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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Hennessy Advisors, Inc.    HNNA

HENNESSY ADVISORS, INC.

(HNNA)
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HENNESSY ADVISORS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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12/03/2019 | 04:44pm EDT

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 which, 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, taxes, general economic and
financial conditions, movement of interest rates, competitive conditions,
industry regulation, and fluctuations in the stock market, many of which are
beyond the control of our management. Further, the business and regulatory
environments in which we operate remain complex, uncertain, and subject to
change. We expect that regulatory requirements and developments will cause us to
incur additional administrative and compliance costs. In addition, while current
domestic economic conditions are



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relatively stable, further increases in short-term interest rates, policy
changes by the administration in Washington, D.C., and developments in
international financial markets could influence economic and financial
conditions significantly. Notwithstanding the variability in our economic and
regulatory environments, we remain focused on the investment performance of the
Hennessy Funds and on providing high-quality customer service to investors.

Our business strategy centers on (i) the identification, completion, and
integration of future acquisitions and (ii) organic growth, through both the
retention of the mutual fund assets we currently manage and the generation of
inflows into the mutual funds we manage. The success of our business strategy
may be influenced by the factors discussed in Item 1A, "Risk Factors." 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 business activity is providing investment advisory services to a
family of open-end mutual funds branded as the Hennessy Funds. We manage 10 of
the 16 Hennessy Funds internally. For the remaining six funds, we have delegated
the day-to-day portfolio management responsibilities to sub-advisors, 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 each 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 business activity is providing shareholder services to shareholders of
each Hennessy Fund.

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 Hennessy Fund. The percentage
amount of the investment advisory fees varies from fund to fund. The percentage
amount of the shareholder service fees is consistent across all funds, but
shareholder service fees are charged on Investor Class shares only. The dollar
amount of the fees we receive fluctuates with changes in the average net asset
value of each Hennessy Fund, 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.

U.S. equities had positive performance for the 12 months ended September 30,
2019, with the S&P 500® Index returning 4.25% and the Dow Jones Industrial
Average returning 4.21% for the period (on a total return basis). During the
recent quarter ended September 30, 2019, equity prices continued their advance
with the S&P 500® Index up 1.70% and the Dow Jones Industrial Average up 1.8%.
Investors appeared to shrug off global growth concerns, heightened geopolitical
risk in the Middle East, and persistent tension around U.S./China trade
negotiations. The U.S. economy continued to post positive GDP growth, gains in
employment, and wage growth. Perhaps more importantly, the market seems to
believe that the Federal Reserve may lower interest rates again later this year,
which should be supportive of equity prices.

Long-term U.S. bonds rallied strongly during the 12 months ended September 30,
2019, as inflation remained benign and below the Federal Reserve's target of 2%.
The unemployment rate in the United States remained low at 3.5% with strong
growth in average hourly earnings of 2.9% in September 2019 compared to the year
prior.

The Japanese equity market fell 5.77% (in U.S. dollar terms) over the 12 months
ended September 30, 2019, as measured by the Tokyo Stock Price Index. Despite
strong earnings growth, a more progressive corporate governance environment, and
impressive gains in corporate productivity, investors appear more focused on the
uncertainty around a U.S./China trade deal.

We strive to provide positive returns for investors in the Hennessy Funds over
market cycles. Seven of the Hennessy Funds achieved positive returns for the
one-year period ended September 30, 2019, and 14 of the 16 Hennessy Funds
achieved positive annualized returns for each of the three-year, five-year, and
ten-year periods ended September 30, 2019.



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To help drive inflows into the Hennessy Funds, we maintain a marketing database
of over 100,000 financial advisors in addition to retail investors. We employ
robust marketing and sales efforts consisting of content, digital, and
traditional marketing initiatives and proactive phone and in-person meetings. In
addition, we maintain an aggressive annual public relations campaign, which has
resulted in the Hennessy brand name appearing on TV, radio, print, or online
media on average once every two to three days.

We provide service to nearly 250,000 mutual fund accounts nationwide comprising
shareholders who employ financial advisors to assist them with investing and
retail shareholders who invest directly with us. We serve approximately 18,500
financial advisors who utilize the Hennessy Funds on behalf of their clients.
Approximately one in five of those advisors owns two or more Hennessy Funds,
demonstrating strong brand loyalty.

Total assets under management as of the end of fiscal year 2019 was
$4.9 billion, a decrease of $1.3 billion, or 21.4%, compared to the end of
fiscal year 2018. The decrease in total assets during fiscal year 2019 was
attributable to net outflows from the Hennessy Funds, partially offset by market
appreciation and the purchase of the assets related to the management of the BP
Funds.

The following table illustrates the changes in our assets under management over
the past three years:



                                              Fiscal Years Ended September 30,
                                          2019              2018              2017
                                                       (In thousands)

Beginning assets under management $ 6,197,617$ 6,612,812 $

 6,698,519
  Acquisition inflows                      194,948           374,361                -
  Organic inflows                          825,541         1,193,270         1,150,462
  Redemptions                           (2,374,734 )      (2,376,180 )      (2,093,315 )
  Market appreciation                       30,467           393,354           857,146

Ending assets under management $ 4,873,839$ 6,197,617 $

6,612,812




The principal asset on our balance sheet, management contracts, represents the
capitalized costs incurred in connection with the purchase of the assets related
to the management of mutual funds. As of the end of fiscal year 2019, this asset
had a net balance of $80.6 million compared to $78.2 million as of the end of
fiscal year 2018. The increase was due to the purchase of the assets related to
the management of the BP Funds.

The principal liability on our balance sheet is the bank debt incurred in
connection with the purchase of the assets related to the management of mutual
funds and the repurchase of 1,500,000 shares of our common stock pursuant to the
completion of our self-tender offer in September 2015. As of the end of fiscal
year 2019, this liability had a gross balance of $17.5 million ($17.4 million
net of reclassified debt issuance costs of $0.12 million, further discussed in
Note 7 under Item 8, "Financial Statements and Supplementary Data"), compared to
$21.9 million ($21.7 million net of reclassified debt issuance costs of $0.15
million) as of the end of fiscal year 2018. The decrease was the result of
making monthly loan payments on our bank debt.



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2017 CORPORATE TAX REFORM


On December 22, 2017, during our first fiscal quarter of 2018, the 2017 Tax Act
was enacted into law. Among other changes to various corporate income tax
provisions within the existing Internal Revenue Code, the 2017 Tax Act reduced
the federal corporate income tax rate from 35% to 21%, effective January 1,
2018. Although the 2017 Tax Act did not become effective until January 1, 2018,
the start of our second fiscal quarter of 2018, we were required to recognize a
reasonable estimate of the effect of the reduced federal corporate income tax
rate on our deferred tax liability in the period of enactment. As a result, we
recorded a one-time non-cash benefit to income tax expense of approximately
$4 million, or $0.54 in diluted earnings per share, during our first fiscal
quarter of 2018. We were also able to blend in the reduced federal corporate
income tax rate beginning January 1, 2018, and received the full benefit of the
reduced rate beginning October 1, 2018.

RESULTS OF OPERATIONS

The following table sets forth items in our statements of income as dollar amounts and as percentages of total revenue:




                                                         Fiscal Years Ended September 30,
                                                      2019                             2018
                                                           Percent of                       Percent of
                                                             Total                            Total
                                            Amounts         Revenue          Amounts         Revenue
                                                        (In thousands, except percentages)
Revenue:
Investment advisory fees                   $  39,357              92.1 %    $  50,235              92.0 %
Shareholder service fees                       3,358               7.9          4,355               8.0

Total revenue                                 42,715             100.0         54,590             100.0

Operating expenses:
Compensation and benefits                     10,933              25.6         13,035              23.9
General and administrative                     5,796              13.6          5,864              10.7
Mutual fund distribution                         512               1.2            524               1.0
Sub-advisory fees                              9,228              21.6         10,461              19.2
Depreciation                                     225               0.5            231               0.4

Total operating expenses                      26,694              62.5         30,115              55.2

Operating income                              16,021              37.5         24,475              44.8
Interest expense                               1,084               2.5          1,227               2.2
Other income                                    (338 )            (0.8 )         (145 )            (0.3 )

Income before income tax expense              15,275              35.8         23,393              42.9
Income tax expense                             4,244              10.0          2,778               5.1

Net income                                 $  11,031              25.8 %    $  20,615              37.8 %


Revenues - Investment Advisory Fees and Shareholder Service Fees


Total revenue comprises investment advisory fees and shareholder service fees.
Comparing fiscal year 2019 to fiscal year 2018, total revenue decreased by
21.8%, from $54.6 million to $42.7 million, investment advisory fees decreased
by 21.7%, from $50.2 million to $39.4 million, and shareholder service fees
decreased by 22.9%, from $4.4 million to $3.4 million.

The decrease in investment advisory fees was mainly due to decreased average daily net assets of the Hennessy Funds.

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The decrease in shareholder service fees was due to a decrease in the average
daily net assets held in Investor Class shares of the Hennessy Funds. Assets
held in Investor Class shares of the Hennessy Funds are subject to a shareholder
service fee, whereas assets held in Institutional Class shares of the Hennessy
Funds are not subject to a service fee.

We collect investment advisory fees from each Hennessy Fund at differing annual
rates. These annual rates range between 0.40% and 1.25% of average daily net
assets. The Hennessy Fund with the largest average daily net assets for fiscal
year 2019 was the Hennessy Focus Fund, with $1.9 billion. We collect an
investment advisory fee from the Hennessy Focus Fund at an annual rate of 0.90%
of average daily net assets. However, we pay a sub-advisory 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 our financial operations. The Hennessy Fund with the
second largest average daily assets for fiscal year 2019 was the Hennessy Gas
Utility Fund, with $0.9 billion. We collect 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 2019 was
$4.9 billion, a decrease of $1.3 billion, or 21.4%, compared to the end of
fiscal year 2018. The decrease was attributable to aggregate net outflows from
the Hennessy Funds, partially offset by market appreciation and the purchase of
the assets related to the management of the BP Funds.

The Hennessy Funds, like many actively managed U.S. mutual funds, experienced
net outflows this year. However, one fund had net inflows for fiscal year 2019
as follows:



                               Largest Net Inflows
                       Fund Name              Net Inflows
                       Hennessy Japan Fund$ 146 million


The Hennessy Funds with the three largest amounts of net outflows for fiscal
year 2019 were as follows:



                              Largest Net Outflows
                   Fund Name                    Net Outflows
                   Hennessy Focus Fund$ (768) million
                   Hennessy Mid Cap 30 Fund    $ (390) millionHennessy Gas Utility Fund$ (192) million


Redemptions as a percentage of assets under management increased from an average
of 3.0% per month during fiscal year 2018 to an average of 3.7% per month during
fiscal year 2019.

Operating Expenses

Comparing fiscal year 2018 to fiscal year 2019, total operating expenses
decreased by 11.4%, from $30.1 million to $26.7 million. Although the dollar
value of operating expenses decreased, as a percentage of total revenue,
operating expenses increased 7.3 percentage points to 62.5%. The dollar value
decrease was due to decreases in all expense categories.

Compensation and Benefits Expense: Comparing fiscal year 2018 to fiscal year
2019, compensation and benefits expense decreased by 16.1%, from $13.0 million
to $10.9 million. Although the dollar value of compensation and benefits expense
decreased, as a percentage of total revenue, compensation and benefits expense
increased 1.7 percentage points to 25.6%. The dollar value decrease was due
primarily to a decrease in incentive-based compensation.

General and Administrative Expense: Comparing fiscal year 2018 to fiscal year
2019, general and administrative expense decreased by 1.2%, from $5.9 million to
$5.8 million. Although the dollar value of general and administrative expense
decreased, as a percentage of total revenue, general and administrative expense
increased 2.9 percentage points to 13.6%. The dollar value decrease resulted
primarily from decreased professional service fees and business
development-related expenses.



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Mutual Fund Distribution Expense: Mutual fund distribution expense consists of
fees paid to various financial institutions that offer the Hennessy Funds as
potential investments to their clients. When the Hennessy Funds are purchased
through one of these financial institutions, the institution typically charges
an asset-based fee, which is recorded in "mutual fund distribution expense" in
our statement of operations to the extent paid by us. When the Hennessy Funds
are purchased directly, we do not incur any such expense. These fees generally
increase or decrease in line with the net assets of the Hennessy Funds held
through these financial institutions, which are affected by inflows, outflows,
and fund performance.

Comparing fiscal year 2018 to fiscal year 2019, mutual fund distribution expense
decreased by 2.3%, from $0.52 million to $0.51 million. Although the dollar
value of mutual fund distribution expense decreased, as a percentage of total
revenue, mutual fund distribution expense increased 0.2 percentage points to
1.2%. The dollar value decrease was due to lower average daily net assets held
by financial institutions.

Sub-Advisory Fees Expense: Comparing fiscal year 2018 to fiscal year 2019,
sub-advisory fees expense decreased by 11.8%, from $10.5 million to
$9.2 million. Although the dollar value of sub-advisory fees expense decreased,
as a percentage of total revenue, sub-advisory fees expense increased 2.4
percentage points to 21.6%. The dollar value decrease resulted from decreased
average daily net assets of the sub-advised Hennessy Funds, partially offset by
fee increases resulting from the amendment to the sub-advisoryagreement for the
Japan Fund and the Japan Small Cap Fund that became effective February 28, 2018,
and the new sub-advisory relationship with BP Capital for the BP Funds that
became effective October 26, 2018.

Depreciation Expense: Comparing fiscal year 2018 to fiscal year 2019, depreciation expense remained the same at $0.23 million. Although the dollar value of depreciation expense remained the same, as a percentage of total revenue, depreciation expense increased 0.1 percentage points to 0.5%.

Interest Expense


Comparing fiscal year 2018 to fiscal year 2019, interest expense decreased by
11.7%, from $1.2 million to $1.1 million. The decrease was due primarily to a
decrease in our principal loan balance.

Income Tax Expense


Comparing fiscal year 2018 to fiscal year 2019, income tax expense increased by
52.8%, from $2.8 million to $4.2 million and our effective income tax rate
increased 133.6%, from 11.9% to 27.8%. These increases reflect the significant
impact of the 2017 Tax Act on our income tax expense and effective income tax
rate for fiscal year 2018. During fiscal year 2018, the 2017 Tax Act required us
to record a one-time non-cashbenefit to income tax expense for the accounting
remeasurement of our deferred tax liability based on the reduced federal
corporate income tax rate. The resulting income tax expense was reduced by
approximately $4 million. Excluding the impact of this one-time benefit, our
income tax expense would have decreased for fiscal year 2019 compared to fiscal
year 2018, due primarily to the decrease in our net operating income and
secondarily to the decrease in the federal corporate income tax rate. Our
effective income tax rate also would have decreased if the impact of the
one-time benefit were excluded because we only benefited from the reduced
federal income tax rate, which was effective January 1, 2018, for nine of the 12
months in fiscal year 2018.

Net Income

Comparing fiscal year 2018 to fiscal year 2019, net income decreased by 46.5%,
from $20.6 million to $11.0 million, due primarily to the decrease in our net
operating income and secondarily as a result of the increase in income tax
expense discussed above.



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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 the end of fiscal year 2019 will be sufficient
to meet our capital requirements for at least one year from the issuance date of
this report. To the extent that liquid resources and cash provided by operations
are not adequate to meet long-term capital requirements, management plans to
raise additional capital by either, or both, seeking to increase our borrowing
capacity or accessing the capital markets. There can be no assurance that we
will be able to raise additional capital.

Our total assets under management as of the end of fiscal year 2019 was
$4.9 billion, a decrease of $1.3 billion, or 21.4%, from the end of fiscal year
2018. The primary sources 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. Our average assets under
management for fiscal year 2019 was $5.2 billion. As of the end of fiscal
year 2019, we had cash and cash equivalents of $24.7 million.

The following table summarizes key financial data relating to our liquidity and
use of cash:



                                                           Fiscal Years Ended September 30,
                                                             2019                    2018
                                                                    (In thousands)
Net cash provided by operating activities               $        14,392$        21,531
Net cash used in investing activities                            (1,974 )                (3,895 )
Net cash used in financing activities                           (13,126 )                (7,941 )

Net (decrease) increase in cash and cash equivalents $ (708 )

$ 9,695

The decrease in cash provided by operating activities of $7.1 million from fiscal year 2018 compared to fiscal year 2019 was due mainly to decreased operating income.


The decrease in cash used for investing activities of $1.9 million was due to
the purchase of the assets related to the management of the Rainier Funds in
fiscal year 2018, which was larger than the purchase of the assets related to
the management of the BP Funds in fiscal year 2019.

The increase in cash used for financing activities of $5.2 million from fiscal
year 2018 compared to fiscal year 2019 was due to shares repurchased in May,
August, and September 2019 under our stock buyback program, as well as an
increased dividend rate.

Dividend Payments. We have consistently paid dividends each year since 2005.
During fiscal year 2019, our Board of Directors increased the quarterly dividend
rate twice, (i) from $0.10 per share to $0.11 per share in October 2018 and
(ii) from $0.11 per share to $0.1375 per share in August 2019. Dividend payments
for fiscal year 2019 totaled $3.6 million.

During fiscal year 2018, our Board of Directors increased the quarterly dividend
rate from $0.075 per share to $0.10 per share in January 2018. Dividend payments
for fiscal year 2018 totaled $2.9 million.



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Our Bank Loan. We have an outstanding term loan agreement with U.S. Bank. The term loan agreement requires monthly payments of $364,583 plus interest calculated based on one of the following, at our option:

(1) the sum of (a) a margin that ranges from 2.25% to 2.75%, depending on our ratio of consolidated debt to consolidated EBITDA, plus (b) the LIBOR rate; or


(2) the sum of (a) a margin that ranges from 0.25% to 0.75%, depending on our
ratio of consolidated debt to consolidated EBITDA, plus (b) the highest rate out
of the following three rates: (i) the prime rate set by U.S. Bank from time to
time; (ii) the Federal Funds Rate plus 0.50%; or (iii) the one-month LIBOR rate
plus 1.00%.

We currently use a one-month LIBOR rate contract, which must be renewed monthly.
As of the end of fiscal year 2019, the effective rate was 4.350%, which
comprised the LIBOR rate of 2.10% as of September 1, 2019, plus a margin of
2.25% based on our ratio of consolidated debt to consolidated EBITDA as of
June 30, 2019. We intend to continue renewing the LIBOR rate contract on a
monthly basis as long as it remains the most favorable option. We have amended
the term loan agreement to address possible LIBOR changes (see further
discussion in Item 1A, "Risk Factors").

All borrowings under the term loan agreement are secured by substantially all of
our assets. The final installment of the then-outstanding principal of
$5.8 million plus accrued interest is due May 9, 2022. As of the end of fiscal
year 2019, we had $17.5 million outstanding under our term loan agreement
($17.4 million net of debt issuance costs).

Our term loan agreement includes certain reporting requirements and loan covenants requiring the maintenance of certain financial ratios. We were in compliance with our loan covenants for fiscal year 2019.

CRITICAL ACCOUNTING POLICIES


Our financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"), 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 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 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, "Intangibles - Goodwill and Other (Topic
350): 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



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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 2019 as the
more-likely-than-not threshold was met as of the end of fiscal year 2019.

The costs related to our purchase of the assets related to the management of
mutual funds are capitalized as incurred. The costs are defined as an
"intangible asset" per the 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 $80.6 million as of the
end of fiscal year 2019.

RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS


In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09,
"Revenue from Contracts with Customers." 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 update did not 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)," as
amended in July 2018 by ASU No. 2018-10, "Codification Improvements to Topic
842, Leases," and ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements,"
that replaces existing lease guidance. The new standard is intended to provide
enhanced transparency and comparability by requiring lessees to record
right-of-use assets and corresponding lease liabilities on the balance sheet.
The new guidance will continue to classify leases as either finance or
operating, with classification affecting the pattern of expense recognition on
the statement of income. These ASUs are effective for fiscal years beginning
after December 15, 2018 (our fiscal year 2020). We are currently evaluating the
impact of these updates and anticipate the recognition of additional assets and
corresponding liabilities relating to these leases on our balance sheet, but do
not expect the adjustments to be material assuming no changes in lease activity.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment." This update
eliminates a step from impairment testing to simplify the process, particularly
for entities with a zero or negative carrying amount for an intangible asset,
and is effective for annual reporting periods beginning after December 15, 2019
(our fiscal year 2021). The adoption of this update is not expected to have a
material impact on our financial condition, results of operations, or cash
flows.

In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which allows companies to account for nonemployee awards in the same manner as employee awards. This update is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods (our fiscal year 2019). The adoption of this update did not have a material impact on our financial condition, results of operations, or cash flows.




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In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement
(Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement." This update eliminates such disclosures as the amount
of and reasons for transfers between Level 1 and Level 2 of the fair value
hierarchy and adds new disclosure requirements for Level 3 measurements. It is
effective for fiscal years beginning after December 15, 2019 (our fiscal year
2021), with early adoption permitted for any eliminated or modified disclosures.
We are currently evaluating the impact of adopting this update, but do not
expect it to have a material impact on our financial condition, results of
operations, cash flows, or related disclosures.

There have been no other significant changes to our critical accounting policies and estimates during fiscal year 2019.

                                       44

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