held in Investor Class shares
over such periods. Assets held in Institutional Class shares of the Hennessy Funds are not subject to a shareholder service fee, whereas assets held in Investor Class shares of the Hennessy Funds are subject to a shareholder service fee.
The Company collects investment advisory fees from each of the Hennessy Funds at differing rates. These range between an annual rate of
0.40% and 0.90% of average daily net assets. The Hennessy Fund with the largest average daily net assets for the three and six months ended March 31, 2018, was the Hennessy Focus Fund, with $2.76 billion for each period. 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-advisory
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 results. The Hennessy Fund with the second largest average daily assets for the three
and six months ended March 31, 2018, was the Hennessy Gas Utility Fund, with $1.15 billion and $1.27 billion, respectively. 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.
Total assets under management as of March 31, 2018, was $6.6 billion. Compared with assets
under management as of December 31, 2017, this represents a decrease of $347 million, or 5.0%. Compared with assets under management as of September 30, 2017, this represents a decrease of $35 million, or 0.5%. The decrease for
each of the above periods was attributable to market depreciation and net outflows from the Hennessy Funds, partially offset by the purchase of assets related to the management of the Rainier U.S. Funds.
The Hennessy Funds with the three largest amounts of net inflows for the three and six months ended March 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
2018
|
|
Six Months Ended March 31, 2018
|
|
Fund
|
|
Net Inflow
|
|
Fund
|
|
Net Inflow
|
|
Hennessy Japan Fund
|
|
$105 million
|
|
Hennessy Japan Fund
|
|
|
$174 million
|
|
Hennessy Japan Small Cap Fund
|
|
$73 million
|
|
Hennessy Japan Small Cap Fund
|
|
|
$125 million
|
|
Hennessy Large Cap Financial Fund
|
|
$18 million
|
|
Hennessy Large Cap Financial Fund
|
|
|
$19 million
|
|
- 24 -
The Hennessy Funds with the three largest amounts of net outflows for the three and six months
ended March 31, 2018, were as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
2018
|
|
Six Months Ended March 31, 2018
|
|
Fund
|
|
Net Outflow
|
|
Fund
|
|
Net Outflow
|
|
Hennessy Gas Utility Fund
|
|
-$176 million
|
|
Hennessy Gas Utility Fund
|
|
|
-$250 million
|
|
Hennessy Mid Cap 30 Fund
|
|
-$122
million
|
|
Hennessy Mid Cap 30 Fund
|
|
|
-$230 million
|
|
Hennessy Focus Fund
|
|
-$84
million
|
|
Hennessy Focus Fund
|
|
|
-$141 million
|
|
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018,
redemptions as a percentage of assets under management increased from an average of 2.8% per month to 3.4% per month. Comparing the six months ended March 31, 2017, to the six months ended March 31, 2018, redemptions as a percentage of
assets under management decreased from an average of 3.0% per month to 2.9% per month.
Operating Expenses
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, total operating expenses increased by
9.2%, from $7.1 million to $7.8 million. The increase was due primarily to increases in
sub-advisory
fee expense and compensation and benefits expense. As a percentage of total revenue, total
operating expenses increased 1.8 percentage points to 55.6%.
Comparing the six months ended March 31, 2017, to the six months ended
March 31, 2018, total operating expenses increased by 7.2%, from $14.2 million to $15.2 million. The increase was due primarily to an increase in
sub-advisory
fee expense. As a percentage of
total revenue, total operating expenses increased 1.2 percentage points to 54.6%.
Compensation and Benefits Expense
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, compensation and benefits expense
increased by 6.5%, from $3.3 million to $3.5 million. The increase was due primarily to an increase in the Companys
stock-based
compensation expense. As a percentage of total revenue,
compensation and benefits expense increased 0.1 percentage points to 24.9%.
Comparing the six months ended March 31, 2017, to the
six months ended March 31, 2018, compensation and benefits expense increased by 2.5%, from $6.5 million to $6.7 million. The increase was due primarily to an increase in the Companys
stock-based
compensation expense. As a percentage of total revenue, compensation and benefits expense decreased 0.6 percentage points to 23.9%.
- 25 -
General and Administrative Expense
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, general and administrative expense
increased by 2.5%, from $1.40 million to $1.43 million. The increase resulted from increased variable sales-related costs and business
development-related
expenses in the current period versus the
prior comparable period. As a percentage of total revenue, general and administrative expense decreased 0.3 percentage points to 10.2%.
Comparing the six months ended March 31, 2017, to the six months ended March 31, 2018, general and administrative expense increased
by 5.6%, from $2.8 million to $2.9 million. The increase resulted primarily from increased variable sales-related costs in the current period versus the prior comparable period. As a percentage of total revenue, general and administrative
expense increased 0.1 percentage points to 10.6%.
Mutual Fund Distribution Expense
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.
Comparing the three months ended
March 31, 2017, to the three months ended March 31, 2018, mutual fund distribution expense increased by 70.8%, from $0.07 million to $0.12 million. The increase was due to both entering into contract amendments that altered the
services provided (and associated fees) and changes in the composition of average daily net assets held by financial institutions. These changes have led to an allocation of a larger portion of mutual fund distribution expense to the Company. As a
percentage of total revenue, mutual fund distribution expense increased 0.4 percentage points to 0.9%.
Comparing the six months ended
March 31, 2017, to the six months ended March 31, 2018, mutual fund distribution expense increased by 82.7%, from $0.1 million to $0.2 million. The increase was due to both entering into contract amendments that altered the
services provided (and associated fees) and changes in the composition of average daily net assets held by financial institutions. As a percentage of total revenue, mutual fund distribution expense increased 0.4 percentage points to 0.9%.
Sub-Advisory
Fee Expense
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018,
sub-advisory
fee expense increased by 15.5%, from $2.3 million to $2.6 million. The increase was a result of an increase in average assets under management in the
sub-advised
Hennessy Funds as well as, to a much lesser extent, the amendment to the
sub-advisory
agreement with SPARX, which immediately increased the
sub-advisory
fees payable to SPARX for the Hennessy Japan Small Cap Fund. As a percentage of total revenue,
sub-advisory
fee expense increased 1.6 percentage points to 18.9%.
- 26 -
Comparing the six months ended March 31, 2017, to the six months ended March 31, 2018,
sub-advisory
fee expense increased by 13.1%, from $4.6 million to $5.2 million. The increase was primarily a result of an increase in average assets under management in the
sub-advised
Hennessy Funds. As a percentage of total revenue,
sub-advisory
fee expense increased 1.4 percentage points to 18.6%.
Amortization and Depreciation Expense
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, amortization and depreciation expense
increased by 4.4%, from $0.09 million to $0.10 million. The increase was a result of higher fixed asset purchases in the current period. As a percentage of total revenue, amortization and depreciation expense remained the same at 0.7%.
Comparing the six months ended March 31, 2017, to the six months ended March 31, 2018, amortization and depreciation expense
decreased by 3.3%, from $0.184 million to $0.178 million. The decrease was a result of a lower fixed asset base over the
six-month
period. As a percentage of total revenue, amortization and
depreciation expense decreased 0.1 percentage points to 0.6%.
Interest Expense
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, interest expense decreased by 4.3%, from
$0.28 million to $0.27 million. The decrease was due primarily to a decrease in the Companys principal loan balance, and was partly offset by an increase in the interest rate charged to the loan. As a percentage of total revenue,
interest expense decreased 0.2 percentage points to 1.9%.
Comparing the six months ended March 31, 2017, to the six months
ended March 31, 2018, interest expense decreased by 2.8%, from $0.54 million to $0.53 million. The decrease was also due primarily to a decrease in the Companys principal loan balance, and was partly offset by an increase in the
interest rate charged to the loan. As a percentage of total revenue, interest expense decreased 0.2 percentage points to 1.9%.
Income Tax Expense
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, the provision for income tax
expense decreased by 35.4%, from $2.2 million to $1.4 million. This decrease was due to the 2017 Tax Act, signed into law on December 22, 2017, which reduced our corporate federal income tax rate. As a percentage of total revenue,
income tax expense decreased 6.5 percentage points to 10.2%.
Comparing the six months ended March 31, 2017, to the six months ended
March 31, 2018, the provision for income tax expense decreased by 114.7% from an expense of $4.2 million to a benefit of $0.6 million. This decrease was due to the 2017 Tax Act. At December 31, 2017, the Company was required to
record a
one-time,
non-cash
benefit to income taxes of approximately $4 million for the accounting
re-measurement
of the
Companys deferred tax liability based on the lower federal corporate income tax rate. As a percentage of total revenue, income tax expense decreased 18.0 percentage points to
-2.2%.
- 27 -
Net Income
Comparing the three months ended March 31, 2017, to the three months ended March 31, 2018, net income increased by 25.6%, from
$3.6 million to $4.6 million primarily as a result of the reduction in income tax expense discussed above. As a percentage of total revenue, net income increased 5.1 percentage points to 32.5%.
Comparing the six months ended March 31, 2017, to the six months ended March 31, 2018, net income increased by 67.1%, from
$7.6 million to $12.7 million primarily as a result of the reduction in income tax expense discussed above. As a percentage of total revenue, net income increased 17.1 percentage points to 45.8%.
Critical Accounting Policies
Our
financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States, 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. For a discussion of the
accounting policies that we believe are most critical to understanding our results of operations and financial position, see the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on
Form 10-K
for the fiscal year ended September 30, 2017.
Liquidity and
Capital Resources
We continually review our capital requirements to ensure that we have funding available to support our business
model. Management anticipates that cash and other liquid assets on hand as of March 31, 2018, 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, 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.
Total assets under management as of March 31, 2018, was $6.6 billion, which was a decrease of $58 million, or
0.9%, from March 31, 2017. The primary sources 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 $78.4 million as of March 31, 2018. As of March 31, 2018, we had cash and cash equivalents of $16.6 million.
- 28 -
The following table summarizes key financial data relating to our liquidity and use of cash for
the six months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited, in thousands)
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
$
|
8,161
|
|
|
$
|
8,106
|
|
Investing cash outflows
|
|
|
(3,614
|
)
|
|
|
(187
|
)
|
Financing cash outflows
|
|
|
(3,601
|
)
|
|
|
(3,355
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
946
|
|
|
$
|
4,564
|
|
|
|
|
|
|
|
|
|
|
The increase in cash provided by operating activities of $0.06 million for the six months ended
March 31, 2018, was mainly due to increased operating income in the current period versus the six months ended March 31, 2017.
The increase in cash used in investing activities of $3.4 million was mainly related to the purchases of the assets related to the
management of the Rainier U.S. Funds.
The increase in cash used in financing activities of $0.2 million was due to an increase in
dividend payments.
On September 17, 2015, in connection with the repurchase of up to 1,500,000 shares of the Companys common
stock pursuant to its
self-tender
offer, the Company and its lenders entered into a term loan agreement with an original principal amount of $35.0 million (consisting of a $20.0 million promissory
note to U.S. Bank and a $15.0 million promissory note to California Bank & Trust). Then, on September 19, 2016, the Company and its lenders entered into an amendment to the term loan agreement to allow the Company to purchase the
assets related to the management of the Westport Fund and the Westport Select Cap Fund. On November 16, 2017, the Company and its lenders entered into an amendment to the term loan agreement to revise the excess cash flow prepayment
requirements. On November 30, 2017, the Company and its lenders entered into an amendment to the term loan agreement to allow the Company to purchase the assets related to the management of the Rainier U.S. Funds.
The term loan agreement requires 48 monthly payments in the amount of $364,583 plus interest calculated based on one of the following, at the
Companys option:
(1)
the sum of
(a) a margin that ranges from 2.75% to 3.25%, depending on the Companys
ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization (excluding, among other things, certain
non-cash
gains and losses) (EBITDA),
plus
(b) the LIBOR rate; or
- 29 -
(2)
the sum of
(a) a margin that ranges from 0.25% to 0.75%, depending on the
Companys ratio of consolidated debt to consolidated EBITDA,
plus
(b) the highest rate out of the following three rates: (i) the prime rate set by U.S. Bank from time to time, (ii) the Federal Funds Rate plus 0.50%, or
(iii) the
one-month
LIBOR rate plus 1.00%.
The Company currently uses a
one-month
LIBOR rate contract, which must be renewed monthly. As of March 31, 2018, the effective rate is 4.414%, which is comprised of the
one-month
LIBOR rate of
1.664% as of March 1, 2018, plus a margin of 2.75% based on the Companys ratio of consolidated debt to consolidated EBITDA as of December 31, 2017. The Company intends to continue renewing the LIBOR rate 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 the Companys assets. The final installment of the
then-outstanding
principal plus accrued interest is due September 17, 2019. As of March 31, 2018, the Company had $24.1 million outstanding under its term loan ($23.8 million net of debt issuance
costs).
The term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of certain financial
ratios. The Company was in compliance for the periods ended March 31, 2018 and 2017.