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Summary of the Organization, Description of Business and Significant Accounting Policies | 12 Months Ended
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Sep. 30, 2013
Accounting Policies [Abstract] |
Summary of the Organization, Description of Business and Significant Accounting Policies |
(1) | Summary of the Organization, Description of Business and Significant Accounting Policies
| (a) | Organization and Description of Business
Hennessy Advisors, Inc. (the “Company”) was founded on February 1, 1989, as a California corporation under the name Edward J. Hennessy, Incorporated. In 1990, the Company became a registered investment advisor and on April 15, 2001, the Company changed its name to Hennessy Advisors, Inc. The Company’s operating activities consist primarily of providing investment advisory services to sixteen open-end mutual funds (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 . Value Fund, the Hennessy Total Return Fund, the Hennessy Equity and Income Fund, the Hennessy Balanced Fund, the Hennessy Core Bond Fund, the Hennessy Gas Utility Index 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’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 all of the Hennessy Funds through portfolio management of the Hennessy Funds. The Company earns shareholder service fees from some of the Hennessy Funds by assisting customers of such funds in purchases, sales, distribution and customer service. 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 ASC 605. The Company waives fees to comply with contractual expense ratio limitations. The fee waivers are calculated daily by the Hennessy Funds’ accountants at U.S. Bancorp Fund Services, LLC and are charged to expense monthly by the Company as an offset to revenue. The waived fees are deducted from investment advisory fee income, and reduce the amount of advisory fees that the Hennessy Funds pay in the subsequent month. To date, the Company has only waived fees based on contractual obligations, but the Company has the ability to waive fees at its discretion to compete with other mutual funds with lower expense ratios. If the Company were to elect to waive fees, the decision to waive fees would not apply to previous periods, but would only apply on a going forward basis. As of September 30, 2013, the Company has never voluntarily waived fees, and has no current intention to voluntarily waive fees. The Company’s 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.
| (b) | Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments which 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. Marketable securities classified as available-for-sale are reported at fair value, with net unrealized gains or losses recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, until realized. Realized gains and losses on investments are computed based upon specific identification and are included in interest and other income (expense), net. Investments designated as trading securities are stated at fair value, with gains or losses resulting from changes in fair value recognized in the income statement. The Company holds investments in publicly traded mutual funds, which are accounted for as trading securities. Accordingly, unrealized gains of $0.003 million and $0.007 million, respectively, were recognized in operations for fiscal years 2013 and 2012. Dividend income is recorded on the ex-dividend date. Purchases and sales of marketable securities are recorded on a trade date basis, and realized gains and losses recognized on sale are determined on a specific identification/average cost basis.
| (d) | Management Contracts Purchased
The Company has purchased assets related to the management of open-end mutual funds from time to time throughout its history. Prior to September 30, 2012, the Company had completed several purchases of assets related to the management of 13 different mutual funds, some of which were reorganized into already existing Hennessy Funds. In accordance with guidance issued by the Financial Accounting Standards Board, the Company periodically reviews the carrying value of its purchased management contracts to determine if any impairment has occurred. The fair value of management contracts are based on management estimates and assumptions, including third-party valuations that utilize appropriate valuation techniques. The fair value of the management contracts was estimated by applying the income approach. It is the opinion of the Company’s management that there was no impairment as of September 30, 2013 or 2012. 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 as of September 30, 2013. On October 26, 2012, the Company purchased the assets related to the management of the entire family of ten FBR funds (the “FBR Funds”), adding approximately $2.2 billion in assets under management. The purchase was consummated in accordance with the terms and conditions of that certain Asset Purchase Agreement, dated as of June 6, 2012, between the Company and FBR Fund Advisers, Inc. The purchase price was comprised of two payments: an initial payment of $19,692,137 made on October 26, 2012 based upon the net asset value of the FBR Funds as of October 25, 2012 and a contingent payment of $19,193,595 made on November 5, 2013 based upon the net asset value of the FBR Funds as of October 28, 2013. The initial payment was funded with $3.4 million of available cash and $16.3 million of debt proceeds that were obtained pursuant to an amendment and restatement of the Company’s existing loan agreement with U.S. Bank National Association that allowed the Company to borrow the additional amount due. The additional capitalized transaction costs of $1.2 million, of which $0.2 million was capitalized in the prior year, include legal fees, printing fees and other costs related to the purchase. The contingent payment due under the Asset Purchase Agreement was determined to be $19,193,595 as of October 28, 2013. The amount of the liability was booked as of September 30, 2013 because it was measurable. The contingent payment was funded in part with $13,286,666 of debt proceeds that were obtained pursuant to an amendment of the Company’s existing loan agreement with U.S. Bank National Association that allowed the Company to borrow such amount, with the remainder of the payment being funded out of working capital. Of the $13,286,666 of debt proceeds, $11,625,883 is shown as a long-term liability on the balance sheet because it was funded by U.S. Bank National Association on a long-term basis.
Management contracts balance at 9/30/2012 |  | $ | 22,557,186 |
Initial purchase price for assets related to management of the FBR Funds |  | $ | 19,692,137 |
Contingent purchase price for assets related to management of the FBR Funds |  | $ | 19,193,595 |
Capitalized transaction costs in current year |  | $ | 988,100 |
Management contracts balance at 9/30/2013 |  | $ | 62,431,018 |
Contingent purchase price payment allocation: |  |  |  |
Current portion |  | $ | 7,567,712 |
Long-term portion |  | $ | 11,625,883 |
Total |  | $ | 19,193,595 |
| (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, 2013 and 2012. Accordingly, the fair values presented in the Company’s financial statements as of September 30, 2013 and 2012 may not be indicative of amounts that could be realized on disposition of the financial instruments. The fair value of receivables, accounts payable and notes payable has been estimated at carrying value due to the short maturity of these instruments. The fair value of purchased management contracts is estimated at the cost of the purchase. The fair value of marketable securities and money market accounts is based on closing net asset values as reported by securities exchanges registered with the Securities and Exchange Commission.
| (f) | Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally one to ten years.
| (g) | Income Taxes
The Company, under the FASB guidance on “Accounting for Uncertainty in Income Tax,” uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company utilizes a two-step approach for evaluating uncertain tax positions. Step one, recognition, requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, measurement, is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. The Company did not have any amounts of unrecognized tax benefits as of September 30, 2013 and 2012. In addition, the Company did not have any amounts of unrecognized tax benefits that, if recognized, would affect its effective tax rate. The Company has elected to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. To date, the Company has recognized no interest and penalties related to unrecognized tax benefits. The Company files U.S. federal and state tax returns and has determined that its major tax jurisdictions are the United States, California and Massachusetts. The tax years ended in 2009 through 2012 remain open and subject to examination by the appropriate governmental agencies in the U.S., the 2008 through 2012 tax years remain open in California, and the 2012 tax year remains open in Massachusetts. The Company’s effective tax rate of 40.9% and 43.9% for the fiscal years ended September 30, 2013 and 2012, respectively, differ from the federal statutory rate of 34% primarily due to the effects of state income taxes.
| (h) | Earnings Per Share
Basic earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding, while diluted earnings per share is determined by dividing net earnings by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of common stock equivalents. There were 245,998 and 433,438 of common stock equivalents, consisting of unexercised options and unvested RSUs, excluded from the earnings per share calculations for the years ended September 30, 2013 and 2012, respectively, because they were anti-dilutive.
| (i) | Stock-Based Compensation
On January 17, 2013, the Company established, and a shareholder vote approved, the 2013 Omnibus Incentive Plan (the “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. The Plan replaced the 2001 Omnibus Plan that the Company had previously adopted and had in place. The maximum number of shares that may be issued under the Plan is 50% of the number of outstanding shares of common stock of the Company, subject to adjustment by the compensation committee of the Board of Directors of the Company upon the occurrence of certain events. The number of shares of common stock subject to awards that remain outstanding under the 2001 Omnibus Plan reduces the number of shares available for issuance under the Plan. The 50% limitation does not invalidate any awards made prior to a decrease in the number of outstanding shares, even if such awards have result or may result in shares constituting more than 50% of the outstanding shares being available for issuance under the Plan. Shares available under the Plan that are not awarded in one particular year may be awarded in subsequent years. The compensation committee of the Board of Directors of the Company has the authority to determine the awards granted under the Plan, including among other things, the individuals who receive the awards, the times when they receive them, vesting schedules, performance goals, whether an option is an incentive or nonqualified option and the number of shares to be subject to each award. However, no participant may receive options or stock appreciation rights under the Plan for an aggregate of more than 50,000 shares in any calendar year. The exercise price and term of each option or stock appreciation right is fixed by the compensation committee except that the exercise price for each stock option that is intended to qualify as an incentive stock option must be at least equal to the fair market value of the stock on the date of grant and the term of the option cannot exceed 10 years. In the case of an incentive stock option granted to a 10% or more shareholder, the exercise price must be at least 110% of the fair market value on the date of grant and cannot exceed five years. Incentive stock options may be granted only within ten years from the date of adoption of the Plan. The aggregate fair market value (determined at the time the option is granted) of shares with respect to which incentive stock options may be granted to any one individual, which stock options are exercisable for the first time during any calendar year, may not exceed $100,000. An optionee may, with the consent of the compensation committee, elect to pay for the shares to be received upon exercise of his or her options in cash, shares of common stock or any combination thereof. The exercise price of all options granted under the 2001 Omnibus Plan was equal to the market price of the underlying common stock on the grant date and all options were granted and fully vested on the grant date. There were no options granted during the fiscal year ended September 30, 2013. The Company, per the fair value recognition provisions of the FASB guidance on Stock Compensation, uses the “Modified Perspective” method in accordance with the transition and disclosure provisions of the codification for stock based compensation. All compensation costs related to restricted stock units vested during the years ended September 30, 2013 and 2012 have been recognized in its financial statements. The Company has reserved up to 2,043,791 shares of the Company’s common stock in respect of granted options, in accordance with terms of the Plan. An aggregate of 185,998 options have been granted to certain employees, executive officers, and directors of the Company and are outstanding as of September 30, 2013. These options were fully vested at the date of grant, and have a weighted average exercise price of $7.09 per share. Through September 30, 2013, 247,440 options were exercised, leaving 185,998 options fully vested and exercisable as of that date. A summary of the status of stock options granted is presented in the following table for the fiscal years ended September 30, 2013 and 2012:
|  | Number Of Options |  |  | Weighted Avg. Exercise Price |  |  | Weighted Avg. Remaining Contractual Term |  | Aggregate Intrinsic Value |
Outstanding at 9/30/2011 |  |  | 645,050 |  |  | $ | 4.43 |  |  | 1.82 years |  | $ | 0 |
Granted |  |  | — |  |  |  | — |  |  |  |  |  |  |
Exercised |  |  | (5,000 | ) |  | $ | 2.97 |  |  |  |  |  |  |
Forfeited |  |  | — |  |  |  | — |  |  |  |  |  |  |
Expired |  |  | (206,612 | ) |  | $ | 2.97 |  |  |  |  |  |  |
Outstanding at 9/30/2012 |  |  | 433,438 |  |  | $ | 5.14 |  |  | 1.45 years |  | $ | 0 |
Granted |  |  | — |  |  |  | — |  |  |  |  |  |  |
Exercised |  |  | (247,440 | ) |  | $ | 3.67 |  |  |  |  |  |  |
Forfeited |  |  | — |  |  |  | — |  |  |  |  |  |  |
Expired |  |  | — |  |  |  | — |  |  |  |  |  |  |
Outstanding at 9/30/2013 |  |  | 185,998 |  |  | $ | 7.09 |  |  | 1.05 years |  | $ | 442,148 |
Exercisable at 9/30/2013 |  |  | 185,998 |  |  | $ | 7.09 |  |  | 1.05 years |  | $ | 442,148 |
During the fiscal year ended September 30, 2013 the Company granted 60,000 restricted stock units (“RSU”) under the Plan. RSUs represent 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 when it is required to deliver shares to an RSU recipient. The RSUs granted under the Plan vest over four years, at the rate of 25 percent per year. The Company recognizes compensation expense on a straight-line basis over the four-year vesting term of each award. RSU activity for the years ended September 30, 2013 and 2012 was as follows:
|  | Restricted Stock Unit Activity Years Ended September 30, 2013 and 2012 |
|  | Number of Restricted Share Units |  |  | Weighted Avg. Fair Value at Each Date |
Non-vested Balance at September 30, 2011 |  |  | 15,949 |  |  | $ | 5.28 |
Granted |  |  | — |  |  | $ | — |
Vested (1) |  |  | (14,512 | ) |  | $ | 3.52 |
Forfeited |  |  | (375 | ) |  | $ | 2.66 |
Non-vested Balance at September 30, 2012 |  |  | 1,062 |  |  | $ | 2.59 |
Granted |  |  | 60,000 |  |  | $ | 8.61 |
Vested (1) |  |  | (1,687 | ) |  | $ | 4.90 |
Forfeited |  |  | — |  |  | $ | — |
Non-vested Balance at September 30, 2013 |  |  | 59,375 |  |  | $ | 8.61 |
(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 12,127 and 13,406 shares of common stock issued for restricted stock units vested in the fiscal years ended September 30, 2013 and 2012, respectively.
Restricted Stock Unit Compensation Fiscal Year Ended September 30, 2013 |
|  | (In Thousands) |
Total expected compensation expense related to Restricted Stock Units |  | $ | 2,667 |
Compensation Expense recognized as of September 30, 2013 |  |  | (2,156 | )
Unrecognized compensation expense related to RSU’s at September 30, 2013 |  | $ | 511 |
As of September 30, 2013, there was $0.5 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 four years.
| (j) | Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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