HAI-Form 10-K 17 Cover.qxp 12/4/17 6:32 PM Page 1
HENNESSY
ADVISORS, INC.
FORM 10-K
ANNUAL REPORT
Year Ended September 30, 2017
Hennessy Advisors, Inc.
7250 Redwood Boulevard, Suite 200
Novato, California 94945
800-966-4354
www.hennessyadvisors.com
(This page intentionally left blank.) UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to
Commission File Number 001-36423
HENNESSY ADVISORS, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
7250 Redwood Blvd., Suite 200
Novato, California
(Address of principal
executive office)
68-0176227
(IRS Employer
Identification No.)
94945
(Zip Code)
(415) 899-1555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, no par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act:
Large accelerated filer ☐
Accelerated filer
☒
Non-accelerated filer ☐ (do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of Common Stock held by non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) of the Registrant, based on the
closing price of $16.81 on March 31, 2017, was $76,181,962.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
As of November 28, 2017, there were 7,802,995 shares of Common Stock (no par value) issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy statement for its 2018 annual meeting of stockholders will be, when filed, incorporated by reference in Part III,
Items 10, 11, 12, 13, and 14.
HENNESSY ADVISORS, INC.
TABLE OF CONTENTS
BUSINESS
I
PART
ITEM 1
ITEM IA RISK FACTORS
ITEM 1B UNRESOLVED STAFF COMMENTS
ITEM 2
ITEM 3
ITEM 4
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5
ITEM 6
ITEM 7
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8
ITEM 9
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A CONTROLS AND PROCEDURES
ITEM 9B OTHER INFORMATION
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
ITEM 11
ITEM 12
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 13
ITEM 14
PART IV
ITEM 15
ITEM 16
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
2
3
21
31
31
31
31
32
35
36
47
48
71
71
72
72
72
72
73
73
73
76
77
PART I
ITEM 1. BUSINESS
GENERAL
Hennessy Advisors, Inc. (the “Company,” “we,” “us,” or “our”) is a publicly traded investment management
firm whose primary business activity is managing, servicing and marketing 14 open-end mutual funds branded as
the Hennessy Funds. We are committed to employing a consistent and repeatable investment process for the
Hennessy Funds, combining time-tested stock selection strategies with a highly disciplined, team-managed
approach, and to providing superior service to investors. Our goal is to provide products that investors can have
confidence in, knowing their money is invested as promised, with their best interest in mind. Our firm was founded
on these principles over 28 years ago and the same principles guide us today.
We earn revenues primarily by providing investment advisory services to the Hennessy Funds. We also
provide shareholder services to the Hennessy Funds, but we have only earned shareholder service fees from all of
(versus only some of) the Hennessy Funds since March 1, 2015. Investment advisory services include managing the
composition of each fund’s portfolio (including the purchase, retention, and disposition of portfolio securities in
accordance with each fund’s investment objectives, policies, and restrictions), conducting investment research,
monitoring compliance with each fund’s investment restrictions and applicable laws and regulations, overseeing the
selection and continued employment of sub-advisors and monitoring such sub-advisors’ investment performance
and adherence to investment policies and compliance procedures, overseeing other service providers, maintaining
public relations and marketing programs for each fund, preparing and distributing regulatory reports, and overseeing
distribution through third-party financial intermediaries. Shareholder services include maintaining an “800” number
that the current investors of the Hennessy Funds may call to ask questions about the funds or their accounts, or to get
help with processing exchange and redemption requests or changing account options. The fees we receive for
investment advisory and shareholder services are calculated as a percentage of the average daily net asset values of
the Hennessy Funds. Accordingly, our revenues increase or decrease as our average assets under management rises
or falls. 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.
For four of the Hennessy Funds whose assets related to fund management were acquired through asset
purchases, we have delegated the day-to-day portfolio management responsibilities to sub-advisors. In exchange for
these sub-advisory services, we pay each sub-advisor a fee out of our own assets, which is calculated as a percentage
of the average daily net asset values of the sub-advised funds. Accordingly, the sub-advisor fees we pay increase or
decrease as our average assets under management in our sub-advised funds increases or decreases, respectively.
Our average assets under management for fiscal year 2017 was $6.6 billion. As of the end of fiscal year 2017,
our total assets under management was $6.6 billion, an increase of almost 1,660% from $375 million as of the end of
our first fiscal year as a public company, which was September 30, 2002.
Our business strategy centers on (i) organic growth through our marketing and sales efforts and (ii) growth
through strategic purchases of management-related assets.
HISTORICAL TIMELINE
1989
1996
1998
In February, we were founded as a California corporation under our previous name, Edward J. Hennessy,
Inc., and registered as a broker-dealer with the National Association of Securities Dealers (now known as
the Financial Industry Regulatory Authority).
In March, we launched our first mutual fund, the Hennessy Balanced Fund.
In October, we launched our second mutual fund, the Hennessy Total Return Fund.
3
2000
2002
2003
2004
2005
2007
2009
2011
2012
In June, we successfully completed our first asset purchase by purchasing the assets related to the
management of two funds previously managed by Netfolio, Inc. (formerly known as O’Shaughnessy
Capital Management, Inc.), named the O’Shaughnessy Cornerstone Growth Fund and O’Shaughnessy
Cornerstone Value Fund, which are now called the Hennessy Cornerstone Growth Fund and the Hennessy
Cornerstone Value Fund. The amount of the purchased assets as of the closing date totaled approximately
$197 million.
In May, we successfully completed a self-underwritten initial public offering of our stock by raising $5.7 million
at a split-adjusted price of $1.98 (HNNA.OB) and changed our firm name to Hennessy Advisors, Inc. Our total
assets under management at the time of our initial public offering was approximately $358 million.
In September, we purchased the assets related to the management of a fund previously managed by SYM
Financial Corporation, named the SYM Select Growth Fund, and reorganized the assets of such fund into
the Hennessy Cornerstone Mid Cap 30 Fund. The amount of the purchased assets as of the closing date
was approximately $35 million.
In March, we purchased the assets related to the management of five funds previously managed by
Lindner Asset Management, Inc. and reorganized the assets of such funds into four of our existing
Hennessy Funds. The amount of the purchased assets as of the closing date totaled approximately
$301 million.
In July, we purchased the assets related to the management of a fund previously managed by Landis
Associates LLC, named The Henlopen Fund, and changed the fund name to the Hennessy Cornerstone
Growth, Series II Fund. The amount of the purchased assets as of the closing date was approximately
$299 million.
In November, we launched the Hennessy Micro Cap Growth Fund, LLC, a non-registered private pooled
investment fund.
In March, we purchased the assets related to the management of two funds previously managed by RBC
Global Asset Management (U.S.) Inc., named the Tamarack Large Growth Fund and the Tamarack Value
Fund, and reorganized the assets of such funds into the Hennessy Cornerstone Large Growth Fund and the
Hennessy Large Value Fund, respectively. In conjunction with the completion of the transaction, RBC
Global Asset Management (U.S.) Inc. became the sub-advisor to the Hennessy Large Value Fund. The
amount of the purchased assets as of the closing date totaled approximately $158 million.
In September, we purchased the assets related to the management of two funds previously managed by
SPARX Investment & Research, USA, Inc. and sub-advised by SPARX Asset Management Co., Ltd.,
named the SPARX Japan Fund and the SPARX Japan Smaller Companies Fund, which are now called the
Hennessy Japan Fund and the Hennessy Japan Small Cap Fund, respectively. In conjunction with the
completion of the transaction, SPARX Asset Management Co., Ltd. became the sub-advisor to the
Hennessy Japan Fund and the Hennessy Japan Small Cap Fund. The amount of the purchased assets as of
the closing date totaled approximately $74 million.
In October, we reorganized the assets of the Hennessy Cornerstone Growth, Series II Fund into the
Hennessy Cornerstone Growth Fund.
In October, we purchased the assets related to the management of 10 funds previously managed by FBR
Fund Advisers (the “FBR Funds”). We reorganized the assets of three of the FBR Funds into our existing
Hennessy Funds and changed the fund names of the other seven FBR Funds to become part of our product
offerings. In conjunction with the completion of the transaction, Broad Run Investment Management, LLC
became the sub-advisor to the Hennessy Focus Fund, Financial Counselors, Inc. became the sub-advisor to
the Hennessy Equity and Income Fund (fixed income allocation) and the Hennessy Core Bond Fund, and The
London Company of Virginia, LLC became the sub-advisor to the Hennessy Equity and Income Fund (equity
allocation). The amount of the purchased assets as of the closing date was approximately $2.2 billion.
In December, we closed the Hennessy Micro Cap Growth Fund, LLC.
2014
In April, our common stock began trading on The NASDAQ Capital Market.
4
2015
2016
2017
In September, we completed a self-tender offer, under which we repurchased 1,500,000 shares of our
common stock at $16.67 per share.
In September, we purchased the assets related to the management of two funds previously managed by
Westport Advisers, LLC, named the Westport Fund and the Westport Select Cap Fund, and reorganized
the assets of such funds into the Hennessy Cornerstone Mid Cap 30 Fund. The amount of the purchased
assets as of the closing date totaled approximately $435 million.
In February, we liquidated the Hennessy Core Bond Fund and reorganized the Hennessy Large Value
Fund into the Hennessy Cornerstone Value Fund. Additionally, for the Hennessy Technology Fund, we
implemented changes to the investment strategy and the portfolio management team, decreased the
investment advisory fee from 0.90% to 0.74%, and adopted an expense limitation agreement.
In March, we launched Institutional Class shares for the Hennessy Gas Utility Fund.
In May, we signed a definitive agreement with Manning & Napier Group, LLC and Rainier Investment
Management, LLC to purchase the assets related to the management of three Rainier Funds – the Rainier
Large Cap Equity Fund, the Rainier Small/Mid Cap Equity Fund, and the Rainier Mid Cap Equity Fund.
Upon completion of the transaction, which is subject to the approval of the shareholders of the Rainier
Funds, the assets related to the Rainier Large Cap Equity Fund will merge into the Hennessy Cornerstone
Large Growth Fund and the assets related to the Rainier Mid Cap Equity Fund and the Rainier Small/Mid
Cap Equity Fund will merge into the Hennessy Cornerstone Mid Cap 30 Fund.
PRODUCT INFORMATION
Investment Strategies of the Hennessy Funds
We manage 14 mutual funds that have each been categorized as Domestic Equity, Multi-Asset, or Sector and
Specialty, as shown below:
Domestic Equity
Multi-Asset
The Hennessy Funds’ Family
Hennessy Cornerstone Growth Fund Hennessy Total Return Fund
Hennessy Focus Fund
Hennessy Cornerstone Mid Cap 30
Fund
Hennessy Cornerstone Large Growth
Fund
Hennessy Cornerstone Value Fund
Hennessy Equity and Income Fund Hennessy Small Cap Financial Fund
Hennessy Large Cap Financial Fund
Hennessy Balanced Fund
Sector and Specialty
Hennessy Gas Utility Fund
Hennessy Technology Fund
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Domestic Equity Funds
Five of the Hennessy Funds are categorized as Domestic Equity products. Of those five funds, four utilize a
quantitative investment strategy, and one is actively managed, but they all employ a highly disciplined, team-
managed approach to investing. Following is a brief description of the investment objectives and principal
investment strategies of the Hennessy Funds in the Domestic Equity product category:
•
Hennessy Cornerstone Growth Fund (Investor Class symbol HFCGX and Institutional Class symbol
HICGX). The Hennessy Cornerstone Growth Fund seeks long-term growth of capital by investing in
growth-oriented common stocks using a highly disciplined, quantitative formula. While a majority of
the companies generally selected by the Cornerstone Growth formula are small-cap companies, the
Cornerstone Growth formula may also select mid- and large-cap companies. This fund screens for
stocks with a market capitalization of more than $175 million, a price-to-sales ratio of less than 1.5,
higher annual earnings than in the previous year, and stock price appreciation, or positive relative
strength, over the prior three- and six-month periods. The fund then invests in the 50 common stocks
with the highest one-year price appreciation.
5
•
•
•
•
Hennessy Focus Fund (Investor Class symbol HFCSX and Institutional Class symbol HFCIX). The
Hennessy Focus Fund seeks capital appreciation by employing a fundamental, bottom-up investment
approach that concentrates the fund’s holdings in companies most attractive to its portfolio managers.
This fund seeks high-quality, growth-oriented companies with demonstrated strong competitive
positions, predictable cash earnings growth, high return on invested capital, excellent management, and
modest valuation. It maintains a concentrated portfolio of 20 to 30 stocks that are conviction-weighted
with 60% to 80% of the fund’s assets invested in the fund’s top 10 holdings.
Hennessy Cornerstone Mid Cap 30 Fund (Investor Class symbol HFMDX and Institutional
Class symbol HIMDX). The Hennessy Cornerstone Mid Cap 30 Fund seeks long-term growth of capital
by investing in mid-cap, growth-oriented companies using a highly disciplined, quantitative formula.
This fund screens for stocks with a market capitalization of between $1 billion and $10 billion,
excluding American Depository Receipts (“ADRs”), a price-to-sales ratio of less than 1.5, higher annual
earnings than in the previous year, and positive stock price appreciation, or positive relative strength,
over the three- and six-month periods. The fund then invests in the 30 common stocks with the highest
one-year price appreciation.
Hennessy Cornerstone Large Growth Fund (Investor Class symbol HFLGX and Institutional
Class symbol HILGX). The Hennessy Cornerstone Large Growth Fund seeks long-term growth of
capital by investing in growth-oriented common stocks of larger companies using a highly disciplined,
quantitative formula. This fund screens for stocks with a market capitalization exceeding the average of
the relevant database, excluding ADRs, a price-to-cash flow ratio less than the median of the relevant
database, and positive total capital. The fund then invests in the 50 common stocks with the highest one-
year return on total capital.
Hennessy Cornerstone Value Fund (Investor Class symbol HFCVX and Institutional Class symbol
HICVX). The Hennessy Cornerstone Value Fund seeks total return, consisting of capital appreciation
and current income, by investing in larger, dividend-paying companies using a highly disciplined,
quantitative formula. This fund screens for stocks with a market capitalization that exceeds the average
of the relevant database, shares outstanding that exceeds the average of the relevant database, cash flow
that exceeds the average of the relevant database, and 12-month sales that are 50% greater than the
average of the relevant database. The fund then invests in the 50 common stocks with the highest
dividend yield, which is calculated as the annual dividends paid by a company divided by the per share
price of its stock.
Multi-Asset Funds
Three of the Hennessy Funds are categorized as Multi-Asset products. Of those three funds, two utilize a
quantitative investment strategy and one is actively managed. These funds follow a more conservative investment
strategy focused on generating income and providing an alternative to mutual funds containing only equity stocks.
Following is a brief description of the investment objectives and principal investment strategies of the Hennessy
Funds in the Multi-Asset product category:
•
Hennessy Total Return Fund (Investor Class symbol HDOGX). The Hennessy Total Return Fund
seeks total return, consisting of capital appreciation and current income, by investing approximately
50% of its assets in the 10 highest dividend-yielding common stocks of the Dow Jones Industrial
Average (commonly referred to as the “Dogs of the Dow”) and the remaining 50% in U.S. Treasury
securities with a maturity of less than one year. The fund then utilizes a borrowing strategy that allows
the fund’s performance to approximate what it would be if the fund had an asset allocation of roughly
75% Dogs of the Dow stocks and 25% U.S. Treasury securities.
6
•
•
Hennessy Equity and Income Fund (Investor Class symbol HEIFX and Institutional Class symbol
HEIIX). The Hennessy Equity and Income Fund seeks long-term capital growth and current income by
investing in stocks, bonds and other fixed income securities designed to provide a balanced portfolio,
with broad market exposure and low volatility. Under normal circumstances, the fund invests
approximately 60% of its assets in equities, focusing on high-quality, dividend-paying stocks, and
approximately 40% of its assets in high-quality, domestic corporate, agency and government bonds.
Hennessy Balanced Fund (Investor Class symbol HBFBX). The Hennessy Balanced Fund seeks a
combination of capital appreciation and current income by investing approximately 50% of its assets in
the Dogs of the Dow stocks and approximately 50% of its assets in U.S. Treasury securities with a
maturity of less than one year.
Sector and Specialty Funds
Six of the Hennessy Funds are categorized as Sector and Specialty products. Of those six funds, one is
designed as an index fund and the other five are actively managed, but they all focus on a niche sector of the stock
market. Following is a brief description of the investment objectives and principal investment strategies of the
Hennessy Funds in the Sector and Specialty product category:
•
•
•
•
•
Hennessy Gas Utility Fund (Investor Class symbol GASFX and Institutional Class symbol HGASX).
The Hennessy Gas Utility Fund seeks income and capital appreciation by investing in the companies
that deliver natural gas and are members of the American Gas Association (“AGA”). The fund owns all
of the publicly traded companies that comprise the AGA Stock Index. The AGA Stock Index is market
cap weighted and adjusted for the percentage of natural gas assets on each company’s balance sheet.
The fund invests in companies approximately in the same proportion as its weighting in the AGA Stock
Index, with no company representing greater than 5% of its assets.
Hennessy Small Cap Financial Fund (Investor Class symbol HSFNX and Institutional Class symbol
HISFX). The Hennessy Small Cap Financial Fund seeks capital appreciation by investing in companies with
market capitalizations under $3 billion principally engaged in the business of providing financial services.
This fund invests in financial services companies that the portfolio managers believe demonstrate a high-
quality management team with a long-term view, a well-balanced and uncomplicated business model, a
conservative lending culture with high-quality liabilities, sustainable earnings growth opportunities, a low-
cost operating structure, and attractive valuations relative to the industry.
Hennessy Large Cap Financial Fund (Investor Class symbol HLFNX and Institutional Class symbol
HILFX). The Hennessy Large Cap Financial Fund seeks capital appreciation by investing in companies
with market capitalizations over $3 billion principally engaged in the business of providing financial
services. This fund invests in financial services companies that the portfolio managers believe demonstrate
a high-quality management team with a long-term view, a well-balanced and uncomplicated business
model, a conservative lending culture with high-quality liabilities, sustainable earnings growth
opportunities, a low-cost operating structure, and attractive valuations relative to the industry.
Hennessy Technology Fund (Investor Class symbol HTECX and Institutional Class symbol HTCIX).
The Hennessy Technology Fund seeks long-term capital appreciation by investing in high-quality
companies that the portfolio management team believes have the potential to participate in the growth
and innovation of the technology sector. This fund utilizes several metrics to analyze technology
companies, selecting the top 60 that demonstrate sector-leading cash flows and profits with the ability to
sustain profitability and that have a history of delivering returns in excess of cost of capital, an attractive
balance sheet risk profile, an attractive relative valuation, and the ability to generate cash.
Hennessy Japan Fund (Investor Class symbol HJPNX and Institutional Class symbol HJPIX). The
Hennessy Japan Fund seeks long-term capital appreciation by investing in securities of Japanese
companies regardless of market capitalization. This fund screens for companies that the portfolio
managers believe have strong businesses and management, and are trading at an attractive price.
Through in-depth and rigorous analysis and on-site research, the portfolio managers identify stocks with
a “value gap.” The portfolio is limited to its portfolio managers’ best ideas and maintains a concentrated
number of holdings.
7
•
Hennessy Japan Small Cap Fund (Investor Class symbol HJPSX and Institutional Class symbol
HJSIX). The Hennessy Japan Small Cap Fund seeks long-term capital appreciation by investing in
securities of smaller Japanese companies, defined as those with market capitalizations in the bottom
15% of all Japanese companies. This fund screens for small caps that the portfolio managers believe
have strong businesses and management, and are trading at an attractive price. Through in-depth and
rigorous analysis and on-site research, the portfolio managers identify stocks with a “value gap.” The
portfolio is limited to its portfolio managers’ best ideas and is unconfined to benchmarks.
Historical Investment Performance of the Hennessy Funds
The following table presents the average annualized returns for each of the Hennessy Funds and their relevant
benchmark indices for the one-year, three-year, five-year, ten-year and since inception periods ended September 30,
2017.
Returns are presented net of all expenses borne by mutual fund shareholders, but are not net of fees waived or
expenses borne by us. The past investment performance of the Hennessy Funds is no guarantee of future
performance and all of the Hennessy Funds have experienced negative performance over various time periods in the
past and may do so again in the future.
Hennessy Funds Performance as of September 30, 2017:
Hennessy Cornerstone Growth Fund*
Institutional Class Share - HICGX**
Investor Class Share - HFCGX
Russell 2000 Index (1)
S&P 500 Index (2)
Hennessy Focus Fund*
Institutional Class Share - HFCIX**
Investor Class Share - HFCSX
Russell 3000 Index (2)
Russell Midcap Growth Index (3)
One Year
18.15%
17.79%
20.74%
18.61%
One Year
16.20%
15.76%
18.71%
17.82%
Three Years
Five Years
Ten Years
9.81%
9.53%
12.18%
10.81%
13.87 %
13.55 %
13.79 %
14.22 %
3.89 %
3.59 %
7.85 %
7.44 %
Three Years
Five Years
Ten Years
11.42%
11.01%
10.74%
9.96%
14.95 %
14.56 %
14.23 %
14.18 %
9.68%
9.34%
7.57%
8.20%
Hennessy Cornerstone Mid Cap 30 Fund
One Year
Three Years
Five Years
Ten Years
Since Inception
(11/01/96)
9.57%
9.42%
8.76%
8.30%
Since Inception
(1/03/97)
13.42%
13.24%
8.21%
8.75%
Since Inception
(9/17/03)
Institutional Class Share - HIMDX** 14.99%
14.58%
Investor Class Share - HFMDX
Russell Midcap Index (4)
15.32%
S&P 500 Index (2)
18.61%
8.47%
8.14%
9.54%
10.81%
13.06%
12.70%
14.26%
14.22%
8.16%
7.81%
8.08%
7.44%
11.26%
11.00%
10.62%
8.83%
Hennessy Cornerstone Large Growth Fund
Institutional Class Share - HILGX
Investor Class Share - HFLGX
Russell 1000 Index (5)
S&P 500 Index (2)
One Year
16.40 %
16.08 %
18.54 %
18.61 %
Three Years
Five Years
7.28%
7.10%
10.63%
10.81%
12.87 %
12.65 %
14.27 %
14.22 %
Ten Years
—
—
—
7.44%
Since Inception
(3/20/09)
16.88%
16.60%
17.57%
17.39%
8
Hennessy Cornerstone Value Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(11/01/96)
Institutional Class Share -
HICVX**
Investor Class Share - HFCVX
Russell 1000 Value Index (6)
S&P 500 Index (2)
18.09%
17.77%
15.12%
18.61%
7.88%
7.68%
8.53%
10.81%
11.55%
11.32%
13.20%
14.22%
5.90%
5.65%
5.92%
7.44%
7.21%
7.09%
8.64%
8.30%
Hennessy Total Return Fund
One Year
Three Years
Five Years
Ten Years
Investor Class Share - HDOGX
75/25 Blended DJIA/Treasury
Index (7)
Dow Jones Industrial Average (2)
9.50%
6.96%
8.30%
4.56%
18.83%
25.45%
9.33%
12.35%
10.19%
13.57%
6.07%
7.72%
Hennessy Equity and Income Fund*
One Year
Three Years
Five Years
Ten Years
Institutional Class Share - HEIIX
Investor Class Share - HEIFX***
Blended Balanced Index (8)
S&P 500 Index (2)
11.96%
11.53%
10.96%
18.61%
5.74%
5.34%
7.40%
10.81%
8.00%
7.64%
9.14%
14.22%
6.36%
6.05%
6.21%
7.44%
Hennessy Balanced Fund
One Year
Three Years
Five Years
Ten Years
Investor Class Share - HBFBX
50/50 Blended DJIA/Treasury
Index (9)
Dow Jones Industrial Average (2)
7.60%
4.78%
5.17%
3.33%
12.46%
25.45%
6.40%
12.35%
6.93%
13.57%
4.61%
7.72%
Hennessy Gas Utility Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(7/29/98)
5.01%
6.25%
7.41%
Since Inception
(6/03/97)
7.08%
6.88%
6.72%
7.52%
Since Inception
(3/08/96)
4.49%
6.29%
9.23%
Since Inception
(5/10/89)
Institutional Class Share -
HGASX**
Investor Class Share - GASFX
AGA Stock Index (11)
S&P 500 Index (2)
7.36%
7.16%
8.43%
18.61%
4.70%
4.64%
5.88%
10.81%
10.67%
10.62%
11.79%
14.22%
8.97%
8.95%
9.77%
7.44%
9.87%
9.87%
11.01%
10.06%
Hennessy Small Cap Financial Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(1/03/97)
Institutional Class Share -
HISFX**
Investor Class Share - HSFNX
Russell 2000 Financial Services
Index (12)
Russell 2000 Index (1)
24.99%
24.50%
22.48%
20.74%
17.37%
16.94%
15.38%
12.18%
15.72%
15.31%
15.12%
13.79%
9.46%
9.16%
6.75%
7.85%
11.38%
11.23%
9.24%
8.49%
Hennessy Large Cap Financial Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(1/03/97)
Institutional Class Share -
HILFX**
Investor Class Share - HLFNX
Russell 1000 Financial Services
Index (13)
Russell 1000 Index (5)
35.76%
35.16%
27.41%
18.54%
8.65%
8.27%
12.81%
10.63%
13.88%
13.64%
16.65%
14.27%
6.26%
6.15%
2.68%
7.55%
8.20%
8.15%
7.01%
8.22%
9
Hennessy Technology Fund*
One Year
Three Years
Five Years
Ten Years
Since Inception
(2/01/02)
Institutional Class Share -
HTCIX**
Investor Class Share - HTECX
NASDAQ Composite Index (14)
S&P 500 Index (2)
11.16%
10.80%
23.68%
18.61%
7.15%
6.79%
14.41%
10.81%
10.12%
9.78%
17.31%
14.22%
4.84%
4.62%
10.43%
7.44%
6.34%
6.20%
9.27%
7.46%
Hennessy Japan Fund*
One Year
Three Years
Five Years
Ten Years
Institutional Class Share - HJPIX
Investor Class Share - HJPNX
Russell/Nomura Total Market
Index (15)
Tokyo Stock Price
Index (TOPIX) (16)
13.59%
13.14%
14.28%
13.92%
15.35%
15.02%
6.97%
6.74%
16.04%
9.46%
11.68%
2.76%
16.29%
9.32%
11.67%
2.63%
Hennessy Japan Small Cap Fund*
One Year
Three Years
Five Years
Ten Years
Institutional Class Share - HJSIX**
Investor Class Share - HJPSX
Russell/Nomura Small Cap
Index (17)
Tokyo Stock Price
Index (TOPIX) (16)
31.31%
31.02%
16.20%
15.97%
20.81%
20.68%
10.95
10.88
22.29%
14.12%
14.44%
6.86
16.29%
9.32%
11.67%
2.63%
Since Inception
(10/31/03)
9.52%
9.30%
5.30%
5.18%
Since Inception
(8/31/07)
11.07%
11.01%
6.84%
2.81%
*
**
Performance information from the inception date of the fund through the date Hennessy began managing the
fund is included because the previous investment manager(s) managed the fund using a similar investment
strategy.
Performance shown for periods prior to the inception of Institutional Class shares represents the performance
of Investor Class shares of the fund and includes expenses that are not applicable to and are higher than those
of Institutional Class shares.
*** Performance shown for periods prior to the inception of Investor Class shares represents the performance of
Institutional Class shares of the fund and includes expenses that are not applicable to and are lower than those
of Investor Class shares.
(1) The Russell 2000 Index is an unmanaged index commonly used to measure the performance of small-cap U.S.
stocks.
(2) The S&P 500 Index, Russell 3000 Index and Dow Jones Industrial Average are unmanaged, broad-based
indices commonly used to measure the performance of U.S. stocks.
(3) The Russell Midcap Growth Index is an unmanaged index commonly used to measure the performance of
mid-cap, growth oriented U.S. stocks.
(4) The Russell Midcap Index is an unmanaged index commonly used to measure the performance of mid-cap
U.S. stocks.
(5) The Russell 1000 Index is an unmanaged index commonly used to measure the performance of large-cap U.S.
stocks.
(6) The Russell 1000 Value Index is an unmanaged index commonly used to measure the performance of large-
cap, value oriented U.S. stocks.
(7) The 75/25 Blended DJIA/Treasury Index consists of 75% common stocks represented by the Dow Jones
Industrial Average and 25% short-duration Treasury securities represented by the ICE BofAML US 3-Month
Treasury Bill Index, which is an unmanaged index comprised of U.S. Treasury securities maturing in three
months.
(8) The Blended Balanced Index consists of 60% common stocks represented by the S&P 500 Index and 40%
bonds represented by the Barclays Capital Intermediate U.S. Government/Credit Index, which is an
unmanaged index commonly used to measure the performance of U.S. bonds.
10
(9) The 50/50 Blended DJIA/Treasury Index consists of 50% common stocks represented by the Dow Jones
Industrial Average and 50% short-duration Treasury securities represented by the ICE BofAML 1-Year U.S.
Treasury Note Index, which is an unmanaged index comprised of U.S. Treasury securities maturing in
approximately one year.
(10) The Barclays Capital Intermediate U.S. Government/Credit Index is an unmanaged index commonly used to
measure the performance of U.S. bonds.
(11) The AGA Stock Index is a market capitalization weighted index, adjusted monthly, consisting of member
companies of the American Gas Association (AGA).
(12) The Russell 2000 Financial Services Index is an unmanaged index commonly used to measure the
performance of U.S. small-cap financial sector stocks.
(13) The Russell 1000 Financial Services Index is an unmanaged index commonly used to measure the
performance of U.S. large-cap financial sector stocks.
(14) The NASDAQ Composite Index is a broad-based, capitalization-weighted index of all the NASDAQ National
Market and Small Cap stocks.
(15) The Russell/Nomura Total Market Index is a market capitalization-weighted index of Japanese equities and is
presented in U.S. Dollar terms.
(16) The Tokyo Stock Price Index (TOPIX) is a market capitalization-weighted index of all companies listed on
the First Section of the Tokyo Stock Exchange and is presented in U.S. Dollar terms.
(17) The Russell/Nomura Small Cap Index represents the universe of small-cap companies in the Japanese equity
markets and is presented in U.S. Dollar terms.
Investors cannot invest directly in an index. Performance data for an index does not reflect any deductions for fees,
expenses, or taxes.
Development of New Investment Strategies and Expanding Our Product Offerings
We develop new investment strategies and expand our product offerings by identifying client needs and
reviewing asset allocation tables to determine where we can augment our family of mutual funds. Once we identify
an attractive market segment, we select one of the following methods to initiate the new strategy.
• We screen the appropriate universe of stocks with a set of parameters that we believe identifies stocks
that will produce higher long-term returns with lower associated risk than their relative indices. We then
introduce the new investment strategy into the marketplace by opening and directly marketing a new
mutual fund.
• We purchase the assets related to the management of an existing mutual fund that we then manage ourselves.
• We purchase the assets related to the management of an existing mutual fund and then engage the
existing portfolio managers or strategic firm to act as a sub-advisor to manage the fund.
• We purchase the assets related to the management of an existing mutual fund and then employ the
existing portfolio management team to manage the fund.
ASSETS UNDER MANAGEMENT, SOURCES OF REVENUES, AND 12B-1 PLANS
We earn revenues primarily by providing investment advisory services to the Hennessy Funds and secondarily
by providing shareholder services to shareholders of the Hennessy Funds. The fees we receive for these services are
calculated as a percentage of the average daily net asset values of the Hennessy Funds. In addition, the sub-advisor
fees that we pay are also calculated as a percentage of the average daily net asset values of the sub-advised
Hennessy Funds. The amount of our assets under management fluctuates as a result of organic inflows (purchases of
shares of the Hennessy Funds by new or existing shareholders), acquisition inflows, outflows (redemptions of shares
of the Hennessy Funds by shareholders), and market appreciation or depreciation.
11
The following table summarizes our assets under management for the past five fiscal years:
Total Assets Under Management
At Each Fiscal Year Ended 2013-2017
Beginning assets under management
Acquisition inflows
Organic inflows
Redemptions
Market appreciation (depreciation)
9/30/2017
9/30/2016
9/30/2014
9/30/2015
(In thousands)
$ 6,698,519 $ 5,987,985 $ 5,520,802 $ 4,034,181 $ 919,262
— 2,222,961
1,150,462 2,168,840 2,603,428 2,052,286 1,441,677
(2,093,315) (2,417,384) (1,961,186) (1,215,493) (1,198,521)
(175,059) 649,828 648,802
857,146 524,548
434,530
—
9/30/2013
Ending assets under management
$ 6,612,812 $ 6,698,519 $ 5,987,985 $ 5,520,802 $ 4,034,181
As stated above, the fees we receive for providing investment advisory and shareholder services increase or
decrease as our average assets under management rises or falls.
The following table summarizes our sources of revenues, net of sub-advisor fees, for the past five fiscal years.
Investment advisory fees
Shareholder service fees
Subtotal
Sub-advisor fees
Revenues, net of sub-advisor fees
Investment Advisory Agreements and Fees
Revenues for Fiscal Years Ended 2013 - 2017
Years Ended September 30
2017
2016
2015
2014
2013
(In thousands)
$ 48,296 $ 46,391 $ 41,177 $ 33,581 $ 23,423
885
4,659 5,019 3,562
945
52,955 51,410 44,739 34,526 24,308
(9,225) (8,743) (7,284) (5,910) (3,942)
$ 43,730 $ 42,667 $ 37,455 $ 28,616 $ 20,366
We provide investment advisory services to the entire family of the 14 Hennessy Funds pursuant to
management contracts with Hennessy Funds Trust. Under these management contracts, we are responsible for the
provision of investment advisory services to the Hennessy Funds, subject to the oversight of the Board of Trustees
of Hennessy Funds Trust (the “Funds’ Board of Trustees”) and according to each fund’s particular fundamental
investment objectives and policies. The services that we provide to each Hennessy Fund pursuant to these
management contracts include, among other things, the following:
•
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 fund’s portfolio
(including the purchase, retention, and disposition of portfolio securities in accordance with the
fund’s investment objectives, policies, and restrictions), ensuring compliance with “best
execution” for the fund’s 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 fund’s compliance with its investment objectives and restrictions and federal
securities laws;
•
performing activities such as maintaining a compliance program, conducting ongoing reviews of
the compliance programs of the fund’s service providers (including its sub-advisor, as
applicable), conducting on-site visits to the fund’s 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 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 Funds’ Board of Trustees;
12
•
•
overseeing the selection and continued employment of the fund’s sub-advisor, if applicable,
monitoring such sub-advisor’s adherence to the fund’s investment objectives, policies, and
restrictions, and reviewing the fund’s 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 fund’s prospectus and related documents;
preparing or reviewing a written summary of the fund’s 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 fund’s 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
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 management contracts also provide that we are responsible for performing any ordinary clerical and
bookkeeping services needed by the Hennessy Funds that are not provided by the funds’ custodian, administrator, or
transfer agent. The Funds’ Board of Trustees is comprised of our President, Chief Executive Officer and Chairman
of the Board, Neil J. Hennessy, and three trustees who are not interested persons of the Hennessy Funds (the
“disinterested trustees”). Under the Investment Company Act of 1940, a majority of the disinterested trustees must
approve the entry into and continuation of our management contracts. The disinterested trustees also have sole
responsibility for selecting and nominating other disinterested trustees.
In exchange for the services described above, we receive an investment advisory fee from each of the
Hennessy Funds, which is calculated as a percentage of each fund’s average daily net asset value. As of
September 30, 2017, the percentages upon which the annual investment advisory fees payable to us by the Hennessy
Funds are based are as follows:
Hennessy Fund
All Class Shares
Hennessy Cornerstone Growth Fund
Hennessy Focus Fund
Hennessy Cornerstone Mid Cap 30 Fund
Hennessy Cornerstone Large Growth Fund
Hennessy Cornerstone Value Fund
Hennessy Total Return Fund
Hennessy Equity and Income Fund
Hennessy Balanced Fund
Hennessy Gas Utility Fund
Hennessy Small Cap Financial Fund
Hennessy Large Cap Financial Fund
Hennessy Technology Fund*
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Investment Advisory Fee
(as a % of fund assets)
0.74%
0.90%
0.74%
0.74%
0.74%
0.60%
0.80%
0.60%
0.40%
0.90%
0.90%
0.74%
0.80%
0.80%
*
The investment advisory fee for the Hennessy Technology Fund was reduced from 0.90% to 0.74% effective
as of February 28, 2017.
13
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 is charged to expense monthly by the Company as an offset to
revenues. The waived fee is deducted from investment advisory fee income and reduces the aggregate amount of
advisory fees received by the Company in the subsequent month. To date, the Company has only waived fees based
on contractual obligations, but the Company has the ability to waive fees at its discretion. Any decision to waive
fees voluntarily would not apply to previous periods, but would only apply on a going forward basis.
Our 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,” which is the transfer of the Company’s 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.
Sub-advisory Agreements and Fees
For four of the Hennessy Funds whose assets related to fund management were acquired through asset
purchases, we have delegated the day-to-day portfolio management responsibilities to sub-advisors. In each case, the
sub-advisor entity or the individuals working at the sub-advisor entity are the same entities or individuals who
advised the fund prior to our purchase of the assets related to the management of such fund. The services that each
sub-advisor provides to the applicable Hennessy Fund pursuant to the terms of the sub-advisory agreement we have
with such sub-advisor include:
•
•
•
•
acting as portfolio manager for the fund, which includes managing the composition of the fund’s
portfolio (including the purchase, retention, and disposition of portfolio securities in accordance with
the fund’s investment objectives, policies, and restrictions), seeking best execution for the fund’s
portfolio, managing the use of soft dollars for the fund, and managing proxy voting for the fund;
ensuring that its compliance programs include policies and procedures relevant to the fund and
the sub-advisor’s duties as a portfolio manager to the fund;
preparing a written summary of the fund’s performance for the most recent 12-month period for
each annual report of the fund; and
providing a quarterly certification to Hennessy Funds Trust regarding trading and allocation
practices, supervisory matters, the sub-advisor’s compliance program (including its code of
ethics), compliance with the fund’s policies, and general firm updates.
14
These sub-advisory services must be delivered in accordance with the terms of the sub-advisory agreement
and the sub-advised fund’s Prospectus and Statement of Additional Information, all as subject to the direction,
supervision and control of us and the Funds’ Board of Trustees. In exchange for sub-advisory services, we pay sub-
advisor fees to the sub-advisors out of our own assets. Sub-advisor fees are calculated as a percentage of the
applicable sub-advised fund’s average daily net asset value. The following table lists each of our sub-advised funds,
the sub-advisor entity for each fund, and the percentage upon which the annual sub-advisor fees payable by us to the
applicable sub-advisor are based:
Hennessy Fund
Hennessy Focus Fund
Hennessy Equity and Income Fund
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Sub-Advisor
(for all class shares)
Sub-Advisor Fee
(as a % of fund assets)
Broad Run Investment Management, LLC
Financial Counselors, Inc. (fixed income
allocation)
The London Company of Virginia, LLC
(equity allocation)
SPARX Asset Management Co. Ltd.
SPARX Asset Management Co. Ltd.
0.29%
0.27%
0.33%
0.35%
0.20%
The sub-advisory agreements must be renewed annually in the same manner and are subject to the same
termination provisions as the management contracts.
Shareholder Servicing Agreements and Fees
We provide shareholder services to the entire family of the Hennessy Funds pursuant to a shareholder
servicing agreement with Hennessy Funds Trust covering Investor Class shares of such 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. The shareholder services that we provide for the Hennessy Funds include, among other things,
the following:
• maintaining an “800” number that the current investors of the Hennessy Funds may call to ask questions
about the Hennessy Funds or their accounts with the Hennessy Funds;
•
•
•
•
assisting the investors in the Hennessy Funds with processing exchange and redemption requests;
assisting the investors in the Hennessy Funds with changing dividend options, account designations, and
addresses;
responding generally to questions from investors in the Hennessy Funds; and
providing other similar services that the Hennessy Funds may request.
15
In exchange for the services described above, we receive a shareholder service fee from each of the Hennessy
Funds, which is calculated as a percentage of the average daily net asset value of each fund’s Investor Class shares.
The following table lists each of the Hennessy Funds and the percentages upon which the annual shareholder service
fees paid to us by the Hennessy Funds are based:
Hennessy Fund
Investor Class Shares Only
Shareholder Servicing Fee
(as a % of fund assets)
Hennessy Cornerstone Growth Fund
Hennessy Focus Fund*
Hennessy Cornerstone Mid Cap 30 Fund
Hennessy Cornerstone Large Growth Fund
Hennessy Cornerstone Value Fund
Hennessy Total Return Fund
Hennessy Equity and Income Fund*
Hennessy Balanced Fund
Hennessy Gas Utility Fund*
Hennessy Small Cap Financial Fund*
Hennessy Large Cap Financial Fund*
Hennessy Technology Fund*
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
0.10%
*
Commenced March 1, 2015.
12b-1 Plans
All of the Hennessy Funds have adopted a 12b-1 plan. These plans are named after Rule 12b-1 of the
Investment Company Act of 1940, which permits mutual funds to adopt a plan that allows them to collect fees that
can be used to make payments to third parties in connection with the distribution of their fund shares. Amounts paid
under the plans may be spent on any activities or expenses primarily intended to result in sale of shares of the funds,
including, but not limited to, (i) advertising, (ii) compensation paid to financial institutions, broker-dealers, and
others for sales and marketing, (iii) shareholder accounting servicing, (iv) the printing and mailing of prospectuses
to possible new shareholders, and (v) the printing and mailing of sales literature. Mutual funds may also employ a
distributor to distribute and market their fund shares and use 12b-1 fees to pay the distributor for expenses incurred
for telephone costs, overhead costs, costs of employees who engage in or support the distribution of the fund shares,
the printing of prospectuses and other reports for possible new shareholders, advertising, and the preparation and
distribution of sales literature.
16
The 12b-1 fees for each of the Hennessy Funds is calculated as a percentage of such fund’s average daily net
asset value. The following table lists each of the Hennessy Funds and the percentage upon which the 12b-1 fees are
based:
Hennessy Fund
Investor Class Shares Only
Hennessy Cornerstone Growth Fund*
Hennessy Focus Fund
Hennessy Cornerstone Mid Cap 30 Fund*
Hennessy Cornerstone Large Growth Fund*
Hennessy Cornerstone Value Fund*
Hennessy Total Return Fund
Hennessy Equity and Income Fund
Hennessy Balanced Fund
Hennessy Gas Utility Fund
Hennessy Small Cap Financial Fund
Hennessy Large Cap Financial Fund
Hennessy Technology Fund
Hennessy Japan Fund**
Hennessy Japan Small Cap Fund**
12b-1 Fee
(as a % of fund assets)
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
0.15%
Effective November 1, 2015.
*
** Effective March 1, 2016.
CUSTODIAL AND BROKERAGE ARRANGEMENTS
A third-party custodian acts as custodian for all of our assets under management.
All trades for the Hennessy Funds are executed by independent brokerage firms following our direction or that
of our sub-advisors. When selecting brokers, we and our sub-advisors are required to seek “best execution.”
Although there is no single statutory definition, Securities and Exchange Commission (“SEC”) releases and other
legal guidelines make clear that the duty to seek best execution requires us to seek “the most advantageous terms
reasonably available under the circumstances for a customer’s account.” The lowest possible commission, while
important, is not the sole determinative factor. We and our sub-advisors also consider factors such as order size and
market depth, availability of competing markets and liquidity, trading characteristics of the security, financial
responsibility of the broker-dealer, and the broker’s ability to address current market conditions.
Currently, we participate in “soft dollar” arrangements with some of our brokers. This means that we receive
research reports and real-time electronic research to assist us in trading and managing the Hennessy Funds. Under
these soft dollar arrangements, the Hennessy Funds pay brokerage commissions for securities trades at the regular,
market rate, and some or all of the value of those commissions is received by us in the form of research or other
services that benefit the Hennessy Funds. Our soft dollar arrangements comply with SEC guidance regarding soft
dollars.
LICENSE AGREEMENT
Our ability to use the names and formulaic investment strategies of the Hennessy Cornerstone Growth Fund
and the Hennessy Cornerstone Value Fund are governed by the terms and conditions of a license agreement, dated
as of April 10, 2000, with Netfolio, Inc. (formerly known as O’Shaughnessy Capital Management, Inc.). Under the
license agreement, Netfolio, Inc. granted us a perpetual, paid-up, royalty-free, exclusive license to use certain
trademarks, such as “Strategy Indexing,” “Cornerstone Growth,” and “Cornerstone Value,” as well as the formula
investment strategies used by the Hennessy Cornerstone Growth Fund and the Hennessy Cornerstone Value Fund.
All of our advertising, marketing, promotional, and other materials incorporating or referring to the trademarks are
subject to the prior written approval of Netfolio, Inc., except that we do not need Netfolio, Inc.’s prior written
approval to use the trademarks in a manner that is not substantially unchanged from any prior use by Netfolio, Inc.
17
in its own business or from any prior use by us previously approved by Netfolio, Inc. We have the right to assign the
license to another person or entity if the assignee agrees in writing to be bound by the terms of the license
agreement. There are no ongoing licensing fees associated with this license agreement, and Netfolio, Inc. does not
have any contractual rights to terminate the license agreement.
BUSINESS STRATEGY
From the time we launched our first mutual fund in 1996 through the end of fiscal year 2017, we have grown
our assets under management to approximately $6.6 billion. During that time, we have consistently pursued a
growth strategy centered on organic growth through our marketing and sales efforts and growth through strategic
purchases of management-related assets. The implementation of this business strategy is described below.
• Delivering strong investment performance of the Hennessy Funds
One of the most effective ways we can grow the assets of the Hennessy Funds is by delivering strong
investment performance, which we believe should:
•
•
result in an increase in the value of existing assets of the Hennessy Funds;
encourage more investors to buy shares of the Hennessy Funds and decrease the number of investors
who redeem their shares and leave the Hennessy Funds; and
• motivate current investors to invest additional money in the Hennessy Funds.
• Utilizing our branding and marketing campaign to attract assets
We believe we can attract investors to the Hennessy Funds by effectively marketing our consistent and
repeatable investment process that combines time-tested stock selection strategies with a highly disciplined, team-
managed approach. We offer both quantitative funds and actively managed funds. We believe our quantitative funds
will attract investors who want to understand exactly how their investments are managed and who favor statistical
analysis and empirical evidence as the basis for investment decisions. Alternatively, we believe that our actively
managed funds will attract investors who appreciate a fundamental, hands-on investment management approach and
talented portfolio managers. We also believe our more conservative, income-generating funds will attract investors
seeking an alternative to mutual funds invested entirely in equities.
We run a comprehensive and far reaching public relations program designed to disseminate our message
through frequent television appearances, radio spots, feature articles, and print media mentions to a wide variety of
potential investors. Our public relations program has consistently resulted in the Hennessy Funds being mentioned
in national print and broadcast media an average of once every two to three days on media such as CNBC, Fox
News, Bloomberg radio and TV, The Wall Street Journal, Kiplinger, and Barron’s, among others. To facilitate our
presence in the media, we utilize LiveStudio, an in-house studio providing a direct link to media broadcasts, at our
office in Novato, California. Along with our primary spokesperson, Neil J. Hennessy, who is our President, Chief
Executive Officer and Chairman of the Board and President, Chief Investment Officer and a Portfolio Manager of
the Hennessy Funds, we also utilize the following Portfolio Managers of the Hennessy Funds as spokespersons:
Brian Peery, David Ellison, Winsor (Skip) Aylesworth, and Ryan Kelley. These additional spokespersons have
enabled us to further expand our public relations program. We also include our sub-advisors for media coverage to
promote our sub-advised funds.
We maintain and regularly update a robust website. We also utilize more focused marketing efforts, such as
sending informational and promotional communications, fund performance updates, news articles pertaining to the
Hennessy Funds, and Portfolio Manager commentaries to investors and prospective investors. We also participate in
exhibitions at select investment advisor trade shows throughout the year. Additionally, we attend strategic industry-
related conferences, and Mr. Hennessy participates as a moderator or guest speaker on industry-related panels
whenever the opportunity arises.
• Expanding our distribution network to additional mutual fund platforms
One of the ways investors may purchase shares of the Hennessy Funds is through mutual fund supermarkets,
such as Schwab, Fidelity, TD Ameritrade and Pershing. Mutual fund supermarkets generally offer funds of many
different investment companies to investors, in exchange for a services fee paid by the applicable fund or that fund’s
18
investment advisor. This ability to purchase various mutual funds in a single location is very attractive to investors.
The majority of our $6.6 billion of assets under management as of September 30, 2017, is held at mutual fund
supermarkets.
Investments in the Hennessy Funds are also available through national wire houses and broker-dealers, as well
as independent and regional broker-dealers. We see continued opportunities to form new relationships with these
financial institutions, thereby enhancing the accessibility of our no-load mutual funds to investors.
•
Increasing our current base of financial advisors and investment professionals
Investment professionals generally have access to a wide variety of investment products they may recommend
to their investors. A recommendation by an investment professional to an investor to buy one of the Hennessy Funds
may greatly influence that investor. Thus, we believe that expanding our current base of investment professionals
who utilize no-load funds for their investors will help us increase our assets under management, which will in turn
increase our revenues.
•
Securing participation on the platforms of national, full-service firms
We continually strive to develop relationships with national full-service firms that permit their investment
professionals to offer no-load funds to their investors as a way to increase the amount of assets that we manage,
which will in turn increase our revenues.
•
Pursuing strategic purchases of management agreements for additional mutual funds
A primary component of our growth strategy is to selectively pursue strategic purchases of assets related to
management of additional mutual funds. We believe the regulatory burden imposed upon the mutual fund industry,
along with increased competition, has compressed the margins of smaller to mid-sized mutual fund managers,
making those managers more receptive to an asset purchase. We believe that we are well prepared to benefit from
these attractive asset purchase trends and from the increasing supply of potential targets. In addition, we believe
there are a number of attractive asset purchase opportunities from mutual fund managers who are reaching
retirement age or who are leaving the mutual fund management arena. We have generally been able to offer lower
overall expense ratios to the shareholders of purchased funds. In some instances, we have also been able to improve
performance.
Through our asset purchase strategy, we have successfully completed eight asset purchases of management-
related assets over a 17-year period, and we have efficiently integrated $3.7 billion of net assets of 25 different
mutual funds into the Hennessy Funds family. Our most recent asset purchase was completed on September 23,
2016, when we purchased assets related to the management of The Westport Funds, adding an additional
$435 million to our assets under management. In addition, we signed a definitive agreement with Manning & Napier
Group, LLC and Rainier Investment Management, LLC to purchase the assets related to the management of three
Rainier Funds – the Rainier Large Cap Equity Fund, the Rainier Small/Mid Cap Equity Fund, and the Rainier Mid
Cap Equity Fund. Upon completion of the transaction, which is subject to the approval of the shareholders of the
Rainier Funds, the assets related to the Rainier Large Cap Equity Fund will merge into the Hennessy Cornerstone
Large Growth Fund and the assets related to the Rainier Mid Cap Equity Fund and the Rainier Small/Mid Cap
Equity Fund will be merged into the Hennessy Cornerstone Mid Cap 30 Fund.
• Delivering strong, high-quality financial results.
We seek to maintain a strong financial position and to manage our investment advisory business to meet the
highest regulatory, ethical and business standards and to maintain continuity of service to all of the investors in the
Hennessy Funds.
19
COMPETITION
The investment advisory industry is highly competitive, with new competitors continually entering the
industry. We compete directly with numerous global and U.S. investment managers, commercial banks, savings and
loans associations, brokerage and investment banking firms, broker-dealers, insurance companies, and other
financial institutions that often provide investment products with similar features and objectives to those we offer.
These institutions range from small boutique firms to large financial services complexes. We are considered a small
investment advisory company. Many competing companies are part of larger financial services companies that
conduct business in more markets and have greater marketing, financial, technical, research and distribution
resources and other capabilities than we do. Most of the larger firms offer a broader range of financial services to the
same retail and institutional investors we seek to serve. These factors may place us at a competitive disadvantage,
and we can give no assurance that our strategies and efforts to maintain and enhance our current investor
relationships, as well as to create new ones, will be successful. To grow our business, we must be able to compete
effectively for assets under management. Key competitive factors include:
•
•
•
•
•
•
•
•
the investment performance for the Hennessy Funds;
the expense ratios of the Hennessy Funds;
the array of our product offerings;
industry rankings for the Hennessy Funds;
the quality of our services;
our ability to further develop and market our brand;
our commitment to placing the interests of investors first; and
our general business reputation.
Increased competition could reduce the demand for our products and services, which could have a material
adverse effect on our business, results of operations, and financial condition.
Competition is an important risk that our business faces and should be considered along with other risk factors
that we discuss in Item 1A, “Risk Factors,” below.
REGULATORY ENVIRONMENT
We are subject to extensive and increasing federal and state laws and regulations intended to protect
shareholders of mutual funds and investors of registered investment advisors. We believe we are in compliance in all
material respects with all applicable laws and regulations.
We are registered as an investment advisor with the SEC and therefore must comply with the requirements of
the Investment Advisers Act of 1940 and related SEC regulations. Such requirements relate to, among other things,
fiduciary duties to investors, engaging in transactions with investors, maintaining an effective compliance program,
solicitation arrangements, conflicts of interest, advertising, limitations on agency cross and principal transactions
between an advisor and advisory investors, recordkeeping and reporting requirements, disclosure requirements and
general anti-fraud provisions.
We manage accounts for the Hennessy Funds on a discretionary basis, with authority to buy and sell securities
for each portfolio, select broker-dealers to execute trades, and negotiate brokerage commission rates. In connection
with certain of these transactions, we receive soft dollar credits from broker-dealers that have the effect of reducing
certain of our expenses. All of our soft dollar arrangements are intended to be within the safe harbor provided by
Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). If our ability to use soft
dollars were reduced or eliminated as a result of the implementation of statutory amendments or new regulations,
our operating expenses would increase.
20
Our mutual funds are registered with the SEC under the Investment Company Act of 1940, which imposes
additional obligations on both the funds and the advisor, including detailed operational requirements. While we
exercise broad discretion over the day-to-day management of the business and affairs of the Hennessy Funds and the
investment portfolios of the Hennessy Funds, our own operations are subject to oversight and management by the
Funds’ Board of Trustees. Under the Investment Company Act of 1940, a majority of the trustees must not be
“interested persons” with respect to us (sometimes referred to as the “independent trustee” requirement). The
responsibilities of the Funds’ Board of Trustees include, among other things, annually approving the continuation of
our investment management agreements with the Hennessy Funds, approving other service providers, determining
the method of valuing assets, and monitoring transactions involving affiliates. The Investment Company Act of 1940
also imposes on the investment advisor to a mutual fund a fiduciary duty with respect to the receipt of the advisor’s
investment advisory fees. That fiduciary duty may be enforced by the SEC, by administrative action, or by litigation
by investors in the Hennessy Funds pursuant to a private right of action.
The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers
Act of 1940 and the Investment Company Act of 1940, ranging from fines and censures to the suspension of
individual employees to termination of an investment advisor’s registration. A violation of applicable law or
regulations could also subject us, our directors and our employees to civil actions brought by private parties. We
believe we are in compliance in all material respects with all applicable SEC requirements.
EMPLOYEES
As of September 30, 2017, we employed 23 employees, 20 of whom were full-time employees.
The executive officers of the company are Neil J. Hennessy, President, Chief Executive Officer and Chairman
of the Board of our Board of Directors; Teresa M. Nilsen, Executive Vice President, Chief Operating Officer, Chief
Financial Officer, Secretary and a member of our Board of Directors; and Daniel B. Steadman, Executive Vice
President in charge of expansion, Chief Compliance Officer and a member of our Board of Directors. In addition to
our executive officers’ responsibilities at Hennessy Advisors, Inc., Mr. Hennessy serves as President, Chief
Investment Officer, and a Portfolio Manager of the Hennessy Funds and is a member of the Funds’ Board of
Trustees, Ms. Nilsen is an Executive Vice President and Treasurer of the Hennessy Funds, and Mr. Steadman is an
Executive Vice President and Secretary of the Hennessy Funds.
AVAILABLE INFORMATION
We make available free of charge through a link on our website, www.hennessyadvisors.com, our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We are not including
the information contained on our website as part of, or incorporating it by reference into, this Annual Report on
Form 10-K.
ITEM 1A. RISK FACTORS
We face many risks and uncertainties, several of which are inherent in the financial services industry and the
investment advisory business. Investors should carefully consider the risks described below, together with all of the
other information included in this Annual Report on Form 10-K, in evaluating us and our common stock. Our
business, results of operations, financial condition, and stock price could be materially adversely affected by any of
the risks we face, including those described below.
Volatility in and disruption of the capital markets and changes in the economy may significantly affect our
revenues.
The securities markets are inherently volatile and may be affected by factors beyond our control, including
global economic conditions, industry trends, interest and inflation rate fluctuations, and other factors that are
difficult to predict. Because our assets under management is largely concentrated in equity products, our results are
particularly susceptible to downturns in the equity markets. We derive all of our operating revenues from investment
21
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 asset value of the Hennessy Funds. Accordingly, our revenues increase or
decrease as our average assets under management increases or decreases, which is affected by market appreciation
or depreciation and purchases and redemptions of shares of the Hennessy Funds. This risk is further discussed and
quantified in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” below.
Investors in the Hennessy Funds can redeem their investments at any time and for any reason, including poor
investment performance. A decline in our assets under management adversely affects our revenues.
Investors in the Hennessy Funds may redeem their investments at any time and for any reason without prior
notice. Success in the investment advisory and mutual fund business is largely dependent on investment
performance, as well as client servicing and distribution. If the Hennessy Funds perform poorly compared to the
mutual funds of other investment advisory firms, we may experience a decrease in purchases of shares and an
increase in redemptions of shares of the Hennessy Funds, thereby reducing our assets under management and
adversely affecting our revenues.
Adverse opinions of the Hennessy Funds by third parties, including rating agencies or industry analysts, could
decrease new investments in, or accelerate redemptions from, the Hennessy Funds, which would adversely affect
our revenues.
The Hennessy Funds are rated, ranked, and assessed by independent third parties, including rating agencies,
industry analysts, distribution partners, and industry periodicals. These ratings, rankings, and assessments often
influence the investment decisions of investors, but they can be affected by a number of factors that are not under
our direct control, and they may change frequently. For example, a ranking agency like Morningstar may change its
ranking designs and methodology, which could result in a decrease in the ratings of the Hennessy Funds without any
action on our part. If the Hennessy Funds received an adverse rating, ranking, or assessment from a third party, it
could result in an increase in the withdrawal of assets from the Hennessy Funds by existing investors and the
inability to attract additional investments into the Hennessy Funds from existing and new investors, thereby
reducing our assets under management and adversely affecting our revenues.
Investor behavior is influenced by short-term investment performance of mutual funds.
Investor behavior may be based on many factors, including short-term investment performance. Poor short-
term performance of the Hennessy Funds, irrespective of longer-term success, could potentially lead to a decrease in
purchases of shares of the Hennessy Funds and an increase in redemptions, thereby reducing our assets under
management and adversely affecting our revenues.
The failure or negative performance of products offered by competitors may have a negative impact on the
Hennessy Funds within such similar product type, irrespective of our fund performance.
Many competitors offer similar products to the Hennessy Funds, and the failure or negative performance of
competitors’ products could lead to a loss of confidence in the corresponding products in the Hennessy Funds
lineup, irrespective of the performance of such funds. Any loss of confidence in a product type could lead to
redemptions in the Hennessy Fund within such product type, which could have a material adverse effect on our
business, results of operations, and financial condition.
We derive a substantial portion of our revenues from a limited number of the Hennessy Funds.
During fiscal year 2017, our average assets under management was concentrated in the following three
Hennessy Funds: (i) the Hennessy Focus Fund (39% of average assets under management); (ii) the Hennessy Gas
Utility Fund (22% of average assets under management); and (iii) the Hennessy Cornerstone Mid Cap 30 Fund (17%
of average assets under management). Consequently, our revenues followed a similar pattern of concentration:
(a) the Hennessy Focus Fund (46% of total revenue); (b) the Hennessy Cornerstone Mid Cap 30 Fund (16% of total
revenue); and (c) the Hennessy Gas Utility Fund (14% of total revenue). As a result, our operating results are
particularly dependent upon the performance of these funds and our ability to maintain and grow assets under
management in these funds. If any of these funds were to experience a significant increase in redemptions for any
reason, our assets under management would be reduced, adversely affecting our revenues.
22
We face intense competition in attracting investors and retaining net assets in the Hennessy Funds.
The investment advisory industry is intensely competitive, and new participants are continually entering the
industry. We compete directly with numerous global and U.S. investment advisors, commercial banks, savings and
loan associations, brokerage and investment banking firms, broker-dealers, insurance companies, and other financial
institutions that often provide investment products with similar features and objectives to those we offer. These
institutions range from small boutique firms to large financial services complexes. We are considered a small
investment advisory company. Many competing companies are part of larger financial services companies that
conduct business in more markets and have greater marketing, financial, technical, research, and distribution
resources and other capabilities than we do. Most of the larger firms offer a broader range of financial services to the
same retail and institutional investors we seek to serve. If we are unable to attract investors and retain net assets in
the Hennessy Funds due to increased competition, our revenues could decline and we could experience a material
adverse effect on our business, results of operations, and financial condition.
For more information regarding competitive factors, see the “Competition” subheading in Item 1, “Business,”
above.
Market consolidation and industry trends could negatively impact our business.
In recent years, there have been several instances of industry consolidation, both in the area of distributors and
managers of investment products. Further consolidation may occur in these areas in the future. The increasing size
and market influence of certain distributors of our products and of certain direct competitors may have a negative
impact on our ability to compete at the same levels of profitability in the future. Additionally, the market
environment in recent years has led some investors to increasingly favor lower–fee, passive products. As a result,
investment advisors that emphasize passive products have gained, and may continue to gain, market share from
active managers like us. While we cannot predict how much market share these competitors will gain, we believe
there will always be demand for good active management.
Our investment advisory and shareholder servicing agreements can be terminated on short notice, are not freely
assignable, and must be renewed annually; the loss of such agreements would reduce our revenues.
We generate all of our operating revenues from the investment advisory and shareholder servicing agreements
with the Hennessy Funds. These agreements may be terminated without penalty on 60 days’ notice and may not be
assigned without investor consent. In addition, they must be renewed annually by (i) the Funds’ Board of Trustees or
the vote of a majority of the outstanding shares of the applicable Hennessy Fund and (ii) a majority of the
disinterested trustees of Hennessy Funds Trust. The termination or non-renewal of these agreements, or the
renegotiation of the terms of these agreements in a manner detrimental to us, could result in a substantial reduction
of our revenues, which could have a material adverse effect on our business, results of operations, and financial
condition.
We utilize unaffiliated sub-advisors to manage the portfolio composition of certain of the Hennessy Funds and
any matters that have an adverse impact on their businesses, or any change in our relationships with our sub-
advisors, could lead to a reduction in assets under management, which would adversely affect our revenues.
We utilize unaffiliated sub-advisors to manage the portfolio composition of four of the Hennessy Funds.
Although we perform due diligence on our sub-advisors, we do not manage their day-to-day business activities. Our
financial condition and profitability may be adversely affected by situations that are specific to such sub-advisors,
such as a disruption of their operations, exposure to disciplinary action or reputational harm.
We periodically negotiate the terms and conditions of these sub-advisory relationships, and there can be no
assurance that such terms will remain acceptable to us or our sub-advisors. These relationships may also be
terminated by us or the applicable sub-advisor upon short notice without penalty. An interruption or termination of
our sub-advisory relationships could affect our ability to market our sub-advised funds and result in a reduction in
assets under management, which would adversely affect our revenues.
23
Assets invested through third-party intermediaries have a higher risk of redemption and are subject to changes in
fee structures, which could reduce our revenues.
Investments in the Hennessy Funds made through third-party intermediaries, as opposed to direct investments
in the Hennessy Funds, can be more easily moved to investments in funds outside of the Hennessy Fund family.
Third-party intermediaries are attractive to investors because of the ease of accessibility to a variety of funds, but
this causes the investments to be more sensitive to fluctuations in performance, especially in the short-term. If we
were unable to retain the assets of the Hennessy Funds held through third-party intermediaries, our assets under
management would be reduced. As a result, our revenues could decline and our business, results of operations and
financial condition could be materially adversely affected.
We depend on third-party investment professionals and the distribution channels they utilize to market the
Hennessy Funds.
Our primary source of distribution of the Hennessy Funds is through intermediaries that include national,
regional and independent broker-dealers, financial planners and registered investment advisors. Our success is
highly dependent on access to these various distribution channels. We cannot guarantee we will be able to retain
access to these channels at similar pricing or at all. Increasing competition for these distribution channels could
cause our distribution costs to rise, which could have a material adverse effect on our net income. These distribution
intermediaries can generally terminate their relationship with us on short notice. Moreover, new fiduciary
regulations have led to, and may continue to lead to, significant shifts in distributors’ business models and more
limited product offerings, potentially resulting in reduced distribution of certain of the Hennessy Funds. Our lack of
access to these distribution channels could have a material adverse effect on our business because investment
professionals may not distribute the Hennessy Funds if we are no longer participants on the platforms of firms that
permit their investment professionals to utilize no-load funds for their investors. Either of these events could cause
the net assets of the Hennessy Funds to decline, which would decrease our revenues and have a material adverse
effect on our results of operations.
In addition, these intermediaries generally offer their customers a broad array of investment products that are
in addition to, and compete with, the Hennessy Funds. The intermediaries or their customers may favor competing
investment products over the Hennessy Funds. To the extent that current or future intermediaries or their customers
prefer to do business with our competitors, our market share, revenues, and net income could decline.
Industry trends and market pressure to lower our investment advisory fees could reduce our profit margin.
Our profits are highly dependent on the fees we are able to charge to the Hennessy Funds for investment
advisory services. To the extent we are forced to compete on the basis of the investment advisory fees we charge to
the Hennessy Funds, we may not be able to maintain our current fee structures. We have historically competed
primarily on the performance of the Hennessy Funds and not on the level of our investment advisory fees relative to
those of our competitors. In recent years, however, there has been a trend toward lower fees in the investment
advisory industry. In order for us to maintain our fee structure in a competitive environment, we must be able to
provide our mutual fund investors with investment returns and service that will adequately compensate them for
investing in our mutual funds with our current fee structures. We cannot be assured that we will succeed in
maintaining our current fee structures. Fee reductions on existing or future business could have a material adverse
effect on our results of operations.
We may be required to forego all or a portion of our fees under our management contracts covering the
Hennessy Funds.
On an annual basis, the Funds’ Board of Trustees must conduct analysis regarding the reasonableness of our
investment advisory fees. We regularly analyze the expense ratios of the Hennessy Funds and have the right to
waive fees at our discretion to compete with other mutual funds with lower expense ratios (although in the past we
have only waived fees based on contractual obligations). Any decision to waive fees voluntarily would not apply to
previous periods, but would only apply on a going forward basis.
24
We utilize quantitative investment strategies for some of the Hennessy Funds that require us to invest in specific
portfolios of securities and hold these positions for a specified period of time regardless of performance.
Our formula-driven funds adhere to specific investment strategies during the annual rebalancing period and
throughout the course of the year. Adhering to our investment strategies may result in the sale of securities that have
been performing well in the near term and the purchase of securities that have been performing less well in the near
term. Additionally, we will maintain a position in a relatively poorly performing security throughout the course of
the portfolio holding period. Either of these actions could, in theory, result in relatively low performance of the
formula-driven Hennessy Funds and adversely affect the net assets of such Hennessy Funds. A decrease in the net
assets of the Hennessy Funds would adversely affect our revenues.
The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund invest in the Japanese stock market in yen,
which involves foreign exchange and economic uncertainties.
The Hennessy Japan Fund and the Hennessy Japan Small Cap Fund are invested in securities listed on the
Japanese stock market, which exposes these funds to risks that are not typically associated with an investment in a
U.S. issuer. The values of these funds fluctuate with changes in the value of the Japanese yen versus the U.S. dollar.
Investments in Japanese securities also expose these funds to the economic uncertainties affecting Japan. Japanese
financial accounting standards and practices may differ, and there may be less information on Japanese companies
available publicly. If these circumstances result in a reduction of the total assets of the Hennessy Japan Fund and the
Hennessy Japan Small Cap Fund, our assets under management would be reduced, which would adversely affect our
revenues.
The terms of our loan agreement may restrict our current and future operations, particularly our ability to
respond to certain changes or to take future actions. In addition, certain events could cause us to default on our
loan agreement.
The gross amount outstanding under our loan agreement with U.S. Bank National Association (“U.S. Bank”)
and California Bank & Trust, as of the end of fiscal year 2017, was $26.3 million (initially $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).
The loan agreement contains a number of covenants that collectively impose operating and financial restrictions on
us, including restrictions that may limit our ability to engage in acts that may be in our long-term best interests. The
loan agreement also contains a number of events that would constitute an event of default, such as a failure by us to
comply with the covenants in the loan agreement or the termination or non-renewal of one or more of our
management contracts if such termination or non-renewal would reasonably be expected to have a material adverse
effect on us. The occurrence of an event of default would give the lenders the right to declare our borrowings,
together with accrued and unpaid interest, to be immediately due and payable. In addition, the lenders would have
the right to proceed against the collateral we granted to them, which consists of substantially all of our assets. If the
debt under our loan agreement were accelerated, we might not have sufficient cash on hand or be able to sell
sufficient collateral to repay this debt, which would have an immediate material adverse effect on our business,
results of operations, and financial condition.
An increase in our borrowing costs may adversely affect our earnings and liquidity.
Under our current loan agreement with U.S. Bank and California Bank & Trust, our interest rate is effectively
4.237% as of the end of fiscal year 2017. Because the interest payable is a floating rate (see further discussion in
Footnote 7 to the Financial Statements under Item 8, “Financial Statements and Supplementary Data,” below), the
interest expense we incur will vary with changes in the applicable reference rate. As a result, an increase in short-
term interest rates will increase our interest costs and could adversely affect our liquidity. Failure to maintain
adequate liquidity could lead to unanticipated costs and force us to revise our strategic and business initiatives,
materially adversely affecting our business, results of operations, and financial condition.
25
We depend on key personnel to manage our business, and the loss of any of their services, combined with our
inability to identify and retain a suitable replacement for such person, could materially adversely affect us.
Additionally, the cost to retain our key personnel could put pressure on our operating margins.
Our success is largely dependent on the skills, experience, and performance of our key personnel. The
business acumen, investment advisory expertise, and business relationships of our key personnel are critical
elements in operating and expanding our business. The loss of services of any of our key personnel for any reason,
combined with our inability to identify and retain a suitable replacement for such person, could have a material
adverse effect on our business, results of operations, and financial condition. Moreover, in order to retain key
personnel, we may be required to increase compensation to such individuals, resulting in additional expense.
Management contracts purchased by us are currently classified as an indefinite life asset subject to impairment
analysis. The impairment analysis is based on subjective criteria, and an impairment loss could be recorded.
The investment management contracts that we have purchased, a $74.6 million asset on the balance sheet as of
the end of fiscal year 2017, are considered an intangible asset with an indefinite useful life. Management reviews the
classification of the asset as an asset with an “indefinite life” each reporting period. If our purchased investment
management contracts are ever classified in the future as an asset with a definite life, we would begin amortizing
such agreements over their remaining useful life. If the contracts continue to be classified as an indefinite life asset,
we would continue to review the carrying value to determine if any impairment has occurred. The analysis has been
based on anticipated future cash flows, which are calculated based on assets under management. Although the
contracts are not currently impaired, there is always a possibility of impairment in the future, which could require us
to write-off all or a portion of the contracts. A write-off, depending on the amount, could have operational risks and
could have a significant impact on the value of our equity and our earnings per share.
We pursue strategic asset purchases as part of our regular business strategy, and such acquisitions involve
inherent risks that could adversely affect our operating results and financial condition and potentially dilute the
holdings of current shareholders.
As part of our regular business strategy, we pursue strategic purchases of assets related to management of
additional mutual funds. This strategy is accompanied by risks including, among others, the possibility of the
following:
•
•
•
•
•
•
•
•
•
•
•
the potential unavailability of attractive acquisition opportunities;
a high level of competition from other companies that may have greater financial resources than we do;
our inability to value potential asset purchases accurately and negotiate acceptable purchase terms;
our inability to secure enough affirmative votes to gain approval from the target fund’s shareholders of
the proposed fund reorganization related to the acquisition of the management assets;
the loss of mutual fund assets paid for in an asset purchase through redemptions by shareholders of the
mutual funds involved in the asset purchase;
higher than anticipated asset purchase expenses;
our inability to successfully integrate and maintain adequate infrastructure to support business growth;
increasing our leverage;
the potential diversion of our management’s time and attention;
dilution to our shareholders if we fund an asset purchase in whole or in part with our common stock;
and
adverse effects on our earnings if purchased intangible assets become impaired.
While we seek to mitigate these risks through, among other things, due diligence and indemnification
provisions, these or other risk-mitigating measures that we put in place may not be sufficient to address these risks.
If one or more of these risks occur, we may be unable to successfully complete a purchase of management-related
assets (thereby requiring us to write-off any related expenses), we may experience an impairment of management
26
contract valuations, we may receive negative publicity or suffer other negative impacts on our reputation, and we
may not achieve the expected return on investment. Any of these results could have an adverse effect on our
business, results of operations, and financial condition.
The potential future growth of our business may place significant demands on our resources and employees, and
may increase our expenses, risks, and regulatory oversight.
The potential future growth of our business may place significant demands on our infrastructure and our
investment team and other employees, which may increase our expenses. The potential inability of our systems to
accommodate an increasing volume of transactions could constrain our ability to expand our businesses. We may
face significant challenges in maintaining and developing adequate financial and operational controls, implementing
new or updated information and financial systems, managing and appropriately sizing our work force, and updating
other components of our business on a timely and cost-effective basis. There can be no assurance that we will be
able to manage the growth of our business effectively, or that we will be able to continue to grow, and any failure to
do so could adversely affect our ability to generate revenues and control our expenses.
Higher insurance premiums and increased insurance coverage risks could increase our costs and reduce our
profitability.
While we carry insurance in amounts and under terms that we believe are appropriate, we cannot guarantee
that our insurance will cover all liabilities and losses to which we may be exposed or, if covered, that such liabilities
and losses will not exceed the limits of available insurance coverage, or that our insurers will remain solvent and
meet their obligations. In addition, we cannot guarantee that our insurance policies will continue to be available at
current terms and fees.
We are subject to regulatory and governmental inquiries and civil litigation. An adverse outcome of any such
proceeding could involve substantial financial penalties. Various claims may also arise against us in the ordinary
course of business, such as employment-related claims. There has been increased incidence of litigation and
regulatory investigations in the financial services industry in recent years, including customer claims and class
action suits alleging substantial monetary damages. Certain insurance coverage may not be available or may be
prohibitively expensive in future periods. As our insurance policies come up for renewal, we may need to assume
higher deductibles or co-insurance liabilities, or pay higher premiums, which would increase our expenses and have
a material adverse effect on our results of operations.
We are highly dependent on various software applications and other technologies, as well as on third parties who
utilize various software applications and other technologies, for our business to function properly and to
safeguard confidential information; any significant limitation, failure, or security breach could constrain our
operations.
We use software and related technologies throughout our business and also utilize third-party vendors who use
software and related technologies to provide services to us and the Hennessy Funds. Although we take protective
measures (including striving to understand the protective measures of our third-party vendors) and endeavor to
modify them as circumstances warrant, we may experience system delays and interruptions as a result of natural
disasters, power failures, acts of war, third-party failures, or other unexpected events. We cannot predict with
certainty all of the adverse effects that could result from the failure to efficiently address and resolve these delays
and interruptions. We could also be subject to losses if we fail to properly safeguard sensitive and confidential
information. As part of our normal business operations, we and certain of our third-party vendors store and transmit
confidential and proprietary information. Although we take protective measures, the security of our and our vendors’
computer systems, software, and networks may be vulnerable to hacking, breaches, unauthorized access, misuse,
computer viruses, or other malicious code and other events that could have a security impact, such as an authorized
employee or vendor inadvertently or intentionally causing us to release confidential or proprietary information.
Finally, although we take precautions to password protect and encrypt our laptops and other mobile electronic
hardware, if such hardware is stolen, misplaced, or left unattended, it may become vulnerable to hacking or other
unauthorized use, creating a possible security risk and resulting in potentially costly actions.
27
There have been a number of recent highly publicized cases involving financial services and consumer-based
companies reporting the unauthorized disclosure of client or customer information, as well as cyber-attacks
involving the dissemination, theft, and destruction of corporate information or other assets, as a result of failure to
follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist
organizations and hostile foreign governments.
If any of these events occur, we could suffer a financial loss, a disruption of our business, liability to the
Hennessy Funds and their investors, regulatory intervention, or reputational damage, any of which could have a
material adverse effect on our business, results of operations and financial condition. In addition, we may be
required to expend significant additional resources to modify our protective measures or to investigate and remediate
vulnerabilities or other exposures.
We are exposed to legal risk and litigation, which could increase our expenses and reduce our profitability.
In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings
against the financial services industry have been increasing. While we strive to conduct our business in accordance
with the highest ethical standards, we nevertheless remain exposed to litigation risk. We could be sued by many
different parties, including, by way of example, investors in the Hennessy Funds, our own shareholders, our
employees or regulators. Lawsuits or investigations that we may become involved in could be very expensive and
highly damaging to our reputation, even if the underlying claims are without merit.
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act included “whistleblower”
provisions that entitle persons who report alleged wrongdoing to the SEC to cash rewards. According to a recent
annual report to Congress on the Dodd-Frank Whistleblower Program, whistleblower claims have increased
significantly since the enactment of these provisions. Addressing such claims could generate significant expenses
and take up significant management time, even for frivolous or non-meritorious claims.
Any damage to our reputation could harm our business and lead to a reduction in revenues and profitability.
Our success depends, in part, on maintaining a strong reputation in the investment community. Our reputation
is vulnerable to many threats that can be difficult or impossible to control and costly or impossible to remediate,
even if they are without merit or satisfactorily addressed. Our reputation may be impacted by many factors,
including, but not limited to, litigation, regulatory inquiries or investigations, conflicts of interest, employee
misconduct, and rumors. Any damage to our reputation could result in redemptions by investors in the Hennessy
Funds, impede our ability to attract new investors, or negatively impact our relationships with third-party
intermediaries, all of which could result in a material adverse effect to our business, results of operations, and
financial condition.
Our business is extensively regulated, which increases our costs of doing business, and our failure to comply with
regulatory requirements may harm our financial condition.
Our business is subject to extensive regulation in the United States, particularly by the SEC. We are subject to
regulation under the Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act, the Investment
Company Act of 1940, the Investment Advisers Act of 1940, and various other statutes. The regulations we are
subject to are designed primarily to protect investors in the Hennessy Funds as opposed to our shareholders. In
addition to an increased number of applicable laws and regulations, the mutual fund industry has undergone
increased scrutiny by the SEC and state regulators for the past several years, resulting in numerous enforcement
actions, “sweep” examinations, and new rules and rule proposals. These actions have increased our costs in
managing the Hennessy Funds, and we could continue to experience higher costs if new rules, regulations, or
legislation require us to spend more time, hire additional personnel, or buy new technology to comply with these
rules, regulations, and laws. The changes in rules, regulations, or laws could also have a material adverse effect on
us by limiting the sources of our revenues and increasing our costs. Our business may be materially affected not
only by securities regulations, but also by regulations of general application. For example, the amount of net assets
in the Hennessy Funds in a given time period could be affected by, among other things, existing and proposed tax
legislation and other governmental regulations and policies, including the interest rate policies of the Federal
Reserve Board. As another example, federal legislation relating to cybersecurity could impose additional
requirements on our operations.
28
Although we strive to conduct our business in accordance with applicable rules, regulations, and laws, if we
were found to have violated an applicable rule, regulation, or law, we could be subject to fines, suspensions of
personnel, or other sanctions, including revocation of our registration as an investment advisor. If a sanction were
imposed against us or our personnel, even if only for a small monetary amount, the adverse publicity related to such
a sanction could harm our reputation, result in redemptions by investors in the Hennessy Funds and impede our
ability to attract new investors, all of which could result in a material adverse effect to our business, results of
operations, and financial condition.
The U.S. Department of Labor’s fiduciary rule could adversely affect our financial condition and results of
operations.
In April 2016, the U.S. Department of Labor (the “DOL”) issued a final regulation redefining “investment
advice fiduciary” under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code.
The final regulation significantly expands the class of advisers and the scope of investment advice that are subject to
fiduciary standards, imposing the same fiduciary standards on advisers to individual retirement accounts that have
historically only applied to plans covered by ERISA. The DOL also finalized certain prohibited transaction
exemptions that allow investment advisers to receive compensation for providing investment advice under
arrangements that would otherwise be prohibited due to conflicts of interest. Certain of the DOL regulation
requirements became applicable on April 10, 2017, with certain additional requirements becoming applicable on
July 1, 2019. Financial advisors and broker-dealers have made, or may make, significant operational changes as a
result of the DOL regulation, including with respect to portions of their businesses that are not directly impacted by
the DOL regulation. We continue to review and analyze the potential impact to our business of such operational
changes. These operational changes may result in a decrease in purchases of shares or an increase in redemptions of
shares of the Hennessy Funds, which would adversely affect our assets under management, and thus our revenues.
Our management contracts require us to adhere to the investment policies and strategies of the Hennessy Funds;
any failure to comply with such requirements could result in claims, losses or regulatory sanctions.
Our management contracts with the Hennessy Funds contain contractual provisions that require us to comply
with the investment policies and strategies of the Hennessy Funds when we provide our investment advisory
services. We are also required to comply with numerous investment, asset valuation, distribution, and tax
requirements under applicable law and regulations. Any allegation of a failure to adhere to these requirements could
result in investor claims, reputational damage, withdrawal of assets and potential regulatory sanctions, any of which
could negatively impact our revenues and earnings. We have implemented procedures and utilize the services of
experienced administrators, accountants, and lawyers to assist in satisfying these requirements, but there can be no
assurance that these precautions will protect us from potential liabilities.
Employee misconduct could harm us by impairing our ability to attract and retain investors in the Hennessy
Funds and by subjecting us to significant legal liability, regulatory scrutiny, and reputational harm.
Our reputation is critical to attracting and retaining investors in the Hennessy Funds. In recent years, there
have been a number of highly publicized cases involving fraud, conflicts of interest or other misconduct by
individuals in the financial services industry. Although we strive to conduct our business in accordance with the
highest ethical standards and emphasize the importance of doing so to our employees, there is a risk that our
employees could engage in misconduct that adversely affects our business. For example, if an employee were to
engage in, or be accused of engaging in, illegal or suspicious activity (such as improper trading, disclosure of
confidential information, or breach of fiduciary duties), we could be subject to regulatory sanctions and suffer
serious harm to our reputation, financial position, and ability to maintain and grow the number of investors in the
Hennessy Funds.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and our stock price.
As a public company, we are required to maintain effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex
and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules and
therefore we cannot assure you that our internal control over financial reporting will be effective at all times in the
29
future. If our internal control over financial reporting were ineffective, we could be subjected to adverse regulatory
consequences, including, among others, administrative cease and desist orders, injunctive orders or civil monetary
penalties, or a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability
of our financial statements. Any of these potential consequences could have a material adverse effect on our
business or result in a decline in our stock price.
We intend to pay regular dividends to our shareholders, but our ability to do so is subject to the discretion of our
Board of Directors.
We have consistently paid dividends each year since 2005. The declaration, amount, and payment of
dividends, if any, to our shareholders by us 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.
The historical performance of the Hennessy Funds should not be considered indicative of the future results of
the Hennessy Funds or of any returns expected on our common stock.
The historical and potential future returns of the Hennessy Funds are not directly linked to returns on our
common stock, such that positive performance of the Hennessy Funds will not necessarily result in positive returns
on our common stock. Nonetheless, poor performance of the Hennessy Funds will result in a reduction of our
revenues and could therefore have a material adverse effect on our business, results of operations and financial
condition. Moreover, the historical performance of the Hennessy Funds should not be considered indicative of the
future results that should be expected from such funds.
We may need to raise additional capital to fund new business initiatives or refinance existing debt, and resources
may not be available to us in sufficient amounts or on acceptable terms, which could have an adverse impact on
our business.
Our ability to meet the future cash needs of the Company is dependent upon our ability to generate cash.
Although the Company has been successful in generating sufficient cash in the past, it may not be successful in the
future. We may need to raise additional capital to fund new business initiatives or refinance existing debt, and
financing may not be available to us in sufficient amounts, on acceptable terms, or at all. Our ability to access capital
markets efficiently depends on a number of factors, including the state of credit and equity markets, interest rates,
and credit spreads. If we are unable to access sufficient capital on acceptable terms, our business could be adversely
impacted.
Equity markets and our common stock have historically been volatile.
The market price of our common stock historically has experienced, and may continue to experience,
volatility, and the broader equity markets have experienced, and may again experience, significant price and volume
fluctuations. In addition, our announcements of quarterly operating results, changes in general conditions in the
economy or the financial markets, and other developments affecting us or our competitors could cause the market
price of our common stock to fluctuate substantially.
Our common stock has relatively limited trading volume, and ownership of a large percentage is concentrated
with a small number of shareholders, which could increase the volatility in our stock trading and significantly
affect our share price.
We have a limited number of shareholders, and a large percentage of our common stock is held by an even
smaller number of shareholders. If our larger shareholders were to decide to liquidate their ownership positions, it
could cause significant fluctuations in the share price of our common stock. Public companies with a limited number
of shareholders, such as we have, often have difficulty generating trading volume in their stock.
30
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES.
Our principal executive office is located at 7250 Redwood Boulevard, Suite 200, Novato, California 94945,
where we occupy approximately 13,728 square feet and have the right to use all common areas. Pursuant to a lease
amendment, dated as of August 30, 2016, the term of our lease expires on June 30, 2021, with one five-year
extension available thereafter.
We also have an office located at 101 Federal Street, Suite 1900, Boston, Massachusetts 02110, where we
occupy approximately 670 square feet and have the right to use all common areas. 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.
We also have an office located at 1340 Environ Way, #305, Chapel Hill, North Carolina 27517, where we
occupy approximately 122 square feet and have the right to use all common areas. The initial term of our 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.
See Footnote 10 to the Financial Statements under Item 8, “Financial Statements and Supplementary Data,”
below, for more detail on our leases.
ITEM 3.
LEGAL PROCEEDINGS.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
31
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has traded on The NASDAQ Capital Market under the stock symbol “HNNA” since
April 28, 2014. Prior to that date, our common stock traded on the OTC Bulletin Board under the same symbol. Our
stock began trading on the OTC Bulletin Board on July 15, 2002.
The following table sets forth the high and low sales prices for our common stock on The NASDAQ Capital
Market for the periods indicated:
Fiscal Year Ended September 30, 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended September 30, 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range
High
Low
$ 24.13 $ 16.23
21.60 16.07
19.87 13.88
16.95 14.29
Price Range
High
Low
$ 22.00 $ 15.70
20.00 16.13
26.33 17.73
26.31 21.67
Dividends Paid per Share
$
$
$
$
0.067(1)
0.075(2)
0.075(3)
0.075(4)
Dividends Paid per Share
$
$
$
$
0.040(5)
0.053(6)
0.053(7)
0.053(8)
(1) We paid a cash dividend on December 8, 2016, to shareholders of record as of November 15, 2016, of $0.067
per share.
(2) We paid a cash dividend on March 6, 2017, to shareholders of record as of February 10, 2017, of $0.075 per
share.
(3) We paid a cash dividend on June 8, 2017, to shareholders of record as of May 16, 2017, of $0.075 per share.
(4) We paid a cash dividend on September 11, 2017, to shareholders of record as of August 17, 2017, of $0.075
per share.
(5) We paid a cash dividend on December 9, 2015, to shareholders of record as of November 16, 2015, of $0.040
per share.
(6) We paid a cash dividend on March 7, 2016, to shareholders of record as of February 12, 2016, of $0.053 per
share.
(7) We paid a cash dividend on June 13, 2016, to shareholders of record as of May 19, 2016, of $0.053 per share.
(8) We paid a cash dividend on September 12, 2016, to shareholders of record as of August 18, 2016, of $0.053
per share.
We intend to continue to pay regular dividends to our shareholders, but our ability to do so is subject to the
discretion of our Board of Directors.
On November 28, 2017, the last reported sale price of our common stock on The NASDAQ Capital Market
was $16.50 per share. As of the end of fiscal year 2017, we had 116 holders of record of our Common Stock. In
addition to the 116 holders of record, there are 40 brokerage firm accounts that represent 1,262 additional individual
shareholders for a total of 1,378 shareholders as of the end of fiscal year 2017.
The equity compensation plan information required by Item 201(d) of Regulation S-K is set forth in the
“Equity Compensation Plan Information” subheading in Item 12, “Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.”
32
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return of our common stock from
September 30, 2012, through September 30, 2017, with the cumulative total return of the S&P 500 and the SNL U.S.
Asset Manager Index. The SNL U.S. Asset Manager Index is a composite of 42 publicly traded asset management
companies prepared by S&P Global Market Intelligence LLC. The graph assumes the investment of $100 in our
common stock and in each of the two indexes on September 30, 2012, and the reinvestment of all dividends.
Index
Hennessy Advisors, Inc.
S&P 500 Index
SNL U.S. Asset Manager Index*
9/30/2014
9/30/2013
9/30/2012
$100.00 $ 339.07 $ 725.49 $ 876.66 $1,321.13 $ 877.22
$100.00 $ 119.34 $ 142.89 $ 142.02 $ 163.93 $ 194.44
$100.00 $ 140.41 $ 163.69 $ 145.16 $ 148.73 $ 192.37
9/30/2016
9/30/2015
9/30/2017
33
*
The SNL U.S. Asset Manager Index, Copyright © 2017, S&P Global Market Intelligence (and its affiliates, as
applicable), includes all publicly traded (NYSE, NYSE MKT, NASDAQ, OTC) Asset Managers in SNL’s
coverage universe. As of September 29, 2017, the SNL U.S. Asset Manager Index included the following:
Affiliated Managers Group Inc.
Fifth Street Asset Management Inc.
Och-Ziff Capital Management Group
LLC
AllianceBernstein Holding L.P.
Financial Engines Inc.
OM Asset Management plc
Apollo Global Management LLC
Fortress Investment Group LLC
Pzena Investment Management Inc.
Ares Management L.P.
Franklin Resources Inc.
Safeguard Scientifics Inc.
Artisan Partners Asset
Management Inc.
GAMCO Investors Inc.
SEI Investments Co.
Ashford Inc.
Hamilton Lane Inc.
Silvercrest Asset Management Group
Associated Capital Group Inc.
Hennessy Advisors, Inc.
T. Rowe Price Group Inc.
BlackRock Inc.
Invesco Ltd.
U.S. Global Investors Inc.
Blackstone Group L.P.
Janus Henderson Group Plc
Virtus Investment Partners Inc.
Carlyle Group L.P.
Cohen & Steers Inc.
KKR & Co. L.P.
Legg Mason Inc.
Waddell & Reed Financial Inc.
Westwood Holdings Group Inc.
Diamond Hill Investment Group Manning & Napier Inc.
WisdomTree Investments Inc.
Eaton Vance Corp.
Medley Management Inc.
ZAIS Group Holdings Inc.
Federated Investors Inc.
Oaktree Capital Group LLC
In accordance with the rules of the SEC, this section entitled “Stock Performance Graph” shall not be
incorporated by reference into any future filings by us under the Securities Act of 1933 or the Securities Exchange
Act of 1934 and shall not be deemed to be soliciting material or to be filed under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
34
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We purchased shares underlying vested RSUs from employees to provide withholding and tax payments on
behalf of our employees. The stock repurchases are presented in the following table for the three months ended
September 30, 2017:
Period
Total number of
shares purchased
Average price
paid per share
Total number of
shares purchased
as part of publicly
announced plans
or programs (3)
Maximum number of
shares that may
yet be purchased
under the plans or
programs (3)
July 1-31, 2017
August 1-31, 2017
September 1-30, 2017 (1)
Total (2)
(a)
(b)
(c)
(d)
0 $
0 $
32,375 $
0.00
0.00
14.98
32,375 $
14.98
0
0
0
0
908,807
908,807
908,807
908,807
(1) The shares repurchased on September 16, 2017, September 17, 2017, September 21, 2017, and September 23,
2017, were repurchased, according to the instructions of employees, to pay for tax expense and withholding on
the compensation recognized for vested RSUs, granted on September 16, 2013, September 17, 2015,
September 21, 2016, and September 23, 2014, respectively, and were not purchased pursuant to the stock
buyback program described below.
(2) The total shares repurchased were purchased at a weighted average price of $14.98 per share.
(3) The share repurchases related to the RSUs were not completed pursuant to a plan or program and are therefore
not subject to a maximum per a plan or program. The Company has adopted a stock buyback program, which
it announced August 5, 2010. Pursuant to the program, the Company is authorized to purchase a maximum of
1,500,000 shares. The program has no expiration date.
ITEM 6.
SELECTED FINANCIAL DATA
The following financial information is derived from our audited financial statements, including the notes
thereto, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
below, and should be read in conjunction therewith.
Hennessy Advisors, Inc.
Financial Highlights
As of and For the Years Ended September 30,
2015
2016
2014
2013
2017
Income Statement Data:
Revenue
Net income
Balance Sheet Data:
Total assets
Cash and cash equivalents
Long-term debt
Per Share Data:
Earnings per share:
Basic
Diluted
Cash dividends declared
(In thousands, except per share amounts)
$52,955 $ 51,410 $ 44,739 $ 34,526 $ 24,308
$14,942 $ 14,367 $ 11,389 $ 7,667 $ 4,820
$97,927 $ 84,939 $ 73,133 $ 75,315 $ 74,734
$15,700 $ 3,535 $ 3,086 $ 7,645 $ 8,406
$21,728 $ 25,956 $ 30,625 $ 22,972 $ 26,653
$ 1.94 $ 1.89 $ 1.29 $ 0.87 $ 0.55
$ 1.92 $ 1.86 $ 1.27 $ 0.87 $ 0.55
$ 0.29 $ 0.20 $ 0.15 $ 0.10 $ 0.09
35
ITEM 7. MANAGEMENT’S 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 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, policy changes from the new 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 Item 1A, “Risk Factors,” above. 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, 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-
advisor’s investment performance, and monitor each sub-advisor’s adherence to the applicable fund’s 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 fund’s
investment performance, purchases and redemptions of shares, general market conditions and the success of our
marketing, sales, and public relations efforts.
36
We completed several changes to the Hennessy Funds product lineup during fiscal year 2017. For the
Hennessy Technology Fund, we changed its investment strategy and portfolio management team, decreased the
investment advisory fee from 0.90% to 0.74%, and adopted an expense limitation agreement. Additionally, we
launched Institutional Class shares for the Hennessy Gas Utility Fund, liquidated the Hennessy Core Bond Fund,
and reorganized the Hennessy Large Value Fund into the Hennessy Cornerstone Value Fund.
U.S. equity markets posted strong gains during fiscal year 2017. At the start of the period, U.S. equities reacted
positively to the election of President Trump, a Republican, to the White House, and to Republican majorities in both
houses of Congress, buoyed by hopes of higher government infrastructure spending, tax reform, and a more pro-business
attitude from our government. In the latter half of the fiscal year, evidence of continued steady domestic economic activity,
a recovery in corporate earnings growth and relatively good economic conditions abroad kept equity prices rising. The
Federal Reserve, feeling confident about the overall strength of the economy and the labor market, raised the federal funds
rate three times during the fiscal year, by a quarter percentage point each time.
The Japanese equity market rose significantly in local currency terms during fiscal year 2017. Early in the period, a
fall in the Japanese yen underpinned the rise in equity prices, led by export-oriented Japanese companies. During the
second half of the fiscal year, equities continued to rally, encouraged by an acceleration in corporate profits growth, broad
evidence of stronger economic activity domestically, buoyant export markets, and a stable inflation rate.
U.S. government bond yields increased precipitously after the U.S. presidential elections in November 2016 in
response to the perceived increased risks of faster economic growth and higher inflation. However, bond yields
drifted gently downwards for the rest of the fiscal year, encouraged by more moderate inflation reports, continued
modest increases in labor costs and the very gradual pace of interest rate increases by the Federal Reserve.
We seek to provide positive annualized returns to investors in the Hennessy Funds on average over a market
cycle and to generate inflows into the Hennessy Funds through our marketing and sales efforts. We regularly target
over 100,000 financial advisors through our marketing and sales program, and currently serve 19,000 advisors who
utilize 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 team of sales professionals to serve our advisor community and
to assist us with providing services to our over 320,000 mutual fund accounts across the country. In addition, we
have an active public relations effort with the Hennessy brand name appearing on TV, radio, print or online media
on average once every two and a half to three days.
Each of the 14 Hennessy Funds achieved positive annualized returns for the one-year, three-year, five-year,
10-year and since inception periods ended September 30, 2017. Total assets under management as of the end of
fiscal year 2017 was $6.6 billion, a decrease of 1.3%, or $86 million, from $6.7 billion as of the end of fiscal year
2016, which was itself an increase of 11.9%, or $711 million, from $6.0 billion as of the end of fiscal year 2015. The
decrease in total assets during fiscal year 2017 was attributable to $943 million in net outflows, offset by
$857 million in market appreciation. The increase in total assets during fiscal year 2016 was 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 2013:
Total Assets Under Management
At Each Fiscal Year Ended 2013-2017
9/30/2017
9/30/2016
9/30/2015
9/30/2014
9/30/2013
Beginning assets under management
Acquisition inflows
Organic inflows
Redemptions
Market appreciation (depreciation)
— 434,530
(In thousands)
$ 6,698,519 $ 5,987,985 $ 5,520,802 $ 4,034,181 $ 919,262
— 2,222,961
1,150,462 2,168,840 2,603,428 2,052,286 1,441,677
(2,093,315) (2,417,384) (1,961,186) (1,215,493) (1,198,521)
(175,059) 649,828 648,802
857,146 524,548
—
Ending assets under management
$ 6,612,812 $ 6,698,519 $ 5,987,985 $ 5,520,802 $ 4,034,181
37
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 the end of fiscal year 2017,
this asset had a net balance of $74.6 million, compared to $74.4 million as of the end of fiscal year 2016. The
increase was mainly due to payments for legal, printing, and proxy solicitation costs in connection with the pending
purchase of assets related to the management of three of the Rainier 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 1,000,000 shares of the Company’s common stock
pursuant to the completion of its self-tender offer in September 2015. As of the end of fiscal year 2017, this liability
had a gross balance of $26.3 million ($26.0 million net of reclassed deferred loan fees of $0.3 million, further
discussed in Footnote 7), compared to $30.6 million as of the end of fiscal year 2016. The decrease was the result of
making monthly loan payments on our bank debt.
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 fiscal years 2017, 2016, and 2015:
Revenue:
Investment advisory fees
Shareholder service fees
Fiscal Year Ended September 30,
2017
2016
2015
Percent
of Total
Revenue
Amounts
Percent
of Total
Revenue
Amounts
Percent
of Total
Revenue
Amounts
(In thousands, except percentages)
$ 48,297
4,658
91.2% $ 46,391
5,019
8.8
90.2% $ 41,177
3,562
9.8
92.0%
8.0
Total revenue
52,955
100.0
51,410
100.0
44,739
100.0
Operating expenses:
Compensation and benefits
General and administrative
Mutual fund distribution
Sub-advisor fees
Amortization and depreciation
12,862
5,882
274
9,225
366
24.3
11.1
0.5
17.4
0.7
11,943
5,806
775
8,743
353
23.2
11.3
1.5
17.0
0.7
9,750
5,223
2,403
7,284
265
Total operating expenses
28,609
54.0
27,620
53.7
24,925
Operating income
Interest expense
Other income
Income before income tax expense
Income tax expense
24,346
1,109
(12)
23,249
8,307
46.0
2.1
(0.0)
23,790
1,232
(2)
43.9 22,560
15.7 8,193
46.3
2.4
(0.0)
50.4
16.0
19,814
1,012
(1)
18,803
7,414
21.8
11.7
5.4
16.3
0.5
55.7
44.3
2.3
(0.0)
42.0
16.5
Net income
$14,942
28.2% $ 14,367
27.9% $ 11,389
25.5%
Revenues – Investment Advisory Fees and Shareholder Service Fees
Total revenue is comprised of investment advisory fees and shareholder service fees. Total revenue increased
3.0% in fiscal year 2017 compared to fiscal year 2016 and increased 14.9% to $51.4 million in fiscal year 2016
compared to fiscal year 2015.
Investment advisory fees increased 4.1% in fiscal year 2017 compared to fiscal year 2016 and increased
12.7% to $46.4 million in fiscal year 2016 compared to fiscal year 2015. The increases in investment advisory fees
in both fiscal years were mainly due to increased average daily net assets of the Hennessy Funds.
38
Average daily net assets of the Hennessy Funds for fiscal year 2017 increased by $238 million, or 3.8%, to
$6.6 billion, compared to fiscal year 2016. In fiscal year 2016, average daily net assets increased by $319 million, or
5.3%, to $6.3 billion, compared to fiscal year 2015.
Shareholder service fees decreased 7.2% to $4.7 million in fiscal year 2017 compared to fiscal year 2016. The
decrease in shareholder service fees was due to a change in the composition of average daily net assets. 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 average daily net assets
held in Institutional Class shares increased, while the average daily net assets held in Investor Class shares
decreased, versus fiscal year 2016.
Shareholder service fees increased 40.9% to $5.0 million in fiscal year 2016 compared to fiscal year 2015.
The increase in shareholder service fees from fiscal year 2015 to fiscal year 2016 was 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 fiscal year 2015.
The Company collects investment advisory fees from each of the Hennessy Funds at differing rates. These
annual rates previously ranged between 0.40% and 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 fee for the Hennessy Japan
Fund was reduced from 1.00% to 0.80% and the annual rate of the investment advisory fee for the Hennessy Japan
Small Cap Fund was reduced from 1.20% to 0.80%, each effective as of March 1, 2016.
The Hennessy Fund with the largest average daily net assets for fiscal year 2017 was the Hennessy Focus
Fund, with $2.55 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 fund’s sub-advisor, which reduces the net operating profit contribution of the fund to the Company’s
financial operations. The Hennessy Fund with the second largest average daily assets for fiscal year 2017 was the
Hennessy Gas Utility Fund, with $1.44 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.
Total assets under management as of the end of fiscal year 2017 was $6.6 billion, a decrease of 1.3%, or
$0.09 billion, from $6.7 billion as of the end of fiscal year 2016. The decrease in total assets during fiscal year 2017
is attributable to aggregate net outflows from the Hennessy Funds of $943 million, partly offset by aggregate market
appreciation of $857 million.
Total assets under management as of the end of fiscal year 2016 was $6.7 billion, an increase of 11.9% or
$711 million, compared with $6.0 billion as of the end of fiscal year 2015. The increase in total assets under
management during fiscal year 2016 was 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 and net outflows for fiscal year 2017 were
as follows:
Largest Net Inflows
Fund Name
Hennessy Japan Fund
Hennessy Japan Small Cap Fund
Hennessy Small Cap Financial Fund
Net Inflows
$90 million
$42 million
$21 million
Largest Net Outflows
Fund Name
Hennessy Mid Cap 30 Fund
Hennessy Gas Utility Fund
Hennessy Focus Fund
Net Outflows
$(545) million
$(195) million
$(138) million
39
The Hennessy Funds with the three largest amounts of net inflows and net outflows for fiscal year 2016 were
as follows:
Largest Net Inflows
Fund Name
Hennessy Focus Fund
Hennessy Total Return Fund
Hennessy Japan Fund
Net Inflows
$398 million
$14 million
$4 million
Largest Net Outflows
Fund Name
Hennessy Gas Utility Fund
Hennessy Equity & Income Fund
Hennessy Small Cap Financial Fund
Net Outflows
$(311) million
$(126) million
$(65) million
The Hennessy Funds with the three largest amounts of net inflows and net outflows for fiscal year 2015 were
as follows:
Largest Net Inflows
Fund Name
Hennessy Mid Cap 30 Fund
Hennessy Focus Fund
Hennessy Equity & Income Fund
Net Inflows
$609 million
$375 million
$96 million
Largest Net Outflows
Fund Name
Hennessy Gas Utility Fund
Hennessy Small Cap Financial Fund
Hennessy Cornerstone Value Fund
Net Outflows
$(400) million
$(50) million
$(19) million
Redemptions as a percentage of assets under management decreased from an average of 3.2% per month
during fiscal year 2016 to an average of 2.7% per month during fiscal year 2017. Redemptions as a percentage of
assets under management increased from an average of 2.7% per month during fiscal year 2015 to an average of
3.2% per month during fiscal year 2016.
Operating Expenses
Total operating expenses increased 3.6% to $28.6 million in fiscal year 2017 from $27.6 million in fiscal
year 2016. The increase was due primarily to increases in compensation and benefits expense and sub-advisor fee
expense. As a percentage of total revenue, total operating expenses increased 0.3 percentage points to 54.0% in
fiscal year 2017 as compared to fiscal year 2016.
Total operating expenses increased 10.8% to $27.6 million in fiscal year 2016, from $24.9 million in fiscal
year 2015. The increase was due primarily to increases in compensation and benefits expense, general and
administrative expense, and sub-advisor fee expense, but was partially offset by a decrease in mutual fund
distribution expense. As a percentage of total revenue, Total operating expenses decreased 2.0 percentage points to
53.7% in fiscal year 2016 as compared to 55.7% in fiscal year 2015.
Compensation and Benefits Expense: Compensation and benefits expense increased 7.7% to $12.9 million in
fiscal year 2017 compared to $11.9 million in fiscal year 2016. This increase was primarily due to equity
compensation awards granted in the current year, as well as an increase in the Company’s incentive-based
compensation expense related to the Company’s increased profitability in fiscal year 2017 compared to fiscal
year 2016. As a percentage of total revenue, compensation and benefits expense increased 1.1 percentage points to
24.3% for fiscal year 2017 compared to 23.2% in fiscal year 2016.
Compensation and benefits expense increased 22.5% to $11.9 million in fiscal year 2016 compared to
$9.8 million in fiscal year 2015. The increase was due primarily to an increase in the Company’s incentive-based
compensation expense related to the Company’s increased profitability in fiscal year 2016 compared to fiscal
year 2015, as well as increased employment necessary to support the continued development of the Company. As a
percentage of total revenue, compensation and benefits expense increased 1.4 percentage points to 23.2% for fiscal
year 2016 compared to 21.8% in fiscal year 2015.
General and Administrative Expense: General and administrative expense increased 1.3% to $5.9 million in
fiscal year 2017 from $5.8 million in fiscal year 2016. The increase resulted primarily from an increase in outside
vendor support, including legal and audit work, during fiscal year 2017. As a percentage of total revenue, general
and administrative expense decreased 0.2 percentage points to 11.1% for fiscal year 2017 compared to 11.3% in
fiscal year 2016.
40
General and administrative expense increased 11.2% to $5.8 million in fiscal year 2016, from $5.2 million in
fiscal year 2015. The increase resulted primarily from an increase in outside vendor support, including legal and tax
work and cybersecurity consulting, during fiscal year 2016. As a percentage of total revenue, general and
administrative expense decreased 0.4 percentage points to 11.3% in fiscal year 2016, from 11.7% in fiscal
year 2015.
Mutual Fund Distribution Expense: Mutual fund distribution expense decreased 64.6% to $0.3 million in
fiscal year 2017 from $0.8 million in fiscal year 2016. As a percentage of total revenue, mutual fund distribution
expense decreased 1.0 percentage points to 0.5% for fiscal year 2017 compared to 1.5% in fiscal year 2016.
Mutual fund distribution expense decreased 67.7% to $0.8 million in fiscal year 2016, from $2.4 million in
fiscal year 2015. As a percentage of total revenue, mutual fund distribution expense decreased 3.9 percentage points
to 1.5% for fiscal year 2016 compared to 5.4% in fiscal year 2015.
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.
The decrease in mutual fund distribution expense in fiscal year 2017 was primarily due to the timing of
accruals made by the Company to financial intermediaries following the completion of contract negotiations in the
prior period and also, to a lesser extent, the implementation of a Distribution (Rule 12b-1) Plan for each of the
following Hennessy Funds as of the given dates:
• 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
*
The Hennessy Large Value Fund was reorganized into the Hennessy Cornerstone Value Fund as of
February 28, 2017.
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 Hennessy Funds pursuant to their distribution plans.
Sub-Advisor Fee Expense: Sub-advisor fee expense increased 5.5% to $9.2 million in fiscal year 2017 from
$8.7 million in fiscal year 2016. The increase is a result of an increase in average assets under management in the
sub-advised Hennessy Funds, with a slight offset as a result of the Company no longer paying sub-advisor fees with
respect to the Hennessy Core Bond Fund following its liquidation as of February 17, 2017, or with respect to the
Hennessy Large Value Fund following its reorganization into the Hennessy Cornerstone Value Fund as of
February 28, 2017. As a percentage of total revenue, sub-advisor fee expense increased 0.4 percentage points to
17.4% for fiscal year 2017, compared to 17.0% in fiscal year 2016.
41
Sub-advisor fee expense increased 20.0% to $8.7 million in fiscal year 2016 from $7.3 million in fiscal year
2015. This increase was 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 fiscal
year 2016, compared to 16.3% in fiscal year 2015.
Amortization and Depreciation Expense: Amortization and depreciation expense increased 3.7% to
$0.37 million in fiscal year 2017 from $0.35 million in fiscal year 2016. As a percentage of total revenue,
amortization and depreciation expense remained the same at 0.7% for fiscal years 2017 and 2016.
Amortization and depreciation expense increased 33.2% to $0.35 million in fiscal year 2016, from
$0.27 million in fiscal year 2015. As a percentage of total revenue, amortization and depreciation expense increased
0.2 percentage points to 0.7% for fiscal year 2016, compared to 0.5% in fiscal year 2015.
The increases in both fiscal years were mainly the result of a higher fixed asset base as compared to the prior
fiscal year.
Interest Expense: Interest expense decreased 10.0% to $1.1 million in fiscal year 2017, from $1.2 million in
fiscal year 2016. The decrease was due primarily to a decrease to the Company’s principal loan balance compared to
fiscal year 2016. As a percentage of total revenue, interest expense decreased 0.3 percentage points to 2.1% for
fiscal year 2017 compared to 2.4% in fiscal year 2016.
Interest expense increased 21.7% to $1.2 million in fiscal year 2016, from $1.0 million in fiscal year 2015.
The increase was due primarily to an increase in the Company’s principal loan balance that occurred on
September 17, 2015, and was used in part to fund the Company’s self-tender offer. As a percentage of total revenue,
interest expense increased 0.1 percentage points to 2.4% for fiscal year 2016, compared to 2.3% in the prior
comparable period.
Income Tax Expense: Income tax expense increased 1.4% to $8.3 million in fiscal year 2017 from
$8.2 million in fiscal year 2016. The increase was due to increased income before income tax expense and was
partially offset by a lower effective tax rate resulting from the early adoption of ASU 2016-09 (see further
discussion in Footnote 12). As a percentage of total revenue, income tax expense decreased 0.3 percentage points to
15.7% for fiscal year 2017 compared to 16.0% in fiscal year 2016.
Income tax expense increased 10.5% to $8.2 million in fiscal year 2016 from $7.4 million in fiscal year 2015.
This change was due to increased income before income tax expense during fiscal year 2016 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 fiscal year 2016 compared to 16.5% in fiscal year 2015.
Net Income
Net income increased by 4.0% to $14.9 million in fiscal year 2017 from $14.4 million in fiscal year 2016 as a
result of the factors discussed above. Net income increased by 26.1% to $14.4 million in fiscal year 2016 from
$11.4 million in fiscal year 2015 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 funding available to support our
business model. Management anticipates that cash and other liquid assets on hand as of September 30, 2017, 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.
42
Total assets under management as of the end of fiscal year 2017 was $6.6 billion, a decrease of 1.3%, or
$0.1 billion, from $6.7 billion as of the end of fiscal year 2016, which was itself an increase of $711 million, or
11.9%, from the end of fiscal year 2015. The primary source of our revenues, 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 $74.9 million as of the
end of fiscal year 2017. Also as of the end of fiscal year 2017, we had cash and cash equivalents of $15.7 million.
The following table summarizes key financial data relating to our liquidity and use of cash for fiscal years
2017, 2016, and 2015:
Cash flow data:
Operating cash flows
Investing cash flows
Financing cash flows
Net increase (decrease) in cash and cash
equivalents
For the Fiscal Year Ended
September 30,
2017
2016
2015
(In thousands)
$ 19,193 $ 18,186 $ 14,444
(450)
(6,583) (5,875) (18,553)
(445) (11,862)
$ 12,165 $
449 $ (4,559)
The increase in cash provided by operating activities of $1.0 million from fiscal year 2016 to fiscal year 2017
was due mainly to increased net income and an increase in deferred restricted stock unit compensation. The increase
in cash provided by operating activities of $3.7 million from fiscal year 2015 to fiscal year 2016 was due mainly to
an increase in net income from fiscal year 2015.
The decrease in cash used for investing activities of $11.4 million from fiscal year 2016 to fiscal year 2017
was due to one-time costs associated with purchasing the assets related to the management of The Westport Funds in
fiscal year 2016. The increase in cash used for investing activities from fiscal year 2015 to fiscal year 2016 was due
to costs associated with purchasing the assets related to the management of The Westport Funds in fiscal year 2016.
The increase in cash used for financing activities of $0.7 million from fiscal year 2016 to fiscal year 2017 was
due to an increased dividend in fiscal year 2017. The decrease in cash used for financing activities from fiscal
year 2015 to fiscal year 2016 was due to the repurchase of 1,500,000 shares of our common stock at $16.67 per
share pursuant to our self-tender offer in fiscal year 2015, adjusted for a 3-for-2 stock split effected on March 6,
2017.
Dividend Payments. A quarterly cash dividend of $0.067 per share was paid on December 8, 2016, to
shareholders of record as of November 15, 2016. Additionally, quarterly cash dividends of $0.075 per share were
paid on March 6, 2017, to shareholders of record as of February 10, 2017; on June 8, 2017, to shareholders of record
as of May 16, 2017; and on September 11, 2017, to shareholders of record as of August 17, 2017. The total payment
from cash on hand was $2.2 million.
Our Bank Loan. We have an outstanding bank loan with U.S. Bank, as administrative 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 1,500,000 shares of our common
stock at $16.67 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 U.S. Bank and California Bank & Trust 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.
43
Our current term loan agreement requires 48 monthly payments of $364,583 plus interest based on, at our
option:
(i) 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
(ii) 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.
From the effective date of the current term loan agreement through February 29, 2016, the interest rate in
effect was U.S. Bank’s prime rate plus a margin based on the Company’s ratio of consolidated debt to consolidated
EBITDA. Effective March 1, 2016, the Company converted $32.8 million of its principal loan balance to a one-
month LIBOR contract, which has been renewed each subsequent month. As of September 30, 2017, the effective
rate is 4.237%, which is comprised of the LIBOR rate of 1.237% as of September 1, 2017, plus a margin of 3.0%
based on the Company’s ratio of consolidated debt to consolidated EBITDA as of June 30, 2017. The Company
intends to renew the one-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 the Company’s assets. The
final installment of the then-outstanding principal of $17.9 million plus accrued 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, 2017. As
of September 30, 2017, we had $26.3 million currently outstanding under our bank loan.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of September 30, 2017, consisting of loan
payments, including the related interest payments due, and operating lease payments:
Principal on bank loan
Interest on bank loan (1)
Operating lease (2)
Operating lease (3)
Operating lease (4)
Total
Payments due by period (in thousands)
Total
Less Than
1 Year
1 - 3 Years
3 - 5 Years
More Than
5 Years
$ 26,250 $ 4,010 $ 22,240 $ — $ —
853 — —
1,805
952
1,430
286 —
794
350
73
93
20 — —
9 — — —
9
$ 29,587 $ 5,394 $ 23,907 $
286 $ —
(1) The interest payable on the bank loan is calculated at the current effective rate as of September 30, 2017, of
4.237%, which is based on the one-month LIBOR rate of 1.237% 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 office space located at 101 Federal Street, Suite 1900, Boston, Massachusetts 02110.
(4) This lease is for office space located at 1340 Environ Way, #305, Chapel Hill, North Carolina 27517.
44
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 management’s 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 management’s 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.
The management contracts we have purchased are considered intangible assets with an indefinite life and we
account for them in accordance with Accounting Standards Update (“ASU”) No. 2012-02, “Testing Indefinite-Lived
Intangible Assets for Impairment,” as amended. Pursuant to ASU No. 2012-02, an entity first assesses 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 a quantitative impairment test in accordance with Subtopic 350-
30, “Intangibles—Goodwill and Other—General 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. We were able
to forego the annual impairment analysis for fiscal year 2017 as the more-likely-than-not threshold is met as of
September 30, 2017.
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 $74.6 million as of
September 30, 2017.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). In addition, the FASB issued related
revenue recognition guidance in five ASUs: principal versus agent considerations (ASU 2016-08), identifying
performance obligations and licensing (ASU 2016-10), a revision of certain SEC staff observer comments (ASU
2016-11), implementation guidance (ASU 2016-12), and technical corrections and improvements (ASU 2016-20).
ASU 2014-09 is a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition
guidance under GAAP, provides enhancements to the quality and consistency of how revenue is reported, and
improves comparability in financial statements presented under GAAP and International Financial Reporting
Standards. This new standard is effective for fiscal years and interim periods within those years beginning after
December 15, 2017 (our fiscal year 2019). 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 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line-of-Credit Arrangements,”
which simplifies the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to term
45
loans should be presented as a direct deduction from the carrying amount of the associated debt liability. This new
standard is effective for annual reporting periods, and interim periods within those reporting periods, beginning after
December 15, 2015 (our fiscal year 2017). The impact of adopting ASU 2015-15 on our financial statements was the
classification of all deferred financing costs as a deduction to the corresponding debt in addition to the
reclassification of deferred financing costs in other current and long-term assets to short and long-term notes payable
as of September 30, 2016, within the balance sheets to conform to the new presentation. Other than these
reclassifications and additional disclosures, the adoption of ASU 2015-15 did not have a material impact on our
financial statements.
In November 2015, the FASB issued ASU 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. This new standard is effective for annual reporting periods, and
interim periods within those reporting periods, beginning after December 15, 2016 (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 ASU No. 2016-09 “Compensation—Stock 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 (i) income tax consequences, (ii) classification of
awards as either equity or liabilities, and (iii) classification on the statement of cash flows. This new standard is
effective for annual reporting periods, and interim periods within those reporting periods, beginning after
December 15, 2016 (our fiscal year 2018). 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 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. As of March 31, 2017, we elected to early adopt ASU 2016-09, using a modified retrospective
approach, effective as if adopted the first day of the fiscal year, October 1, 2016. As a result of early adoption of
ASU 2016-09, income tax benefits of approximately $0.004 million and $0.2 million were recognized as discrete
events in the quarterly periods ended March 31, 2017, and December 31, 2016, respectively. We have elected to
continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than
electing to account for forfeitures as they occur. As such, this has no cumulative effect on retained earnings for the
prior year. With the early adoption of 2016-09, we have elected to present the cash flow statement on a prospective
transition method and no prior periods have been adjusted.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), a consensus of the
FASB’s 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 annual reporting periods,
and interim periods within those reporting periods, beginning after December 15, 2016 (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 January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805): Clarifying the
Definition of a Business.” Based on feedback that the definition of business is being applied too broadly, the update
adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. This new standard is effective for annual reporting periods, and interim periods
within those reporting periods, beginning after December 15, 2017 (our fiscal year 2019). The adoption of this
standard is not expected to have a material impact on our financial condition, results of operations, or cash flows.
46
In May 2017, the FASB issued an update to ASU No. 2017-09 “Compensation—Stock Compensation (Topic
718): Scope of Modification Accounting.” The update was issued to provide clarity and reduce both (i) diversity in
practice and (ii) cost and complexity when applying the guidance in Topic 718. This update is effective for annual
reporting periods, and interim periods within those reporting periods, beginning after December 15, 2017 (our fiscal
year 2019). It is not expected to have a material impact on our financial condition, results of operations, or cash
flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subjected to different types of risk, including market risk and interest rate risk.
Market risk is the risk that we will be adversely affected by changes in the securities market, specifically
changes in equity prices.
As discussed in Item 1A, “Risk Factors,” above, our revenues are calculated as a percentage of the average
daily net asset values of the Hennessy Funds. Declines in the value of the securities held by the Hennessy Funds will
negatively impact our revenues and net income. The following is a summary of the effect that a 10% increase or
decrease in equity prices of the stocks within the Hennessy Funds would have on our assets under management, and
therefore our revenues. The changes are compared to average asset values for fiscal year 2017, and values are based
on an assumption that asset values are consistent throughout the year:
Average Assets
Under Management
Investment Advisor Fees
Shareholder Service Fees
Total Revenue:
Effects of Market Risk on Revenue
(In thousands)
Values Based on Average
Net Assets for Fiscal Year
ended September 30, 2017
Values Based on
a 10% Increase
in Average Assets
Values Based on
a 10% Decrease
in Average Assets
$
$
$
6,563,178 $
7,219,496 $
5,906,860
48,297 $
4,658
52,955 $
53,127 $
5,134
58,261 $
43,467
4,200
47,667
Interest rate risk is the risk that we will be adversely affected by changes in the floating interest rate on our
outstanding debt.
As discussed in Item 1A, “Risk Factors,” above, an increase in our floating interest rate on our $26.3 million
of gross debt would adversely affect our profitability. A decrease in short-term interest rates, however, could
potentially increase our profitability. The following is a summary of the effect that a 10% increase or decrease in
short-term interest rates would have on our interest expense:
Gross Debt Owed at September 30, 2017
26,250 $
26,250 $
26,250
Effects of Interest Rate Changes on Expenses
(In thousands)
Values Based on
a 10% Increase
in Effective
Interest Rate
Values Based on
a 10% Decrease
in Effective
Interest Rate
Values Based on
Effective Interest
Rate of 3.895%
For Fiscal Year 2017
$
Interest Expense
$
1,109 $
1,227 $
1,004
47
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
Management’s Annual Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Income
Statements of Changes in Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
49
50
51
52
53
54
55
56
48
Management’s 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 Company’s 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 Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2017, using the criteria set forth in 2013 Internal Control — Integrated Framework
2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, the Company’s management concluded that, as of September 30, 2017, the Company’s 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 LLP’s attestation report appears in Item 8, “Financial Statements and
Supplementary Data.”
49
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, 2017,
based on criteria established in Internal Control-Integrated Framework 2013 issued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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 “Management 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 company’s 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 company’s 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 company’s
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, 2017, based on criteria established in Internal Control – Integrated
Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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, 2017 and 2016, and the related statements of income,
changes in stockholders’ equity, and cash flows for the three years ended September 30, 2017, of Hennessy
Advisors, Inc. and our report dated December 4, 2017, expressed an unqualified opinion on those financial
statements.
/s/ Marcum LLP
San Francisco, California
December 4, 2017
50
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, 2017 and
2016, and the related statements of income, changes in stockholders’ equity and cash flows for the three years ended
September 30, 2017. 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, 2017 and 2016, and the results of its operations and its cash
flows for the three years ended September 30, 2017, 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, 2017, based
on the criteria established in Internal Control-Integrated Framework 2013 issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated December 4, 2017, expressed an unqualified
opinion on the effectiveness of Hennessy Advisors, Inc.’s internal control over financial reporting.
/s/ Marcum LLP
San Francisco, California
December 4, 2017
51
Hennessy Advisors, Inc.
Balance Sheets
(In thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Investments in marketable securities, at fair value
Investment fee income receivable
Prepaid expenses
Deferred income tax asset
Other accounts receivable
Total current assets
Property and equipment, net of accumulated depreciation of $922 and
$940, respectively
Management contracts
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
September 30,
2017
September 30,
2016
$
15,700 $
8
4,325
1,614
669
584
3,535
8
4,230
1,175
607
580
22,900
10,135
254
74,628
145
296
74,359
149
$
97,927 $
84,939
Accrued liabilities and accounts payable
Income taxes payable
Deferred rent
Current portion of long-term debt, net of discount and debt issuance costs
$
Total current liabilities
Long-term debt, net of discount and debt issuance costs and current portion
Deferred income tax liability
Total liabilities
Commitments and Contingencies (Note 10)
Stockholders’ equity:
Common stock, no par value, 22,500,000 shares authorized:
7,776,563 shares issued and outstanding at September 30, 2017 and
7,661,969 at September 30, 2016
Retained Earnings
Total stockholders’ equity
7,353 $
676
202
4,228
6,578
383
32
4,228
12,459
11,221
21,728
12,210
25,956
10,431
46,397
47,608
14,943
36,587
13,279
24,052
51,530
37,331
Total liabilities and stockholders’ equity
$
97,927 $
84,939
See accompanying notes to financial statements
52
Hennessy Advisors, Inc.
Statements of Income
(In thousands, except share and per share amounts)
Revenue
Investment advisory fees
Shareholder service fees
Total revenue
Operating expenses
Compensation and benefits
General and administrative
Mutual fund distribution
Sub-advisor fees
Amortization and depreciation
Total operating expenses
Net operating income
Interest expense
Other income
Income before income tax expense
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding
(prior periods restated for stock split, see Note 9):
Basic
Diluted
Years Ended September 30,
2017
2016
2015
$ 48,297 $
4,658
52,955
12,862
5,882
274
9,225
366
28,609
24,346
1,109
(12)
23,249
8,307
46,391 $
5,019
51,410
41,177
3,562
44,739
11,943
5,806
775
8,743
353
27,620
23,790
1,232
(2)
22,560
8,193
9,750
5,223
2,403
7,284
265
24,925
19,814
1,012
(1)
18,803
7,414
$
14,942 $
14,367 $
11,389
$
$
1.94 $
1.92 $
1.89 $
1.86 $
1.29
1.27
7,691,937
7,600,583
8,831,094
7,790,527
7,717,965
8,941,034
Cash dividends declared per share:
$
0.29 $
0.20 $
0.15
See accompanying notes to financial statements
53
Hennessy Advisors, Inc.
Statements of Changes in Stockholders’ Equity
Years Ended September 30, 2017, 2016 and 2015
(In thousands, except share data)
Balance at September 30, 2014
Net income
Dividends paid
Employee and director restricted stock vested
Repurchase of common stock pursuant to self-tender offer,
including costs of $55,655
Repurchase of vested employee restricted stock for tax
withholding
Shares issued for auto-investments pursuant to the 2015 Dividend
Reinvestment and Stock Purchase Plan
Shares issued for dividend reinvestment pursuant to the 2015
Dividend Reinvestment and Stock Purchase Plan
Stock-based compensation
Tax effect of restricted stock unit vesting
Balance at September 30, 2015
Net income
Dividends paid
Employee and director restricted stock vested
Repurchase of vested employee restricted stock for tax
withholding
Shares issued for auto-investments pursuant to the 2015 Dividend
Reinvestment and Stock Purchase Plan
Shares issued for dividend reinvestment pursuant to the 2015
Dividend Reinvestment and Stock Purchase Plan
Stock-based compensation
Tax effect of restricted stock unit vesting
Balance at September 30, 2016
Net income
Dividends paid
Employee and director restricted stock vested
Repurchase of vested employee restricted stock for tax
withholding
Shares issued for auto-investments pursuant to the 2015 Dividend
Reinvestment and Stock Purchase Plan
Shares issued for dividend reinvestment pursuant to the 2015
Dividend Reinvestment and Stock Purchase Plan
Stock-based compensation
Adjustment for fractional shares paid in cash in connection with
stock split
Balance at September 30, 2017
Common Stock
Retained
Earnings
Total
Stockholders’
Equity
Number
Amount
9,028,914 $ 10,852 $ 26,562 $
— — 11,389
— — (1,383)
51,113 — —
37,414
11,389
(1,383)
—
(1,500,000) — (25,056)
(25,056)
(10,280)
(71)
(68)
(139)
18 — —
177
—
—
3
(3)
692 —
178 —
—
—
692
178
7,569,942 $ 11,654 $ 11,441 $
— — 14,367
— — (1,500)
119,250 — —
23,095
14,367
(1,500)
—
(28,872)
(282)
(236)
(518)
735
15 —
15
914
(20)
20
— 1,416 —
456 —
—
7,661,969 $ 13,279 $ 24,052 $
— — 14,942
— — (2,243)
152,322 — —
—
1,416
456
37,331
14,942
(2,243)
—
(39,820)
(489)
(164)
(653)
183
3 —
3
1,965
33 —
— 2,118 —
33
2,118
(56)
(1) —
(1)
7,776,563 $ 14,943 $ 36,587 $
51,530
See accompanying notes to financial statements
54
Hennessy Advisors, Inc.
Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
$14,942 $ 14,367 $ 11,389
Fiscal Year Ended September 30,
2017
2016
2015
activities:
Amortization and depreciation
Deferred income taxes
Tax effect from restricted stock units
Restricted stock units repurchased for employee tax withholding
Stock-based compensation
Unrealized gains on marketable securities
Amortization of loan fee payments
Change in operating assets and liabilities:
Investment fee income receivable
Prepaid expenses
Other accounts receivable
Other assets
Accrued liabilities and accounts payable
Income taxes payable
Current portion of deferred rent
219
1,717
—
(653)
2,118
—
147
(95)
(439)
(4)
4
775
292
170
206
456
(518)
265
1,359 1,308
178
(139)
692
(1) —
147 —
1,416
(910)
(178)
(448)
(126)
(91)
(45)
(10)
—
1,879 1,161
(714) 1,097
(48)
(62)
Net cash provided by operating activities
19,193
18,186 14,444
Cash flows from investing activities:
Purchases of property and equipment
Payments related to management contracts
Cash flows from financing activities:
Net cash used in investing activities
(176)
(269)
(184)
(11,678)
(445)
(11,862)
(258)
(192)
(450)
Principal payments on bank loan
Payoff of previous bank loan
Proceeds from new bank loan
Loan fee payments on bank loan
Proceeds from shares issued pursuant to the 2015 Dividend Reinvestment
(4,375)
—
—
—
(4,375)
(3,750)
— (22,972)
— 35,000
(392)
(15)
and Stock Repurchase Plan
Dividend payments
Repurchase of common stock pursuant to self-tender offer, including costs
of $55,655
Cash paid for fractional shares in connection with stock split
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes
Interest
3
(2,210)
15 —
(1,383)
(1,500)
—
(1)
— (25,056)
— —
(6,583)
(5,875) (18,553)
12,165
3,535
449
(4,559)
3,086 7,645
$15,700 $ 3,535 $ 3,086
$ 6,680 $ 6,960 $ 5,194
$ 1,109 $ 1,190 $ 1,004
See accompanying notes to financial statements
55
Notes to Financial Statements
(1) Summary of the Organization, Description of Business and Significant Accounting Policies
(a) Organization and Description of Business
Hennessy Advisors, Inc. was founded on February 1, 1989, as a California corporation under the name
Edward J. Hennessy, Incorporated. In 1990, the Company became a registered investment advisor and on
April 15, 2001, the Company changed its name to Hennessy Advisors, Inc.
The Company’s operating activities consist primarily of providing investment advisory services to 14
open-end 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. Prior to March 1,
2015, the Company only earned shareholder service fees from some of the Hennessy Funds.
The Company’s operating revenues consist of contractual investment advisory and shareholder service
fees paid to it by the Hennessy Funds. The Company earns investment advisory fees from each Hennessy
Fund by, among other things:
•
acting as portfolio manager for the fund or overseeing the sub-advisor acting as portfolio
manager for the fund, which includes managing the composition of the fund’s portfolio
(including the purchase, retention, and disposition of portfolio securities in accordance with the
fund’s investment objectives, policies, and restrictions), ensuring compliance with “best
execution” for the fund’s 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 fund’s compliance with its investment objectives and restrictions and federal
securities laws;
•
•
•
performing activities such as maintaining a compliance program, conducting ongoing reviews of
the compliance programs of the fund’s service providers (including its sub-advisor, as
applicable), conducting on-site visits to the fund’s 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 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 fund’s sub-advisor, if applicable,
monitoring such sub-advisor’s adherence to the fund’s investment objectives, policies, and
restrictions, and reviewing the fund’s 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 fund’s prospectus and related documents;
preparing or reviewing a written summary of the fund’s 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;
56
•
•
•
paying the incentive compensation of the fund’s 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
preparing or reviewing materials for the Funds’ Board of Trustees, presenting or leading
discussions to or with the Funds’ Board of Trustees, preparing or reviewing meeting minutes,
and arranging for training and education of the Funds’ Board of Trustees.
The Company earns shareholder service fees from Investor Class shares of the Hennessy Funds by,
among other things, maintaining an “800” number that the current investors of the Hennessy Funds may call
to ask questions about the Hennessy Funds or their accounts, or to get help with processing exchange and
redemption requests or changing account options. These fee revenues are earned and calculated daily by the
Hennessy Funds’ accountants at U.S. Bancorp Fund Services, LLC. The fees are computed and billed
monthly, at which time they are recognized in accordance with Accounting Standard Codification 605
“Revenue Recognition.”
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 is charged to expense monthly by the Company
as an offset to revenues. The waived fee is deducted from investment advisory fee income and reduces the
aggregate amount of advisory fees received by the Company in the subsequent month. To date, the Company
has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its
discretion. Any decision to waive fees voluntarily would not apply to previous periods, but would only apply
on a going forward basis.
The Company’s contractual agreements for investment advisory and shareholder services provide
persuasive evidence that an arrangement exists with fixed and determinable fees, and the services are rendered
daily. The collectability is probable as the fees are received from the Hennessy Funds in the month subsequent
to the month in which the services are provided.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with original
maturities of three months or less that are readily convertible into cash.
(c) Investments
Investments in highly liquid financial instruments with remaining maturities of less than one year are
classified as short-term investments. Financial instruments with remaining maturities of greater than one year
are classified as long-term investments. A table of investments is included in Footnote 4.
The Company holds investments in publicly traded mutual funds, which are accounted for as trading
securities. Accordingly, unrealized gains of less than $1,000 per year were recognized in operations for fiscal
years 2017, 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
Throughout its history, the Company has completed eight purchases of assets related to the management
of 25 different mutual funds, some of which were reorganized into already existing Hennessy Funds. In
accordance with FASB guidance, the Company periodically reviews the carrying value of its purchased
management contracts to determine if any impairment has occurred. The fair value of management contracts
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 Company’s management that there was no impairment as of September 30,
2017, 2016, or 2015.
57
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, 2017.
The Company completed its most recent asset purchase on September 23, 2016, when it purchased the
assets related to the management of the Westport Fund and the Westport Select Cap Fund. This asset purchase
added approximately $435 million to the Company’s 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 $11.5 million.
(e) Fair Value of Financial Instruments
The FASB guidance on “Disclosures about Fair Value of Financial Instruments” requires disclosures
regarding the fair value of all financial instruments for financial statement purposes. The estimates presented
in these financial statements are based on information available to management as of September 30, 2017,
2016, and 2015. Accordingly, the fair values presented in the Company’s financial statements as of
September 30, 2017, 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 SEC.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets, generally one to 10 years.
(g) Income Taxes
The Company, under the FASB guidance on “Accounting for Uncertainty in Income Tax,” uses a
recognition threshold and measurement attribute for the financial statement recognition and measurement of
uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. The Company utilizes a two-step approach for evaluating uncertain tax positions. Step one,
recognition, requires a company to determine if the weight of available evidence indicates that a tax position is
more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes,
if any. Step two, measurement, is based on the largest amount of benefit, which is more likely than not to be
realized on ultimate settlement.
The Company believes the positions taken on the tax returns are fully supported, but tax authorities may
challenge these positions, which may not be fully sustained on examination by the relevant tax authorities.
Accordingly, the income tax provision includes amounts intended to satisfy assessments that may result from
these challenges. Determining the income tax provision for these potential assessments and recording the
related effects requires management judgement and estimates. The amounts ultimately paid on resolution of an
audit could be materially different from the amounts previously included in the income tax provision, and,
therefore, could have a material impact on our income tax provision, net income and cash flows. The accrual
for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our
domestic operations, including the allocation of income among different jurisdictions. For a further discussion
on taxes, refer to Note 8 to the Financial Statements.
The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions
are the United States, California, District of Columbia, Florida, Massachusetts, Texas, New Hampshire, North
Carolina, Illinois, Maryland, Michigan, Minnesota, and New York. The tax years ended in 2014 through 2016
58
remain open and subject to examination by the appropriate governmental agencies in the U.S.; the tax years
ended in 2013 through 2016 remain open in California; the tax years ended in 2014 through 2016 remain open
in Massachusetts, North Carolina, and New Hampshire; the tax years ended 2015 and 2016 remain open for
Illinois, District of Columbia, Maryland, Michigan, Minnesota, New York, and Texas. For any unfiled tax
returns the statute of limitations will be open indefinitely.
The Company’s effective tax rate of 35.7%, 36.3%, and 39.4% for fiscal year 2017, 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 fiscal year 2017 due to recognition of uncertain tax position benefits
from the finalization of state regulations.
(h) Earnings Per Share
Basic earnings per share is determined by dividing net earnings by the weighted average number of
shares of common stock outstanding, while diluted earnings per share is determined by dividing net earnings
by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of
common stock equivalents.
All common stock equivalents were dilutive and therefore included in the diluted earnings per share
calculation for fiscal years 2017, 2016, and 2015.
On January 26, 2017, the Company’s 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, restricted stock units, and per share data have been adjusted to reflect this stock split.
(i) Equity
Amended and Restated 2013 Omnibus Incentive Plan
Effective January 17, 2013, the Company established, and the Company’s shareholders approved, the 2013
Omnibus Incentive Plan providing for the issuance of options, stock appreciation rights, restricted stock, restricted
stock units, performance awards, and other equity awards for the purpose of attracting and retaining executive
officers, key employees, and outside directors and advisors and increasing shareholder value. On March 26, 2014,
the Company adopted, and the Company’s shareholders approved, the Amended and Restated 2013 Omnibus
Incentive Plan (the “Omnibus Plan”), pursuant to which amounts that a participant in the Omnibus Plan is entitled to
receive with respect to certain types of awards were increased as compared to the limitations included in the prior
2013 Omnibus Incentive Plan. The maximum number of shares that may be issued under the Omnibus Plan is 50%
of the number of outstanding shares of common stock of the Company, subject to adjustment by the compensation
committee of the 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 Omnibus Plan. Shares available under the Omnibus Plan that are not awarded in one particular year may
be awarded in subsequent years.
The compensation committee of the Board of Directors of the Company has the authority to determine
the awards granted under the Omnibus Plan, including among other things, the individuals who receive the
awards, the times when they receive them, vesting schedules, performance goals, whether an option is an
incentive or nonqualified option and the number of shares to be subject to each award. However, no
participant may receive options or stock appreciation rights under the Omnibus Plan for an aggregate of more
than 75,000 shares in any calendar year. The exercise price and term of each option or stock appreciation right
is fixed by the compensation committee except that the exercise price for each stock option that is intended to
qualify as an incentive stock option must be at least equal to the fair market value of the stock on the date of
grant and the term of the option cannot exceed 10 years. In the case of an incentive stock option granted to a
10% or more shareholder, the exercise price must be at least 110% of the fair market value on the date of grant
and cannot exceed five years. Incentive stock options may be granted only within 10 years from the date of
adoption of the Omnibus Plan. The aggregate fair market value (determined at the time the option is granted)
of shares with respect to which incentive stock options may be granted to any one individual, which stock
options are exercisable for the first time during any calendar year, may not exceed $100,000. An optionee
may, with the consent of the compensation committee, elect to pay for the shares to be received upon exercise
of his or her options in cash, shares of common stock or any combination thereof.
59
Under the Omnibus Plan, participants may be granted restricted stock units (“RSUs”), representing an
unfunded, unsecured right to receive a share of the Company’s common stock on the date specified in the
recipient’s award. The Company issues new shares of its common stock when it is required to deliver shares to
an RSU recipient. The RSUs granted under the Omnibus Plan vest over four years, at a rate of 25% per year.
The Company recognizes compensation expense on a straight-line basis over the four-year vesting term of
each award. There were 130,900, 132,300, and 273,750 RSUs granted during fiscal years 2017, 2016, and
2015, respectively.
All compensation costs related to RSUs vested during fiscal years 2017, 2016, and 2015 have been
recognized in the financial statements.
The Company has available up to 3,888,281 shares of the Company’s common stock in respect of
granted stock awards, in accordance with terms of the Omnibus Plan.
RSU activity for fiscal years 2017, 2016, and 2015 was as follows:
Non-vested Balance at September 30,
2014
Granted
Vested (1)
Forfeited
Non-vested Balance at September 30,
2015
Granted
Vested (1)
Forfeited
Non-vested Balance at September 30,
2016
Granted
Vested (1)
Forfeited
Non-vested Balance at September 30,
2017
Restricted Stock Unit Activity
Years Ended September 30, 2017, 2016, and 2015
Weighted Avg. Fair
Number of Restricted
Value at Each Date
Share Units
169,445 $
273,750 $
(75,054) $
(900) $
367,241 $
132,300 $
(120,077) $
— $
379,464 $
130,900 $
(152,073) $
— $
358,291 $
8.35
14.08
9.22
6.01
12.45
21.67
11.79
—
16.19
14.38
13.93
—
16.48
(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 112,503, 60,252, and 27,222 shares of common stock issued for restricted stock units vested in fiscal
years 2017, 2016, and 2015, respectively.
RSU Compensation
Fiscal Year Ended September 30, 2017
Total expected compensation expense related to RSUs
Compensation expense recognized as of September 30, 2017
Unrecognized compensation expense related to RSUs at
September 30, 2017
(In Thousands)
$
12,490
(6,584)
$
5,906
As of September 30, 2017, there was $5.9 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.
60
Dividend Reinvestment and Stock Purchase Plan
In March 2015, the Company established a Dividend Reinvestment and Stock Purchase Plan (the
“DRSPP”) to provide shareholders and new investors with a convenient and economical means of purchasing
shares of the Company’s common stock and reinvesting cash dividends paid on the Company’s common
stock. Under the DRSPP, the Company issued 2,148, 1,649, and 195 shares of common stock in fiscal years
2017, 2016, and 2015, respectively. The maximum number of shares that may be issued under the DRSPP is
1,500,000 shares, of which 1,496,008 shares remain available for issuance.
(j) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
(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 14 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 (ii) 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. 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,” which is the transfer
of the Company’s 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 fund’s 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 and re-investment of the
assets of the applicable Hennessy Fund in accordance with the terms of such agreement and the applicable
Hennessy Fund’s 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 as, 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 based on the amount of each applicable Hennessy Fund’s 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.
61
•
•
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 entity’s 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.
Based on the definitions, the following table represents the Company’s assets categorized in the Level 1
to 3 hierarchies as of the end of fiscal years 2017, 2016, and 2015:
Money market fund deposits
Mutual fund investments
Total
Amounts included in:
Cash and cash equivalents
Investments in marketable securities
Total
Money market fund deposits
Mutual fund investments
Total
Amounts included in:
Cash and cash equivalents
Investments in marketable securities
Total
Money market fund deposits
Mutual fund investments
Total
Amounts included in:
Cash and cash equivalents
Investments in marketable securities
Total
Fair Value Measurements at September 30, 2017
(In thousands)
Level 1
Level 2
Level 3
Total
$
13,832 $ — $ — $
8 — —
13,832
8
$
13,840 $ — $ — $
13,840
$
13,832 $ — $ — $
8 — —
13,832
8
$
13,840 $ — $ — $
13,840
Fair Value Measurements at September 30, 2016
(In thousands)
Level 1
Level 2
Level 3
Total
320 $ — $ — $
8 — —
328 $ — $ — $
320 $ — $ — $
8 — —
328 $ — $ — $
320
8
328
320
8
328
Fair Value Measurements at September 30, 2015
(In thousands)
Level 1
Level 2
Level 3
Total
1,592 $ — $ — $
7 — —
1,599 $ — $ — $
1,592 $ — $ — $
7 — —
1,599 $ — $ — $
1,592
7
1,599
1,592
7
1,599
$
$
$
$
$
$
$
$
There were no transfers between levels during any of such fiscal years.
62
(4)
Investments
The cost, gross unrealized gains, gross unrealized losses, and fair market value of the Company’s
trading investments at the end of fiscal years 2017, 2016, and 2015 was as follows:
2017
Mutual fund investments
Total
2016
Mutual fund investments
Total
2015
Mutual fund investments
Total
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cost
Total
(In thousands)
$ 4 $
4
$ 4 $
4
4
$ 4 $
18
18
18
18
16
16
$
(14) $
(14)
$
(14) $
(14)
(13)
$
(13) $
8
8
8
8
7
7
The mutual fund investments are included as a separate line item in current assets on the Company’s
balance sheets.
(5) Property and Equipment
Property and equipment were comprised of the following for fiscal years 2017 and 2016:
Equipment
Leasehold improvements
Furniture and fixtures
IT Infrastructure
Software
Less: accumulated depreciation
September 30,
2017
2016
(In thousands)
$ 214
123
371
61
407
1,176
(922)
$ 343
123
349
61
360
1,236
(940)
$ 254
$ 296
During fiscal years 2017 and 2016, depreciation expense was $0.22 million and $0.21 million,
respectively.
(6) Management Contracts
The costs related to the Company’s purchase of assets related to management contracts are capitalized
as incurred. The management contract asset was $74.6 million as of the end of fiscal year 2017, compared to
$74.4 million at the end of fiscal year 2016. 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.
(7) 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, 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 Company’s bank
63
loan with U.S. Bank 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 the Company’s common stock at $25 per share
pursuant to its self-tender offer, the Company entered into a 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 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 U.S. Bank and
California Bank & Trust 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 of $364,583 plus interest based on, at
our option:
(1) LIBOR plus a margin that ranges from 2.75% to 3.25%, depending on the Company’s 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 Company’s 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. Bank’s prime rate plus a margin based on the Company’s ratio of consolidated debt to
consolidated EBITDA. Effective March 1, 2016, the Company converted $32.8 million of its principal loan
balance to a one-month LIBOR contract, which has been renewed each subsequent month. As of
September 30, 2017, the effective rate is 4.237%, which is comprised of the LIBOR rate of 1.237% as of
September 1, 2017, plus a margin of 3.0% based on the Company’s ratio of consolidated debt to consolidated
EBITDA as of June 30, 2017. The Company intends to renew the one-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 the Company’s 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)
2018
2019
Total
$ 4,375
21,875
$ 26,250
The previous amended loan agreement included, and the current term loan agreement includes, certain
reporting requirements and loan covenants requiring the maintenance of specified financial ratios. The
Company was in compliance for fiscal years 2017, 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) is not considered “substantially
different” from the original loan with U.S. Bank 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.
64
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 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 for fiscal years 2017, 2016, and 2015 was
$0.1 million for each period. The unamortized balance of the loan fees was $0.3 million as of September 30,
2017. The following is a reconciliation of the reclassification:
Gross Debt at
September 30, 2017
Debt
Issuance Cost
(In thousands)
Debt, Net of Discount,
September 30, 2017
Current portion of debt
Long-term portion of debt
Total Debt
$
$
4,375 $
21,875
26,250 $
(147) $
(147)
(294) $
4,228
21,728
25,956
Gross Debt at
September 30, 2016
Debt
Issuance Cost
Debt, Net of Discount,
at September 30, 2016
Current portion of debt
Long-term portion of debt
Total Debt
$
$
(In thousands)
4,375 $
26,250
30,625 $
(147) $
(294)
(441) $
4,228
25,956
30,184
(8)
Income Taxes
As of both September 30, 2017 and 2016, the Company’s gross liability for unrecognized tax benefits
related to uncertain tax positions was $0.35 million and $0.5 million, respectively, of which $0.2 million and
$0.3 million would decrease the Company’s effective income tax rate if the tax benefits were recognized. The
Company has recognized $0.14 million of the gross liability due to finalization of state regulations. A
reconciliation of the activity related to the liability for gross unrecognized tax benefits during fiscal year 2017
are as follows:
Beginning year balance
Decrease related to prior year tax positions
Increase related to current year tax positions
Settlements
Lapse of statutes of limitations
2017
(In thousands)
$
493
(140)
—
—
—
Ending year balance
$
353
The Company’s net liability for accrued interest and penalties was $0.14 million as of September 30,
2017. 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 12 months, but does not believe it would be material to its
financial statements.
65
Income tax expense was comprised of the following for fiscal years 2017, 2016, and 2015:
Current
Federal
State
Deferred
Federal
State
Total
2017
2016
2015
(In thousands)
$ 6,088 $ 6,324 $ 5,017
493 511 1,089
6,581 6,835 6,106
1,606 1,539 1,444
(136)
120
(181)
1,726 1,358 1,308
$ 8,307 $ 8,193 $ 7,414
The principal reasons for the differences from the federal statutory rate are as follows:
Federal tax at statutory rate
True-up of prior year’s tax provision
State tax at statutory rate
Permanent and other differences
Uncertain tax position allowance
Amendment of prior period tax return
Early adoption of ASU 2016-09
Effective Tax Rate
2015
2017
2016
35.0% 35.0% 35.0%
-1.8
2.6
0.3
0.2
—
—
-2.1
3.9
0.2
2.4
—
—
-0.1
2.5
0.2
-0.5
-0.7
-0.7
35.7% 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, 2017, 2016, and 2015, are presented below:
2017
2016
2015
(In thousands)
Current deferred tax assets:
Accrued compensation
Stock Compensation
State taxes
Capital loss carryforward
Total deferred tax assets
Less: disallowed capital loss
Net deferred tax assets
Noncurrent deferred tax liabilities:
Property and equipment
Management contracts
Total deferred tax liabilities
Net deferred tax liabilities
$
130 $
140
399
10
679
(10)
669
61 $
69
138 137
408 476
11
10
617 693
(10)
(10)
607 683
(24)
(12,186)
(50)
(55)
(10,381) (9,093)
(12,210)
(10,431) (9,148)
$(11,541) $ (9,824) $(8,465)
The Company elected to early adopt ASU 2016-09 using a modified retrospective approach, effective as
if adopted the first day of the fiscal year, October 1, 2016. As a result of the early adoption, income tax
benefits of approximately $0.4 million were recognized. The Company has elected to continue to estimate the
number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account
for forfeitures as they occur. As such, this has no cumulative effect on retained earnings for the prior year.
With the early adoption of ASU 2016-09, the Company has elected to present the cash flow statement on a
prospective transition method and no prior periods have been adjusted.
66
(9) Earnings Per Share
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 fiscal years 2017, 2016, and 2015:
September 30,
Weighted average common stock outstanding
Common stock equivalents - stock options and
RSU’s
2017
2016
7,691,937 7,600,583 8,831,094
2015
98,590 117,382 109,940
7,790,527 7,717,965 8,941,034
All common stock equivalents were dilutive and therefore included in the diluted earnings per share
calculation for fiscal years 2017, 2016, and 2015.
On January 26, 2017, the Company’s 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, restricted stock units, and per share data have been adjusted to reflect this
stock split.
(10) Commitments and Contingencies
The Company’s headquarters is located in leased office space under a single non-cancelable operating
lease at 7250 Redwood Boulevard, Suite 200, in Novato, California. The lease expires on June 30, 2021, with
one five-year extension available thereafter. The minimum future rental commitment as of September 30,
2017, is $1.8 million for the remaining term of the current and amended leases. The 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, 2017, is $13,251 for the remaining term of the most recent
automatic renewal and $79,503 for the next automatic renewal. The rent expense is $6,625 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, 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 future rental
commitment under this lease, as of September 30, 2017, is $3,421 for the remaining term of the most recent
automatic renewal and $5,131 for the next automatic renewal. The 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, 2017,
are as follows:
Fiscal Year
2018
2019
2020
2021
Total
(In thousands)
$
469
395
382
286
$
1,532
67
(11) Retirement Plan
The Company has a 401(k) retirement plan covering eligible employees. Employees are eligible to
participate if they are over 21 years of age and have completed a minimum of 1 month of service with 80
hours in that month. The Company has also made discretionary profit-sharing contributions of $180,233,
$158,865, and $137,608 in fiscal years 2017, 2016, and 2015, respectively. To be eligible for the discretionary
profit-sharing contribution, an employee must be over 21 years of age and have completed a minimum of 6
consecutive months of service with 80 hours of service in each month.
(12) 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, 2017, exceeded the insurance limits of the
Federal Deposit Insurance Corporation by approximately $1.6 million. In addition, total cash and cash
equivalents include $13.7 million held in the First American U.S. Government 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.
(13) Recently Issued and Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09). In addition, the FASB issued related
revenue recognition guidance in five ASUs: principal versus agent considerations (ASU 2016-08), identifying
performance obligations and licensing (ASU 2016-10), a revision of certain SEC staff observer comments (ASU
2016-11), implementation guidance (ASU 2016-12), and technical corrections and improvements (ASU 2016-20).
ASU 2014-09 is a comprehensive new revenue recognition standard that supersedes nearly all revenue recognition
guidance under GAAP, provides enhancements to the quality and consistency of how revenue is reported, and
improves comparability in financial statements presented under GAAP and International Financial Reporting
Standards. This new standard is effective for fiscal years and interim periods within those years beginning after
December 15, 2017 (our fiscal year 2019). 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 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30):
Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line-of-Credit
Arrangements,” which 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. This new standard is effective for annual reporting periods, and interim periods
within those reporting periods, beginning after December 15, 2015 (our fiscal year 2017). The impact of
adopting ASU 2015-15 on our financial statements was the classification of all deferred financing costs as a
deduction to the corresponding debt in addition to the reclassification of deferred financing costs in other
current and long-term assets to short and long-term notes payable as of September 30, 2016, within the
balance sheets to conform to the new presentation. Other than these reclassifications and additional
disclosures, the adoption of ASU 2015-15 did not have a material impact on our financial statements.
In November 2015, the FASB issued ASU 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. This new standard is effective for annual
reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016 (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.
68
In March 2016, the FASB issued ASU No. 2016-09 “Compensation—Stock 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.
This new standard is effective for annual reporting periods, and interim periods within those reporting periods,
beginning after December 15, 2016 (our fiscal year 2018). 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 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. As of March 31, 2017,
we elected to early adopt ASU 2016-09, using a modified retrospective approach, effective as if adopted the
first day of the fiscal year, October 1, 2016. As a result of early adoption of ASU 2016-09, income tax benefits
of approximately $0.004 million and $0.2 million were recognized as discrete events in the quarterly periods
ended March 31, 2017, and December 31, 2016, respectively. We have elected to continue to estimate the
number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account
for forfeitures as they occur. As such, this has no cumulative effect on retained earnings for the prior year.
With the early adoption of 2016-09, we have elected to present the cash flow statement on a prospective
transition method and no prior periods have been adjusted.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), a consensus of
the FASB’s 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 annual
reporting periods, and interim periods within those reporting periods, beginning after December 15, 2016 (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 January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805): Clarifying
the Definition of a Business.” Based on feedback that the definition of business is being applied too broadly,
the update adds guidance to assist entities with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. This new standard is effective for annual reporting periods,
and interim periods within those reporting periods, beginning after December 15, 2017 (our fiscal year 2019).
The adoption of this standard is not expected to have a material impact on our financial condition, results of
operations, or cash flows.
In May 2017, the FASB issued an update to ASU No. 2017-09 “Compensation—Stock Compensation
(Topic 718): Scope of Modification Accounting.” The update was issued to provide clarity and reduce both
(1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718. This update is
effective for annual reporting periods, and interim periods within those reporting periods, beginning after
December 15, 2017 (our fiscal year 2019). It 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 Company’s critical accounting policies and
estimates during fiscal year 2017.
69
(14) Quarterly Financial Data Schedule (Unaudited)
Hennessy Advisors. Inc.
Quarterly Financial Data
(In thousands, except per share amounts)
Year Ended September 30, 2017
Revenue
Operating expense
Operating income
Interest Expense
Other (income) expense, net
3/31/17
12/31/16
Fiscal Year
$ 13,294 $ 13,236 $ 13,178 $ 13,247 $ 52,955
7,052 7,125 6,908 7,524 28,609
9/30/17
6/30/17
6,242 6,111 6,270 5,723 24,346
266
278
— —
281
(3)
284
(9)
1,109
(12)
Income before income tax expense
5,976 5,833 5,992 5,448 23,249
Income tax expense
Net Income
Earnings per share:
Basic
Diluted
Revenue
Operating expense
Operating income
Interest Expense
Other (income) expense, net
1,980 2,205 2,032 2,090
8,307
3,996 3,628 3,960 3,358 14,942
$ 0.52 $ 0.47 $ 0.51 $ 0.44 $
0.52 0.47 0.51 0.42
1.94
1.92
Year Ended September 30, 2016
3/31/16
12/31/15
Fiscal Year
$ 13,153 $ 12,192 $ 12,995 $ 13,070 $ 51,410
6,892 6,740 6,862 7,126 27,620
9/30/16
6/30/16
6,261 5,452 6,133 5,944 23,790
361
—
309
(1)
279
283
(1) —
1,232
(2)
Income before income tax expense
5,900 5,144 5,855 5,661 22,560
Income tax expense
Net Income
Earnings per share:
Basic
Diluted
2,250 1,861 1,961 2,121
8,193
3,650 3,283 3,894 3,540 14,367
$ 0.48 $ 0.43 $ 0.51 $ 0.47 $
0.48 0.43 0.50 0.45
1.89
1.86
(15) Pending Asset Purchase of the Rainier U.S. Funds
On May 11, 2017, the Company announced that it signed a definitive agreement with Manning &
Napier Group, LLC and Rainier Investment Management, LLC to purchase the assets related to the
management of three Rainier Funds, including the Rainier Mid Cap Equity Fund, the Rainier Small/Mid Cap
Equity Fund, and the Rainier Large Cap Equity Fund (collectively, the “Rainier U.S. Funds”). The Company
filed a Current Report on Form 8-K regarding this transaction on each of May 11, 2017, and September 27,
2017.
The definitive agreement includes customary representations, warranties and covenants of the Company
and Rainier Investment Management, LLC, and provides for a payment upon closing based on the net assets
of the Rainier U.S. Funds at the close of business on the trading day immediately preceding the closing date
(yet to be determined).
Upon completion of the transaction, which is subject to the approval of the shareholders of the Rainier
Funds, the assets related to the Rainier Large Cap Equity Fund will merge into the Hennessy Cornerstone
Large Growth Fund and the assets related to the Rainier Mid Cap Equity Fund and the Rainier Small/Mid Cap
Equity Fund will merge into the Hennessy Cornerstone Mid Cap 30 Fund. The transaction is subject to
customary closing conditions, including the approval of the Rainier U.S. Funds’ shareholders.
70
(16) Subsequent Events
As of the file date of December 4, 2017, management evaluated the existence of events occurring
subsequent to the fiscal year end of September 30, 2017, and determined the following to be subsequent
events:
On October 31, 2017, the Company announced an additional cash dividend of $0.075 per share to be
paid on December 8, 2017, to shareholders of record as of November 15, 2017. 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.
On November 16, 2017, we entered into an amendment to our term loan agreement with U.S. Bank and
California Bank & Trust to revise the excess cash flow prepayment requirements.
On November 30, 2017, we entered into an amendment to our term loan agreement with U.S. Bank and
California Bank & Trust to allow us to consummate the purchase of assets related to the management of the
Rainier U.S. Funds.
On December 1, 2017, the Company purchased the assets related to the management of the Rainier
Large Cap Equity Fund and the Rainier Mid Cap Equity Fund, adding approximately $122 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 11, 2017, as amended, between the Company and Manning &
Napier Group, LLC and Rainier Investment Management, LLC. 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 shareholder meeting for the Rainier Small/Mid Cap Equity Fund has been adjourned to
December 26, 2017.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s report on internal control over financial reporting set forth in Item 8, “Financial Statements and
Supplementary Data,” above, is incorporated herein by reference.
ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The attestation report of our independent registered public accounting firm regarding internal control over
financial reporting set forth in Item 8, “Financial Statements and Supplementary Data,” above, is incorporated
herein by reference.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer
and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of
the period covered by this report. Based on such evaluation, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures as of September 30, 2017, were effective to
provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the
rules and forms of the SEC, and (2) accumulated and communicated to management, including the principal
executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
71
CHANGES IN INTERNAL CONTROLS
There have been no changes in internal control over financial reporting as defined in Rules 13a-15(f) under the
Securities Exchange Act of 1934 that occurred during the fiscal quarter ended September 30, 2017, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information regarding our executive officers and directors, Section 16 compliance, and the members of the
Audit Committee and the Audit Committee financial expert can be found in our Proxy Statement for our 2018
Annual Meeting (“Proxy Statement”) under the captions “Election of Directors,” “Corporate Governance” and
“Executive Officers,” respectively. Such information is incorporated by reference as if fully set forth herein.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial
officer, executive vice presidents, directors, and all employees. The code has been designed in accordance with the
Sarbanes-Oxley Act of 2002 to promote honest and ethical conduct. The code also applies to Hennessy Funds Trust.
The Code of Ethics is posted on our website at www.hennessyadvisors.com. In the event the Company amends or
waives any of the provisions of the Code of Ethics, the Company intends to disclose these actions on its website. We
are not including the information contained on our website as part of, or incorporating it by reference into, this
report.
Any person may obtain a copy of the Hennessy Advisors, Inc. Code of Ethics, at no cost, by forwarding a
written request to:
Hennessy Advisors, Inc.
7250 Redwood Blvd., Suite 200
Novato, CA 94945
Attention: Teresa Nilsen
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation committee interlocks and compensation we paid to our directors and our
“named executive officers” during our most recent fiscal year can be found in the Proxy Statement under the
captions “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report,”
“Compensation Discussion and Analysis,” and “Compensation of Executive Officers and Directors.” Such
information is incorporated by reference as if fully set forth herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding our principal securities holders and the security holdings of our directors and executive
officers can be found in the Proxy Statement under the caption “Voting Securities.” Such information is
incorporated by reference as if fully set forth herein.
72
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of September 30, 2017, with respect to our equity compensation
plans pursuant to which shares of our common stock may be issued. We do not have any equity compensation plans
that have not been approved by our shareholders:
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(2)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(2)
Number of securities
remaining for issuance
under compensation plans
(excluding securities
reflected in column (a))
(1)
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by
security holders
Equity compensation plans not approved
by security holders
Total
395,313 $
0
395,313 $
0.00
0
0.00
1,879,401
0
1,879,401
(1) The maximum number of shares of common stock that may be issued under the Omnibus Plan is 50% of our
outstanding common stock, or 3,888,282 shares, as of fiscal year 2017.
(2) The number of securities to be issued includes 395,313 shares relating to RSUs to be issued according to the
vesting schedule of 25% per year. The exercise price for RSUs is zero, which is included in the weighted
average exercise price of outstanding securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Information regarding the Company’s related person transactions, related person transactions policy, and
director independence can be found in the Proxy Statement under the caption “Corporate Governance.” Such
information is incorporated by reference as if fully set forth herein.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding the fees billed to the Company by Marcum LLP for professional services can be found
in the Proxy Statement under the caption “Independent Registered Public Accounting Firm.” Such information is
incorporated by reference as if fully set forth herein.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules for Hennessy Advisors, Inc. are included under
Item 8, “Financial Statements and Supplementary Data,” above.
73
Exhibit Index
Set forth below is a listing of all exhibits to this Annual Report on Form 10-K, including those incorporated by
reference.
Exhibits
2.1
2.2
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Transaction Agreement, dated as of May 10, 2017, among Hennessy Advisors, Inc., Rainier Investment
Management, LLC, and Manning & Napier Group, LLC. (16)*
Transaction Agreement, dated May 2, 2016, between the registrant and Westport Advisers, LLC (11)*
Amended and Restated Articles of Incorporation (15)
Fourth Amended and Restated Bylaws (9)
License Agreement, dated April 10, 2000, between Edward J. Hennessy, Inc. and Netfolio, Inc. (2)
Investment Advisory Agreement, dated March 23, 2009, between the registrant and Hennessy Funds Trust
(on behalf of the Hennessy Cornerstone Large Growth Fund) (3)
Investment Advisory Agreement, dated October 25, 2012, between the registrant and Hennessy Funds
Trust (on behalf of the Hennessy Focus Fund, the Hennessy Equity and Income Fund, the Hennessy Core
Bond Fund, the Hennessy Gas Utility Fund, the Hennessy Small Cap Financial Fund, the Hennessy Large
Cap Financial Fund and the Hennessy Technology Fund) (4)
Investment Advisory Agreement, dated February 28, 2014, between the registrant and Hennessy Funds
Trust (on behalf of the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone Mid Cap 30 Fund,
the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy Balanced Fund,
the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund) (7)
Amendment to Investment Advisory Agreement, dated March 1, 2016, between the registrant and
Hennessy Funds Trust (on behalf of the Hennessy Cornerstone Growth Fund, the Hennessy Cornerstone
Mid Cap 30 Fund, the Hennessy Cornerstone Value Fund, the Hennessy Total Return Fund, the Hennessy
Balanced Fund, the Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund) (14)
Sub-Advisory Agreement, dated October 25, 2012, between the registrant and Broad Run Investment
Management, LLC (for the Hennessy Focus Fund) (4)
Sub-Advisory Agreement, dated October 25, 2012, between the registrant and The London Company of
Virginia, LLC (for the Hennessy Equity and Income Fund (equity sleeve)) (4)
Sub-Advisory Agreement, dated October 25, 2012, between the registrant and Financial Counselors, Inc.
(for the Hennessy Equity and Income Fund (fixed income sleeve)) (4)
Sub-Advisory Agreement, dated February 28, 2014, between the registrant and SPARX Asset
Management Co., Ltd. (for the Hennessy Japan Fund and the Hennessy Japan Small Cap Fund) (7)
10.10
Amended and Restated Servicing Agreement, dated February 28, 2014, between the registrant and
Hennessy Funds Trust (on behalf of the Hennessy Cornerstone Growth 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 Balanced Fund, the
Hennessy Japan Fund, and the Hennessy Japan Small Cap Fund) (7)
10.11
First Amendment to Amended and Restated Servicing Agreement, dated March 1, 2015, between the
registrant and Hennessy Funds Trust (on behalf of all Funds) (10)
10.12
Hennessy Advisors, Inc. Amended and Restated 2013 Omnibus Incentive Plan (6)
10.13
Form of Restricted Stock Unit Award Agreement for Employees (1)(5)
10.14
Form of Restricted Stock Unit Award Agreement for Directors (1)(5)
10.15
Form of Stock Option Award Agreement for Employees (1)(5)
74
10.16
Form of Stock Option Award Agreement for Directors (1)(5)
Amended and Restated Bonus Agreement, dated as of October 10, 2016, between the registrant and
Teresa M. Nilsen (1)(13)
Amended and Restated Bonus Agreement, dated as of October 10, 2016, between the registrant and
Daniel B. Steadman (1)(13)
Third Amended and Restated Employment Agreement, dated as of October 10, 2016, between the
registrant and Neil J. Hennessy (1)(13)
Term Loan Agreement among the registrant, U.S. Bank National Association and California Bank &
Trust, dated September 17, 2015 (8)*
First Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association and
California Bank & Trust, dated September 19, 2016 (12)*
Second Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association and
California Bank & Trust, dated November 16, 2017 (17)
Third Amendment to Term Loan Agreement among the registrant, U.S. Bank National Association and
California Bank & Trust, dated November 30, 2017 (18)*
Consent of Marcum LLP, Independent Registered Public Accounting Firm
Rule 13a-14a Certification of the Chief Executive Officer
Rule 13a-14a Certification of the Chief Financial Officer
Written Statement of the Chief Executive Officer, Pursuant to 18 U.S.C. § 1350
Written Statement of the Chief Financial Officer, Pursuant to 18 U.S.C. § 1350
Financial statements from the Annual Report on Form 10-K of the registrant for the year ended
September 30, 2017, filed on December 4, 2017, formatted in XBRL: (i) the Balance Sheets; (ii) the
Statements of Income and Comprehensive Income; (iii) the Statements of Changes in Stockholders’
Equity; (iv) the Statements of Cash Flows; and (v) the Notes to Financial Statements.
10.17
10.18
10.19
10.20
10.21
10.22
10.23
23.1
31.1
31.2
32.1
32.2
101
Notes:
*
The related schedules to the agreement are not being filed herewith. The registrant agrees to furnish
supplementally a copy of any such schedules to the Securities and Exchange Commission upon request.
(1) Management contract or compensatory plan or arrangement.
(2)
Incorporated by reference from the Company’s Form SB-2 registration statement (SEC File No. 333-66970)
filed August 6, 2001.
Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2009 (SEC
File No. 000-49872), filed December 4, 2009.
Incorporated by reference from the Company’s Form 10-Q for the quarter ended December 31, 2012 (SEC
File No. 000-49872), filed January 17, 2013.
Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 000-49872) filed
September 18, 2013.
Incorporated by reference to Annex A of the Company’s definitive proxy statement on Schedule 14A for the
Company’s Special Meeting of Shareholders held on March 26, 2015 (SEC File No. 000-49872), filed
February 21, 2014.
Incorporated by reference from the Company’s Form 10-Q for the quarter ended June 30, 2014 (SEC File
No. 001-36423), filed August 6, 2014.
Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
September 23, 2015.
Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
November 2, 2015.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
75
(10) Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2015 (SEC
File No. 001-36423), filed November 30, 2015.
(11) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
May 3, 2016.
(12) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
September 23, 2016.
(13) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
October 13, 2016.
(14) Incorporated by reference from the Company’s Form 10-K for the fiscal year ended September 30, 2016 (SEC
File No. 001-36423), filed December 1, 2016.
(15) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
March 7, 2017.
(16) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
May 11, 2017.
(17) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
November 20, 2017.
(18) Incorporated by reference from the Company’s Current Report on Form 8-K (SEC File No. 001-36423) filed
December 4, 2017.
ITEM 16. FORM 10-K SUMMARY
None.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
Hennessy Advisors, Inc.
(Registrant)
By: /s/ Neil J. Hennessy
Neil J. Hennessy
Chief Executive Officer and President
(As a duly authorized Officer on behalf of the
Registrant and as Principal Executive Officer and
Chairman of the Board of Directors)
Dated: December 4, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
By: /s/ Teresa M. Nilsen
Dated: December 4, 2017
Teresa M. Nilsen
Chief Financial Officer, Secretary and Director
(Principal Financial and Accounting Officer)
By: /s/ Daniel B. Steadman
Daniel B. Steadman
Executive Vice President and Director
By: /s/ Kathryn R. Fahy
Kathryn R. Fahy
Director of Finance
By: /s/ Henry Hansel
Henry Hansel
Director
By: /s/ Brian A. Hennessy
Brian A. Hennessy
Director
By: /s/ Daniel G. Libarle
Daniel G. Libarle
Director
By: /s/ Rodger Offenbach
Rodger Offenbach
Director
By: /s/ Susan Pomilia
Susan Pomilia
Director
By: /s/ Thomas L. Seavey
Thomas L. Seavey
Director
77
Dated: December 4, 2017
Dated: December 4, 2017
Dated: December 4, 2017
Dated: December 4, 2017
Dated: December 4, 2017
Dated: December 4, 2017
Dated: December 4, 2017
Dated: December 4, 2017
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements of Hennessy Advisors, Inc. on Form S-3
(No. 333-201934) and Form S-8 (No. 333-188439) of our report dated December 4, 2017, with respect to our audits
of the financial statements of Hennessy Advisors, Inc. as of September 30, 2017 and 2016 and for the years ended
September 30, 2017, 2016 and 2015, and our report dated December 4, 2017, with respect to our audit of the
effectiveness of internal control over financial reporting of Hennessy Advisors, Inc. as of September 30, 2017,
which reports are included in this Annual Report on Form 10-K of Hennessy Advisors, Inc. for the year ended
September 30, 2017.
/s/ Marcum LLP
Marcum LLP
San Francisco, California
December 4, 2017
Exhibit 31.1
Rule 13a – 14a Certification of the Chief Executive Officer
I, Neil J. Hennessy, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Hennessy Advisors, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: December 4, 2017
/s/ Neil J. Hennessy
Neil J. Hennessy, Chief Executive Officer and President,
Hennessy Advisors, Inc.
Exhibit 31.2
Rule 13a – 14a Certification of the Chief Financial Officer
I, Teresa M. Nilsen, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Hennessy Advisors, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: December 4, 2017
/s/ Teresa M. Nilsen
Teresa M. Nilsen, Chief Financial Officer,
Hennessy Advisors, Inc.
Exhibit 32.1
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. §1350
Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Chief Executive Officer of Hennessy
Advisors, Inc. (the “Company”), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of
the Company for the year ended September 30, 2017 (the “Report”) fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the Company.
/s/ Neil J. Hennessy
Neil J. Hennessy, Chief Executive Officer and President
Hennessy Advisors Inc.
Date: December 4, 2017
Exhibit 32.2
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. §1350
Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Chief Financial Officer of Hennessy
Advisors, Inc. (the “Company”), hereby certify, based on my knowledge, that the Annual Report on Form 10-K of
the Company for the year ended September 30, 2017 (the “Report”) fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of the Company.
/s/ Teresa M. Nilsen
Teresa M. Nilsen, Chief Financial Officer
Hennessy Advisors, Inc.
Date: December 4, 2017
(This page intentionally left blank.) HAI-Form 10-K 17 Cover.qxp 12/4/17 6:32 PM Page 2
SKU: 001CSN2DD2
001CSN24E9