^
Diamond Hill
============
Investment Group, Inc.
April 12, 2004
Dear Fellow Shareholder,
Last year was a most welcome respite from the difficult market environment of
the preceding three years. The Diamond Hill Investment Group, Inc. (the
"Company") benefited greatly from the markets' strong upswing, resulting in an
important leap forward for the Company. By virtually every measurement we had an
excellent year:
o Client portfolios enjoyed excellent returns, on both an absolute and
relative basis,
o Sales efforts resulted in $107 million in new assets under management
("AUM"),
o Operating losses narrowed considerably, with a net loss of $1 million.
The third point is the proverbial "bottom line." Since we embarked on our path
of building an outstanding investment management firm, we have absorbed
considerable losses, as can be seen in the decline in the tangible book value
per share. In effect, we have invested the Company's tangible financial
resources in an intangible asset, that being our business of investment
management.
The value of this business is what Benjamin Graham referred to as a company's
intrinsic value. Warren Buffett has popularized this concept, and refers to his
company's intrinsic value (in general terms) with every shareholder letter.
Our goals continue to be to:
o Provide excellent investment results for our clients, and
o Grow the intrinsic value per share of the Company.
As of March 31, 2004, AUM stood at $300 million, up from $250 million at
December 31, 2003. Two important guideposts for AUM are the levels necessary
for:
o Breakeven, with AUM in the $400-600 million range, and
o Scale, with AUM in the $2-4 billion range.
We are striving to achieve our first breakeven quarter in the next 6-18 months,
while scale will most likely take several years to reach. The fact that the
investment results for our clients have been excellent gives us confidence in
the eventuality of achieving scale, yet the timing is difficult to predict. [The
timing is very important in calculating the intrinsic value per share due to the
time value of money.]
I would like to thank my colleagues, the Board of Directors and especially you
for your support and for entrusting your capital with us. You can be confident
that we will continue to work to justify that trust.
Sincerely,
/s/ Ric
R.H. Dillon
President
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-24498
DIAMOND HILL INVESTMENT GROUP, INC
(Name of small business issuer in its charter)
Ohio 65-0190407
---------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S.
Employer incorporation or organization) Identification No.)
375 North Front Street, Suite 300, Columbus, Ohio 43215
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (614) 255-3333
--------------
Securities registered under Section 12(b) of the Exchange Act:
-------------------------------------------------------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year $1,160,584
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.)
As of February 5, 2004: 1,332,908 Shares of Common Stock
@ Bid of $7.10 = $9,463,647
@ Asked of $8.86 = $11,809,564
State the number of shares outstanding of each of the issuer's classes of common
equity, as of February 5, 2004:
Common Stock: 1,523,999 shares
Transitional Small Business Disclosure Format (check one): Yes |_| ; No |X|
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
PAGE
----
Part I:
Item 1. Description of Business 1-4
Item 2. Description of Property 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
Part II:
Item 5. Market for Common Equity and Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis or Plan of Operation 6-9
Item 7. Financial Statements 10-26
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial 27
Disclosure
Item 8A Controls and Procedures 27
Part III:
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance 27
With Section 16(a) of the Exchange Act
Item 10. Executive Compensation 27
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related 27
Stockholder Matters
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits and Reports on Form 8-K 28
Item 14. Principal Accountant Fees and Services 28
Signatures 29
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
PART I
ITEM 1: DESCRIPTION OF BUSINESS
GENERAL
Diamond Hill Investment Group, Inc. ("the Company") is an Ohio corporation
reincorporated in May 2002 and previously a Florida corporation since April
1990. The Company has two subsidiary operating companies.
Diamond Hill Capital Management, Inc. ("DHCM"), an Ohio corporation, is a wholly
owned subsidiary of the Company and a registered investment adviser. DHCM is the
investment adviser to the Diamond Hill Focus Fund, Diamond Hill Small Cap Fund,
Diamond Hill Large Cap Fund, Diamond Hill Short Term Fixed Income Fund and
Diamond Hill Strategic Income Fund, open-end mutual funds, and Diamond Hill
Investment Partners, L.P. DHCM also offers advisory services to institutional
and individual investors.
Diamond Hill Securities, Inc. ("DHS"), an Ohio corporation, is a wholly owned
subsidiary of DHCM and a NASD registered broker-dealer. DHS is registered with
the Securities and Exchange Commission and the securities commissions of six
states (including Ohio). DHS trades securities on a fully-disclosed basis and
clears customer transactions through an unaffiliated broker-dealer that also
maintains the customer accounts. DHS is also a registered investment adviser and
offers advisory services to institutional and individual investors. DHS is the
investment adviser to the Diamond Hill Bank & Financial Fund.
The Company operates primarily as a holding company with investment advisory
services provided by DHCM and DHS and underwriting and broker-dealer operations
conducted by DHS. The Company maintains an investment portfolio, primarily
composed of mutual funds and the investment partnership, which are managed by
DHCM. References to the Company also include references to DHCM and DHS.
In May of 2000, with the change in executive management, the Company shifted its
emphasis from its historical investment related activities through its DHS
subsidiary, to the investment advisory services of its DHCM subsidiary.
Staffing, other costs associated with this shift and various marketing
initiatives have negatively impacted the Company in 2002 and 2003. Management
believes that this process was necessary in order to achieve a critical
threshold of assets under management to support operations in the future.
However, there can be no assurance the Company will be able to achieve the
critical threshold of assets under management to support future operations.
ASSETS UNDER MANAGEMENT
As of December 31, 2003, assets under management totaled $250,072,505, a 132%
increase from December 31, 2002. The table below provides a summary of assets
under management as of December 31, 2003 and 2002:
12/31/2003 12/31/2002 % CHANGE
------------ ------------ -----------
Individually Managed Accounts $142,606,649 $ 55,839,370 155
Mutual Funds 95,864,575 44,831,827 114
Alternative Investments 11,601,281 7,210,934 61
------------ ------------ -----------
Total Assets Under Management $250,072,505 $107,882,131 132
INVESTMENT ADVISORY ACTIVITIES
Diamond Hill Capital Management
DHCM executes its investment strategies through fundamental research. Analysts
evaluate a company's prospects based upon its current business and financial
position, future growth opportunities, and management capability and strategy.
The intended result is a reasonably accurate determination of "intrinsic value".
Intrinsic value is the present value of all future cash flows, which we estimate
the investment will
1
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
generate, discounted at a rate that reflects the required return for the
investment given the estimated level of risk. In other words, it is the
estimated price a minority shareholder should pay in order to achieve a
satisfactory or "fair" return on the investment. The estimate of intrinsic value
is then compared to current market prices to evaluate whether, in the opinion of
the adviser, an attractive investment opportunity exists. A proprietary
valuation model, which forecasts cash flows for five years including a "terminal
value" (the expected stock price in five years), assists in many of these
intrinsic value estimations. The adviser believes that although securities
markets are competitive, pricing inefficiencies often exist allowing for
attractive investment opportunities. Furthermore, the adviser believes that
investing in securities whose market prices are significantly below the
adviser's estimate of intrinsic value (or selling short securities whose market
prices are above intrinsic value) is the most assured method to achieve above
average returns as well as mitigate risk.
Currently available portfolio products managed by DHCM include All Cap
Concentrated Equity, Small Cap Equity, Large Cap Equity, Long-Short Equity,
Short-Term Fixed Income, Strategic Income and Balanced (portfolios consisting of
stocks and bonds). These products are available on a separately managed basis or
through a mutual fund.
Typically, an account with less than $500,000 is invested in the applicable
mutual fund. Clients investing $500,000 to $1 million typically are managed in
"wrap programs" where the investor pays a fee, based on assets under management,
for a variety of financial products and for investment advisory and management
services, brokerage services, including commissions, and other related services.
DHCM receives a portion of the "wrap fee" for managing the investor's assets.
DHCM currently participates in wrap programs with DHS and Synovus Securities,
Inc. Client accounts that are greater than $1 million are separately managed and
may be in a "wrap program" or directly served by DHCM with a variety of banks
and brokerage firms acting as custodian for each client account.
The All Cap Concentrated Equity product is typically comprised of 20-30 stocks,
which are also included in either the Small Cap Equity or Large Cap Equity
products. These stocks are selected to comprise the All Cap Concentrated Equity
portfolio based on the portfolio manager's view of their attractiveness. The
Diamond Hill Focus Fund (Ticker: DIAMX) is constructed in the same manner as the
All Cap Concentrated Equity, with the exception that the adviser also has the
ability to sell securities short. In a short sale, stock is borrowed and
immediately sold for the proceeds. The intention is to be able to buy the stock
later at a lower price, returning the borrowed stock and benefiting from a price
decline.
The Company also offers an alternative investment, the Diamond Hill Investment
Partners, L.P. ("DHIP"), a limited partnership that invests in and trades
securities. DHCM is the managing member of the DHIP general partner and offers
interests in the partnership to certain high net worth clients who typically
invest at least $500,000 in the partnership.
Diamond Hill Securities
-----------------------
Diamond Hill Securities serves as the adviser to the Diamond Hill Bank &
Financial Fund, a financial services sector fund. The Diamond Hill Bank &
Financial Fund principally invests in banks and thrifts as well as specialty
finance and insurance companies using the same investment approach and
methodology as DHCM (i.e., investing in stocks that are deemed to be available
at a substantial discount to an estimate of intrinsic value). The Fund is
typically invested in a relatively concentrated number, 25-35, of stocks from
the financial services sector. Currently, there are no separate accounts managed
as a bank and financial sector portfolio.
Business Development
--------------------
The Company develops business with clients through direct contact or strategic
alliances. The primary geographic areas are Columbus, Ohio and Georgia, with
current efforts outside this area on an opportunistic basis.
As of December 31, 2003, the Company managed approximately $77 million in assets
for clients of Synovus Securities, Inc. ("Synovus"), a broker-dealer located in
Columbus, Georgia. The Company has a Sub-
2
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
Advisory Agreement with Synovus. These assets which are in both the Company's
managed account and mutual fund products make up approximately 30% of the
Company's assets under management.
The Company currently relies upon existing relationships where prospects have
knowledge sufficient to have confidence in the Company's policies. Many of these
relationships are with former clients/contacts of DHCM associates. High net
worth individuals, retirement plans and charitable foundations are the
categories of clients DHCM expects to develop. Alliances with brokers,
consultants, legal and financial advisers and selected individuals constitute a
large part of the business development effort.
MARKET MAKING AND BROKERAGE ACTIVITIES
Historically, the Company's brokerage subsidiary had specialized in community
and regional bank stocks, selecting those bank stocks which DHS believes to be
most likely to show an increase in value over both the short and the long term.
With the change in executive management in May 2000, the Company has shifted its
emphasis from its traditional investment related activities through its DHS
subsidiary, to the investment advisory services of its DHCM subsidiary.
Therefore, market-making activities have significantly declined since that date.
DHS continues to transact trades for the separately managed accounts, which the
Company manages.
COMPETITION
Competition in the area of investment management services and mutual funds is
intense and includes investment management firms, broker-dealers, banks and
insurance companies. Many competitors are better known than the Company, are
better capitalized, offer a broader range of investment products and have more
offices, employees and sales representatives. The Company competes primarily on
the basis of investment philosophy, performance and customer service.
INVESTMENT PORTFOLIO
DHCM holds positions in the Company's fixed income mutual fund products and
DHIP, the Company's limited partnership product.
REGULATION
The securities industry is subject to extensive regulation under both federal
and state laws. The principal purpose of regulation of investment advisers and
broker-dealers is the protection of retail investors in the securities markets
rather than protection of stockholders of investment advisers and
broker-dealers. The SEC is the federal agency charged with the administration of
federal securities laws. The Ohio Division of Securities is charged with the
administration and enforcement of the Ohio Securities Act. Much of the
regulation of broker-dealers, which do business on an interstate basis, has been
delegated by the SEC to self-regulatory organizations, principally the National
Association of Securities Dealers ("NASD") and the national securities
exchanges. These self-regulatory organizations adopt rules (which are subject to
approval by the SEC), which govern the industry and conduct periodic
examinations of member broker-dealers. Investment advisers are subject to
regulation by the SEC and state securities commissions in the states in which
they are registered.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, trading practices among
broker-dealers, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by regulatory organizations or changes in the interpretation
or enforcement of existing laws and rules often affect directly the method of
operation and profitability of broker-dealers. In addition, securities
regulators may conduct administrative proceedings, which can result in censure,
fine, suspension or expulsion of a broker-dealer, its officers or employees.
DHCM and DHS each operate in this highly regulated environment and are subject
to examination and licensing requirements by federal and state authorities. DHS
is subject to regulation by the SEC and the state
3
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
securities regulatory agencies in the states in which it operates; DHS also is a
member of the NASD. DHCM and DHS are registered investment advisers and subject
to regulation by the SEC pursuant to the Investment Advisers Act of 1940.
EMPLOYEES
The Company currently has 14 full-time employees, none of whom are members of a
union. The Company generally believes that its relationship with employees is
good.
SEC FILINGS
This Form 10-KSB report includes financial statements for the years ended
December 31, 2003 and December 31, 2002. The Company files Forms 10-KSB annually
with the SEC and files Forms 10-QSB after each of the first three fiscal
quarters.
The public may read and copy any materials the Company files with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.
The Company will distribute copies of this Form 10-KSB to shareholders in lieu
of preparing a separate annual report.
ITEM 2: DESCRIPTION OF PROPERTY
The Company sub-leases approximately 8,500 square feet of office space in the
Arena Office Building at 375 North Front Street, Suite 300, Columbus, Ohio
43215, from an unaffiliated third party for an aggregate current monthly rental
of $10,000. This lease expires May 31, 2005. The Company moved on May 13, 2002,
to this more strategic location in downtown Columbus.
ITEM 3: LEGAL PROCEEDINGS
The Company is not engaged in any litigation, other than routine litigation that
is incidental to its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the most recent quarter to a vote of
security holders.
4
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the NASDAQ Small Cap Market under the
symbol DHIL. The range of high and low prices for each quarter since January 1,
2002, are shown below:
BEGINNING DATE ENDING DATE HIGH LOW
--------------------- ----------------------------------------- -------------
January 1, 2002 March 31, 2002 $4.00 $3.91
April 1, 2002 June 30, 2002 $8.75 $3.92
July 1, 2002 September 30, 2002 $8.24 $4.10
October 1, 2002 December 31, 2002 $8.00 $3.61
January 1, 2003 March 31, 2003 $6.11 $4.00
April 1, 2003 June 30, 2003 $5.20 $3.90
July 1, 2003 September 30, 2003 $5.10 $3.52
October 1, 2003 December 31, 2003 $7.14 $4.51
The source of this bid information is Bloomberg L.P. These quotations reflect
inter-dealer prices, without retail markup, markdown or commissions and may not
represent actual transactions. In addition, due to the relatively "thin" market
in the Company's Common Stock, quoted prices cannot be considered indicative of
any viable market for such stock. During the year ended December 31, 2003,
approximately 389,400 shares of the Company's Common Stock were traded.
Information regarding recent sales of unregistered Company securities is
disclosed in the Company's Form 10-QSB filing for the period ended September 30,
2003, filed with the Securities and Exchange Commission on November 14, 2003.
As of December 31, 2003, there were approximately 1,000 holders of record of
common shares. The Company has not paid any dividends during the last two fiscal
years and has no present intention of paying dividends.
Information with respect to securities authorized for issuance under equity
compensation plans is disclosed in Item 11 of this Form 10-KSB.
5
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-looking Statements
--------------------------
Throughout this discussion, the Company may make forward-looking statements
relating to such matters as anticipated operating results, prospects for
achieving the critical threshold of assets under management, technological
developments, economic trends (including interest rates and market volatility),
expected transactions and acquisitions and similar matters. While the Company
believes that the assumptions underlying its forward-looking statements are
reasonable, any of the assumptions could prove to be inaccurate and accordingly,
the actual results and experiences of the Company could differ materially from
the anticipated results or other expectations expressed by the Company in its
forward-looking statements. Factors that could cause such actual results or
experiences to differ from results discussed in the forward-looking statements
include, but are not limited to: the adverse effect from a decline in the
securities markets; a decline in the performance of the Company's products; a
general downturn in the economy; changes in government policy and regulation;
changes in the Company's ability to attract or retain key employees; unforeseen
costs and other effects related to legal proceedings or investigations of
governmental and self-regulatory organizations; and other risks identified from
time-to-time in the Company's other public documents on file with the SEC.
General
-------
With the change in executive management in May of 2000, the Company has shifted
its emphasis from its traditional investment related activities through its DHS
subsidiary, to the investment advisory services of its DHCM subsidiary. DHCM
manages portfolios of stocks representing interests in entities operating in
various economic sectors, as opposed to a portfolio of bank stocks only.
Staffing and costs associated with this shift and the various marketing
initiatives at DHCM negatively impacted the Company in 2002 and 2003. Management
believes that this process was necessary in order to achieve a critical
threshold of assets under management to support operations in the future.
However, there can be no assurance that the Company will be able to achieve the
critical threshold of assets under management to support future operations.
Year ended December 31, 2003 compared to Year ended December 31, 2002
---------------------------------------------------------------------
Investment management revenues for the year ended December 31, 2003 increased to
$1,160,584 compared to $669,058 for the year ended December 31, 2002, a 73%
increase. This increase results primarily from the increase in assets under
management from which the Company derives its revenues.
The Company increased its investment management fees from all three of its
investment products: mutual funds, managed accounts and a private investment
partnership, Diamond Hill Investment Partners, L.P. ("DHIP"). Fees from mutual
funds were up 25%, for the year ended December 31, 2003, from $370,163 to
$465,549. Fees from managed accounts posted the largest dollar increase over the
year ended December 31, 2002, with at dollar increase of $329,779, or a 119%
increase. Investment management fees collected from the DHIP improved the most,
relatively, over the year ended December 31, 2002. These fees, which include a
performance incentive fee of approximately $30,000, grew by a multiple of 4,
increasing from $22,505 to 88,866. In conjunction with the shift in emphasis to
the investment advisory services of DHCM, a program has been initiated to
attempt to gather new assets under management at DHCM. Assets under management
increased to $250,072,505 as of December 31, 2003, a 132% increase since
December 31, 2002. However, there can be no assurance that the Company will be
able to achieve the critical threshold of assets under management at DHCM to
support future operations.
Operating expenses for the year ended December 31, 2003 decreased to $2,184,801
compared to $2,521,421 for the year ended December 31, 2002, a decrease of 13%.
Salaries, benefits and payroll taxes decreased slightly to $1,520,150 in 2003
from $1,602,243 in 2002, a decrease of 5%. This decrease reflects personnel
changes. Legal and audit expense dropped to $70,481 from $185,382 for the year
ended December 31, 2003 versus the year ended December 31, 2002, a 62% decrease.
Since there are no current
4
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
plans for major administrative projects or new products, management expects
legal and audit professional expense to remain steady in 2004 as compared to
2003. General and administrative expenses decreased to $443,802 in 2003 compared
to $511,689 in 2002, a decrease of 13%. Management expects general and
administrative expenses to remain steady in 2004 as compared to 2003. Sales and
marketing expense for the year ended December 31, 2003 decreased by 32% to
$150,368 from $222,107 for the year ended December 31, 2002. This decrease is
primarily due the reduction in expenditures for consulting services. Management
expects sales and marketing expenses to increase in 2004 as compared to 2003 due
to increased sales efforts.
Mutual fund administration, which is administrative services fees collected in
connection with the Company's mutual fund products net of all mutual fund
administrative expenses paid by the Company, decreased from a net expense of
$331,425 for the year ended December 31, 2002 to $258,226 for the year ended
December 31, 2003, a 22% improvement. Administrative fees collected increased,
while administrative expenses paid were relatively flat for the year ended
December 31, 2003 versus the year ended December 31, 2002. This increase in fees
is primarily due to the increase in assets under management in the Company's
mutual fund products. DHCM has an administrative, fund accounting and transfer
agency services agreement with the Diamond Hill Funds, where DHCM performs
certain services for each series of the trust. These services include mutual
fund administration, accounting, transfer agency and other related functions.
For performing these administrative services, each series of the trust
compensates DHCM a fee at an annual rate of 0.45% times each series' average
daily net assets. DHCM collected $268,164 and $179,647 for mutual fund
administration revenue for the year ended December 31, 2003 and 2002,
respectively. In fulfilling its role under this agreement, DHCM has engaged
several third-party providers and the cost for their services are paid by DHCM.
Mutual fund administration expense for the year ended December 31, 2003 and 2002
was $526,390 and $511,072, respectively. As assets under management grow in the
mutual fund products, the Company expects fees collected to increase, while the
Company expects expenses paid to remain steady; therefore, causing the net
mutual fund administration expense to continue to decrease.
Mutual fund distribution, which includes distribution fees collected in
connection with sales of the Company's mutual funds net of all mutual fund
distribution expenses paid by the Company, increased to a net expense of $93,689
for the year ended December 31, 2003 from $69,716 for the year ended December
31, 2002, a 34% increase. Mutual fund distribution fees collected and expenses
paid both increased during the year ended December 31, 2003 versus the year
ended December 31, 2002. For performing these distribution functions, DHS
collects front-end and back-end sales loads, ranging from 1.00% to 5.75% or
underwriting fees of 0.50% on fund investments. DHS also collects 12b-1 fees at
an annual rate ranging from 0.25% to 1.00% times each series' average daily net
assets. Mutual fund distribution revenue for the year ended December 31, 2003
and 2002 were $164,732 and $114,792, respectively. This increase in fees is
primarily due to the increase in assets under management in the Company's mutual
fund products. DHS is the principal underwriter for Diamond Hill Funds, an Ohio
business trust, and may pay third-party financial institutions a fee for
distribution or for performing certain servicing functions for mutual fund
shareholders. DHS also pays for the production of marketing materials used in
the distribution of the Diamond Hill Funds. Mutual fund distribution expense for
the year ended December 31, 2003 and 2002 were $258,421 and $184,508,
respectively. This increase is the result of increased sales of the mutual fund
shares in 2003 versus 2002, in which DHS finances the commissions paid, and
decreased expense in 2002 due to an adjustment made, during the year ended
December 31, 2002, for a change in accounting treatment for commissions paid to
brokers for the sale of the Company's mutual fund C shares. Previously, the
commission was expensed when paid, despite the fact that the revenue, which
offsets this expense, is collected over a twelve-month period. Therefore, the
portion of commission expense that has not yet been offset by the matching
revenue was capitalized and is amortized over twelve months. As assets under
management grow in the mutual fund products, the Company expects fees collected
to increase, while the Company expects expenses paid to remain steady or
increase; therefore, causing the net mutual fund distribution expense to remain
steady or increase.
Broker-dealer activity, which is revenue from security transactions and
market-making activity net of broker-dealer expenses which are comprised
principally of clearing costs and regulatory fees, decreased to a net expense of
18,062 for the year ended December 31, 2003 from $143,924 for the year ended
December 31, 2002, an 87% improvement. DHS, a registered full-service
broker-dealer, transacts security trades through its
5
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
clearing broker under a correspondent agreement. For the year ended December 31,
2003 and 2002, broker-dealer activity expenses were $44,449 and $153,159,
respectively. This decrease is largely due to the reduction in overhead and
commission expense from reduced activity. DHS earns commissions and service fees
related to business transacted through its clearing broker, along with gains and
losses from market-making activities. Broker-dealer activity revenue for the
year ended December 31, 2003 and 2002 were $26,387 and $9,235, respectively.
Commission revenue decreased by 62% from 2002 to 2003. However market-making
losses negatively impacted the year ended December 31, 2002 by $60,225. In
conjunction with the Company's shift in emphasis from its traditional investment
related activities through DHS, to the investment advisory services of DHCM,
broker dealer activities through DHS have declined. It is expected for 2004,
that this level of expense in 2003 will decrease.
The Company's net operating loss decreased to $1,394,194 for the year ended
December 31, 2003 from $2,397,428 for the year ended December 31, 2002, a 41%
improvement.
Investment return, net of interest expense, increased to a gain of $400,660 for
the year ended December 31, 2003 from a loss of $66,195 for the year ended
December 31, 2002. This investment gain results primarily from increases in
market values of investments in the limited partnership interest and the
Company's fixed income mutual funds. Management is unable to predict how future
fluctuations in market values will impact the performance of the Company's
investment portfolios. Dividend income increased by a multiple of 3 to $89,031
for the year ended December 31, 2003 compared to $29,156 for the year ended
December 31, 2002. In 2004, dividend income may decrease versus 2003 since the
Company's investment in its fixed income mutual funds, which pay monthly
dividends, may yield an anticipated average of four percent (4%) down from 2003
yields. As a result of positive company portfolio investment performance, the
Company's net operating loss was reduced further, causing the net loss to
decrease by 60% for the year ended December 31, 2003 compared to the same time
period for 2002.
Liquidity and Capital Resources
-------------------------------
Nearly 100% of the Company's investment portfolio is readily marketable.
Investments in securities traded on national securities markets and securities
not traded on national securities markets, but with readily ascertainable market
values, are valued at market value. Other securities, for which market
quotations are not readily available, due to infrequency of transactions, are
valued at fair value as determined in good faith by management of the Company.
While management employs objective criteria to ascertain these values, there is
no independent benchmark by which the values assigned by management can be
judged. Accordingly, the value of these securities may be overstated.
By the end of 2002, the Company reallocated its investment portfolio to provide
more liquidity and reduce its equity exposure. In doing so, the Company
transferred $2 million out of its investment in the limited partnership, DHIP,
and invested approximately $1.5 million into the Company's fixed income mutual
funds. The remaining cash was used to pay-off the Company's line of credit and
provide short-term liquidity for current operating expenses. On July 22, 2003,
the Company sold 110,000 shares of the Company's Common Stock, from Treasury
Stock, to certain directors, officers and employees through a private placement
at a price of $4.50, thereby increasing the liquidity and capital resources by
approximately $495,000.
DHS, under a correspondent agreement with its clearing broker, has agreed to
indemnify the clearing broker from damages or losses resulting from customers'
transactions. The Company is, therefore, exposed to off-balance sheet risk of
loss in the event that customers are unable to fulfill contractual obligations.
The Company manages this risk by requiring customers to have sufficient cash in
their account before a buy order is executed and to have the subject securities
in their account before a sell order is executed. The Company has not incurred
any losses from customers being unable to fulfill contractual obligations.
In the normal course of business, the Company may sell securities it has not yet
purchased (short sales) for its own account, and may write options. The
establishment of short positions and option contracts exposes the Company to
off-balance sheet market risks in the event prices change, as the Company may be
obligated to cover such positions at a loss.
8
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
At December 31, 2003, the Company had no short security positions, had not
written any option contracts, and did not own any options. The Company did not
experience any credit losses due to the failure of any counter parties to
perform during the year ended December 31, 2003. Senior management of the
Company is responsible for reviewing trading positions, exposures, profits and
losses, trading strategies and hedging strategies on a daily basis.
As of December 31, 2003, the Company had working capital of approximately $2.8
million compared to $3.3 million at December 31, 2002. The decrease during the
year ended December 31, 2003 is primarily due to the net loss as part of
operating activities. The decrease was partly offset by financing activities,
which includes the private placement that occurred on July 22, 2003. Working
capital includes cash, securities owned and accounts and notes receivable, net
of all liabilities. The Company has no long-term debt.
The Company's net cash balance decreased by $638,190 during the year ended
December 31, 2003. Net cash used by operating activities was $1,154,250. The
primary use of cash flow was the net loss of $993,534. Investing activities used
$3,582 for property and equipment purchased during the year ended December 31,
2003. Financing activities provided $519,642 of cash during the year ended
December 31, 2003, mostly from the $495,000 private placement on July 22, 2003.
The Company's net cash balance decreased by $484,851 during the year ended
December 31, 2002. Net cash used by operating activities was $73,216. The
primary use of cash flow was the net loss of $2,463,623, which was offset by the
decrease in the investment portfolio. Investing activities used $118,935 during
the year ended December 31, 2002 for furnishings and a new phone system for the
new office space the Company began leasing in May 2002. Financing activities
used $292,700 of cash during the year ended December 31, 2002, from the purchase
of Company common stock.
Investment management fees primarily fund the operations of the Company.
Management believes that the Company's existing resources, including available
cash and cash provided by operating activities, will be sufficient to satisfy
its working capital requirements in the foreseeable future. However, no
assurance can be given that additional funds will not be required. To the extent
that returns on investments are less than anticipated, or expenses are greater
than anticipated, the Company may be required to reduce its activities,
liquidate the investment portfolio or seek additional financing. Further, this
additional financing may not be available on acceptable terms, if at all. No
significant capital expenditures are expected in the foreseeable future.
Impact of Inflation and Other Factors
-------------------------------------
The Company's operations have not been significantly affected by inflation. The
Company's investment portfolios of equity and fixed income securities, are
carried at current market values. Therefore, the Company's profitability is
affected by general economic and market conditions, the volume of securities
trading and fluctuations in interest rates. The Company's business is also
subject to government regulation and changes in legal, accounting, tax and other
compliance requirements. Changes in these regulations may have a significant
effect on the Company's operations.
9
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
For the Years Ended December 31, 2003 and 2002
ITEM 7: FINANCIAL STATEMENTS
To the Board of Directors
Diamond Hill Investment Group, Inc.
Columbus, Ohio
We have audited the consolidated statement of financial condition of Diamond
Hill Investment Group, Inc. and its subsidiaries as of December 31, 2003, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years ended December 31, 2003 and 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We have conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Diamond
Hill Investment Group, Inc. and its subsidiaries as of December 31, 2003, and
the consolidated results of their operations and cash flows for the years ended
December 31, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States of America.
BKR Longanbach Giusti, LLC
Columbus, Ohio
January 22, 2004
10
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
As of December 31, 2003
ASSETS
Cash $ 50,985
Investment portfolio (note 3 and 4):
Mutual fund shares and limited partnership interests 2,717,226
Not readily marketable equity securities, at estimated fair value 15,108
Accounts receivable:
Investment products 173,070
Pending settlements and other 229
Property and equipment, net of accumulated depreciation of $135,661 129,664
Deposits and other 227,366
------------
Total assets $ 3,313,648
------------
LIABILITIES
Accounts payable to broker-dealers and other $ 1,589
Accrued expenses 137,245
------------
Total liabilities 138,834
------------
SHAREHOLDERS' EQUITY
Common stock: (note 5)
No par value, 7,000,000 shares authorized,
1,827,972 shares issued and 1,523,999 shares outstanding 10,025,711
Treasury stock, at cost
(303,973 shares) (1,739,206)
Deferred compensation (3,744)
Accumulated deficit (5,107,947)
------------
Total shareholders' equity 3,174,814
------------
Total liabilities and shareholders' equity $ 3,313,648
------------
The accompanying notes are an integral part of these consolidated
financial statements.
11
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, 2003 and 2002
AUDITED
2003 2002
----------- -----------
INVESTMENT MANAGEMENT FEES:
Mutual funds $ 465,549 $ 370,163
Managed accounts 606,169 276,390
Private partnership 88,866 22,505
----------- -----------
Total investment management fees 1,160,584 669,058
----------- -----------
OPERATING EXPENSES:
Salaries, benefits and payroll taxes 1,520,150 1,602,243
Legal and audit 70,481 185,382
General and administrative 443,802 511,689
Sales and marketing 150,368 222,107
----------- -----------
Total operating expenses 2,184,801 2,521,421
----------- -----------
OTHER OPERATING ACTIVITIES
Mutual fund administration, net (Note 8) (258,226) (331,425)
----------- -----------
Mutual fund distribution, net (Note 9) (93,689) (69,716)
----------- -----------
Broker-dealer, net (Note 10) (18,062) (143,924)
----------- -----------
NET OPERATING LOSS (1,394,194) (2,397,428)
----------- -----------
Investment return, net of interest expense 400,660 (66,195)
LOSS BEFORE TAXES (993,534) (2,463,623)
----------- -----------
Income tax provision (credit) -- --
----------- -----------
NET LOSS $ (993,534) $(2,463,623)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE $ (0.68) $ (1.73)
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.68) $ (1.73)
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
12
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
December 31, 2003 and 2002
AUDITED
Retained
Shares Treasury Deferred Earnings
Outstanding Amount Stock Compensation (Deficit) Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2001 1,479,767 $ 10,023,703 ($ 2,101,810) ($ 36,793) ($ 1,513,120) $ 6,371,980
Amortization of deferred
Compensation -- -- -- 21,619 -- 21,619
Purchase of treasury stock (71,300) -- (292,700) -- -- (292,700)
Net loss -- -- -- -- (2,463,623) (2,463,623)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2002 1,408,467 10,023,703 (2,394,510) (15,174) (3,976,743) 3,637,276
Exercise of stock options 1,000 3,910 -- -- -- 3,910
Amortization of deferred
Compensation -- -- -- 11,430 -- 11,430
Sale of treasury stock 114,532 (1,902) 655,304 -- (137,670) 515,732
Net loss -- -- -- -- (993,534) (993,534)
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2003 1,523,999 $ 10,025,711 ($ 1,739,206) ($ 3,744) ($ 5,107,947) $ 3,174,814
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
13
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 2003 and 2002
AUDITED
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (993,534) $(2,463,623)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 38,336
Loss on disposal of property and equipment 732 40,176
Amortization of deferred compensation 11,430
Unrealized (gain) loss (401,794) 209,686
(Increase) decrease in certain assets-
Investment portfolio 459,942 1,930,591
Accounts receivable
Investment products (83,211) 4,941
Pending settlements and other (111) (3,727)
Refundable income taxes -- 414,251
Deposits and other (68,678) (44,905)
Increase (decrease) in certain liabilities-
Accounts payable to broker-dealers and other 1,589 --
Accrued expenses and other (118,951) (235,571)
----------- -----------
Net cash used in operating activities (1,154,250) (73,216)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,582) (122,567)
Proceeds from sale of property and equipment -- 3,632
----------- -----------
Net cash used in investing activities (3,582) (118,935)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 3,910 --
Purchase of treasury stock -- (292,700)
Sale of treasury stock 515,732 --
----------- -----------
Net cash provided (used) in financing activities 519,642 (292,700)
----------- -----------
NET DECREASE IN CASH (638,190) (484,851)
CASH, BEGINNING OF PERIOD 689,175 1,174,026
----------- -----------
CASH, END OF PERIOD $ 50,985 $ 689,175
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 758 $ 1,569
Income taxes -- --
The accompanying notes are an integral part of these consolidated
financial statements.
14
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 1 ORGANIZATION AND NATURE OF BUSINESS
Diamond Hill Investment Group, Inc. (the Company) is an Ohio corporation
incorporated in May 2002, previously a Florida corporation since April 1990. The
Company has two subsidiary operating companies.
Diamond Hill Capital Management, Inc. (DHCM), an Ohio corporation, is a wholly
owned subsidiary of the Company and a registered investment adviser. DHCM is the
investment adviser to the Diamond Hill Focus Fund, Diamond Hill Small Cap Fund,
Diamond Hill Large Cap Fund, Diamond Hill Short Term Fixed Income Fund and
Diamond Hill Strategic Income Fund, open-end mutual funds, which are each a
series in the Diamond Hill Funds trust. DHCM is also the investment adviser to
the Diamond Hill Investment Partners, L.P. and offers advisory services to
institutional and individual investors.
Diamond Hill Securities, Inc. (DHS), an Ohio corporation, is a wholly owned
subsidiary of DHCM and a NASD registered broker-dealer. DHS is registered with
the Securities and Exchange Commission and the securities commissions of six
states (including Ohio). DHS trades securities on a fully-disclosed basis and
clears customer transactions through an unaffiliated broker-dealer that also
maintains the customer accounts. DHS is also a registered investment adviser and
offers advisory services to institutional and individual investors. DHS is the
investment adviser to the Diamond Hill Bank & Financial Fund, which is a series
in the Diamond Hill Funds trust.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported amounts
of revenues and expenses for the periods. Actual results could differ from those
estimates. The following is a summary of the Company's significant accounting
policies:
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the operations of the
Company, DHCM and DHS. All material inter-company transactions and balances have
been eliminated in consolidation.
Cash
----
The Company has defined cash as demand deposits, certificate of deposits and
money market accounts. The Company maintains its cash in seven accounts with two
financial institutions.
Accounts Receivable
-------------------
Accounts receivable are recorded when they are due and are presented in the
statement of financial condition net of any allowance for doubtful accounts.
Accounts receivable are written off when they are determined to be
uncollectible. Any allowance for doubtful accounts is estimated on the Company's
historical losses, existing conditions in the industry, and the financial
stability of those individuals that owe the receivable. No allowance for
doubtful accounts was deemed necessary at December 31, 2003.
Valuation of Investment Portfolio
---------------------------------
Securities and related options traded on national securities markets and
securities not traded on national securities markets, but with readily
ascertainable market values, are valued at market value. Other securities, for
which market quotations are not readily available, due to infrequency of
transactions, are valued at fair value as determined in good faith by the
management of the Company. Realized and unrealized gains and losses are included
in investment profits and losses.
15
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Limited Partnership Interests
-----------------------------
DHCM is the managing member of Diamond Hill General Partner, LLC, the General
Partner of Diamond Hill Investment Partners, L.P. (DHIP), a limited partnership
whose underlying assets consist of marketable securities. DHCM's investment in
DHIP is accounted for using the equity method, under which DHCM's share of the
net earnings or losses of the partnership is reflected in income as earned and
distributions received are reflected as reductions of the investment. The
Company is actively seeking additional unaffiliated investors for DHIP. Several
board members, officers and employees of the Company are members in Diamond Hill
General Partner, LLC. The capital of Diamond Hill General Partner, LLC is not
subject to a management fee or an incentive fee.
Property and Equipment
----------------------
Property and equipment, consisting of computer equipment, furniture, and
fixtures, is carried at cost less accumulated depreciation. Depreciation is
calculated using the straight-line method over estimated lives of five to seven
years.
Reclassifications
-----------------
The consolidated statement of operations for the year ended December 31, 2002,
has been reclassified to conform to the presentation of the consolidated
statement of operations for the year ended December 31, 2003. These
reclassifications have had no effect on the operating results for the year ended
December 31, 2002.
Revenues
--------
Securities transactions and commissions are accounted for on the trade date
basis. Dividend income is recorded on the ex-dividend date and interest income
is accrued as earned. Realized gains and losses from sales of securities are
determined utilizing the first-in, first-out method (FIFO).
Earnings Per Share
------------------
Basic and diluted earnings per common share are computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." A
reconciliation of the numerators and denominators used in these calculations is
shown below:
For the year ended December 31, 2003:
Numerator Denominator Amount
----------- ----------- ------
Basic Earnings $ (993,534) 1,458,264 $(0.68)
Diluted Earnings $ (993,534) 1,458,264 $(0.68)
For the year ended December 31, 2002:
Numerator Denominator Amount
----------- ----------- ------
Basic Earnings $(2,463,623) 1,424,602 $(1.73)
Diluted Earnings $(2,463,623) 1,424,602 $(1.73)
Stock options and warrants have not been included in the denominator of the
diluted per-share computations because the effect of their inclusion would be
anti-dilutive.
16
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including accounts
receivable, notes and interest receivable and securities owned are carried at
amounts that approximate fair value. Similarly, liabilities, including accounts
payable and accrued expenses are carried at amounts approximating fair value.
Note 3 INVESTMENT PORTFOLIO
Investment portfolio balances, which consist of securities classified as
trading, are comprised of the following at December 31, 2003:
Unrealized Unrealized
Market Cost Gains Losses
---------- ---------- ---------- ----------
Mutual fund shares and limited
partnership interest $2,717,226 $2,290,260 $ 428,171 $ (1,205)
Not readily marketable equity
securities 15,108 195,125 -- (180,017)
---------- ---------- ---------- ----------
Total $2,732,334 $2,485,385 $ 428,171 $ (181,222)
========== ========== ========== ==========
Investment portfolio balances, which consist of securities classified as
trading, are comprised of the following at December 31, 2002:
Unrealized Unrealized
Market Cost Gains Losses
---------- ---------- ---------- ----------
Mutual fund shares and limited
partnership interest $2,612,555 $2,577,989 $ 116,584 $ (82,018)
Marketable equity securities 40,519 31,638 23,525 (14,644)
Not readily marketable equity
securities 137,409 335,700 900 (199,191)
---------- ---------- ---------- ----------
Total $2,790,483 $2,945,327 $ 141,009 $ (295,853)
========== ========== ========== ==========
Marketable equity securities at December 31, 2002, consist primarily of bank
stocks, at market value, which are traded on national securities markets. As of
December 31, 2002, the Company had two individual equity security investments
representing 77% and 23% of its marketable equity securities.
17
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 3 INVESTMENT PORTFOLIO (Continued)
DHCM is the managing member the General Partner of Diamond Hill Investment
Partners, L.P., whose underlying assets consist primarily of marketable
securities. The General Partner is contingently liable for all of the
partnership's liabilities.
Summary financial information, including the Company's carrying value and income
from this partnership at December 31, 2003 and 2002 and for the years then
ended, is as follows:
2003 2002
------------ ------------
Total assets $ 21,505,686 $ 12,534,274
Total liabilities 9,904,405 5,323,340
Net assets 11,601,281 7,210,934
Net fair market value of earnings 1,967,729 168,073
DHCM's carrying value 1,363,450 1,109,708
DHCM's income 223,852 45,273
Incentive Fee 29,890 0
DHCM withdrew $2,000,000 of capital from its investment in Diamond Hill
Investment Partners, L.P. during the year ended December 31, 2002. DHCM's income
from this partnership includes its pro-rata capital allocation and its share of
an incentive allocation from the limited partners. In addition, DHCM earns an
administrative fee payable quarterly at the rate of .25% of the value of the
limited partners' capital accounts.
Note 4 LINE OF CREDIT
The Company renewed a line of credit loan with a maximum principal amount of
$325,000 on August 28, 2003 at an annual percentage interest rate of prime plus
0.50%, which is currently 4.50%. The balance due on the line of credit loan at
December 31, 2003 was zero ($0). The Company has pledged $390,000 of its fixed
income mutual fund investments to secure this line. The line of credit loan is
due to mature on August 28, 2004, at which time management intends to renew the
line.
Note 5 CAPITAL STOCK
Common Stock
------------
The Company has only one class of securities, Common Stock.
Treasury Stock
--------------
On July 17, 2000, the Company announced a program to repurchase up to 400,000
shares of its Common Stock through open market purchases and privately
negotiated transactions. From July 17, 2000 through December 31, 2001, the
Company purchased 281,597 shares of its Common Stock for $1,716,407. For the
year ended December 31, 2002, the Company purchased 71,300 shares of its Common
Stock for $292,700. For the year ended December 31, 2003, the Company did not
purchase any of its shares of Common Stock. As of December 31, 2003, the Company
has purchased 352,897 shares for $2,009,107 pursuant to the aforementioned
400,000 share repurchase program. On July 22, 2003, the Company issued 110,000
shares out of Treasury Stock in a private placement to certain directors,
officers and employees of the Company. The shares were sold at $4.50 per share,
and Treasury Stock was reduced by an average cost of $5.72 per share. On
December 31, 2003, the Company issued 4,532 shares out of Treasury Stock to fund
the Company match portion of the Company's 401(k) retirement plan. The shares
were issued at an average price of $5.15 per share, and Treasury Stock was
reduced by an average cost of $5.72 per share. The Company's total Treasury
Stock share balance as of December 31, 2003 is 303,973.
18
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 5 CAPITAL STOCK (Continued)
Authorization of Preferred Stock
--------------------------------
The Company's Articles of Incorporation authorize the issuance of 1,000,000
shares of "blank check" preferred stock with such designations, rights and
preferences, as may be determined from time to time by the Company's Board of
Directors. The Board of Directors is empowered, without shareholder approval, to
issue preference stock with dividend, liquidation, conversion, voting, or other
rights, which could adversely affect the voting or other rights of the holders
of the Common Stock. There were no shares of preferred stock issued or
outstanding at December 31, 2003 or 2002.
Note 6 INCOME TAXES
The Company files a consolidated Federal income tax return. It is the policy of
the Company to allocate the consolidated tax provision to subsidiaries as if
each subsidiary's tax liability or benefit were determined on a separate company
basis. As part of the consolidated group, subsidiaries transfer to the Company
their current Federal tax liability or assets.
2003 2002
----------- -----------
Current income tax provision (benefit) $ -- $ --
Deferred income tax provision (benefit) -- --
----------- -----------
Provision (benefit) for income taxes $ -- $ --
=========== ===========
A reconciliation of income tax expense at the statutory rate to the Company's
effective rate is as follows:
2003 2002
----------- -----------
Income tax expense expected statutory rate xxx 34% 34%
Prior year provision adjustment 0 0
Dividends received deduction 0 0
Unrealized gain 0 0
Valuation allowance (34) (34)
----------- -----------
Income tax expense effective rate 0% 0%
=========== ===========
Deferred tax assets and liabilities consist of the following at December 31,
2003 and 2002:
2003 2002
----------- -----------
Deferred tax benefit of NOL carryforward $ 1,819,000 $ 1,441,000
Stock options and warrants -- --
Investment write down -- --
Unrealized (gains) losses (62,000) 36,000
Other liabilities (14,000) (14,000)
Valuation allowance (1,743,000) (1,463,000)
----------- -----------
Net deferred tax assets (liabilities) $ -- $ --
=========== ===========
As of December 31, 2003, the Company and its subsidiaries had net operating loss
(NOL) carry forwards for tax purposes of approximately $7,274,000. These NOL's
will expire from 2016 to 2023. Any future changes in control may limit the
availability of NOL carryforwards.
19
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 7 OPERATING LEASES
The Company leases office space under an operating lease. Under the previous
operating lease, which expired July 2002, total lease expenses were
approximately $85,500 for the seven months ended July 31, 2002. The Company
entered into a new lease agreement effective May 1, 2002, which terminates on
May 31, 2005. Under this new lease agreement, total lease expenses for the years
ended December 31, 2002 and 2003 were $50,000 and $120,000, respectively. The
future minimum lease payments under the operating lease are as follows:
Year Ended Amount
------------ --------
2004 120,000
2005 50,000
Note 8 MUTUAL FUND ADMINISTRATION
DHCM has an administrative, fund accounting and transfer agency services
agreement with Diamond Hill Funds, an Ohio business trust, under which DHCM
performs certain services for each series of the trust. These services include
mutual fund administration, accounting, transfer agency and other related
functions. For performing these services, each series of the trust compensates
DHCM a fee at an annual rate of 0.45% times each series' average daily net
assets. DHCM collected $268,164 and $179,647 for mutual fund administration
revenue for the year ended December 31, 2003 and 2002, respectively. In
fulfilling its role under this agreement, DHCM has engaged several third-party
providers, and the cost for their services are paid by DHCM. Mutual fund
administration expense for the year ended December 31, 2003 and 2002 was
$526,390 and $511,072, respectively.
Note 9 MUTUAL FUND DISTRIBUTION
DHS is the principal underwriter for Diamond Hill Funds, an Ohio business trust,
and may pay third-party financial institutions a fee for distribution or for
performing certain servicing functions for mutual fund shareholders. For
performing distribution functions, DHS collects front-end and back-end sales
loads, ranging from 1.00% to 5.75% or underwriting fees of 0.50% on fund
investments. DHS also collects 12b-1 fees at an annual rate ranging from 0.25%
to 1.00% times each series' average daily net assets. Mutual fund distribution
revenue for the year ended December 31, 2003 and 2002 was $164,732 and $114,792,
respectively. DHS also pays for the production of marketing materials used in
the distribution of the Diamond Hill Funds. Mutual fund distribution expense for
the year ended December 31, 2003 and 2002 was $258,421 and $184,508,
respectively.
Note 10 BROKER-DEALER
DHS is a registered full-service broker-dealer transacting security trades
through its clearing broker under a correspondent agreement. For the year ended
December 31, 2003 and 2002, broker-dealer activity expenses, principally
clearing charges and regulatory fees, totaled $44,449 and $153,159,
respectively. DHS earns commissions and service fees related to business
transacted through its clearing broker, along with gains and losses from
market-making activities. Broker-dealer activity revenue for the year ended
December 31, 2003 and 2002 was $26,387 and $9,235, respectively.
20
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 11 EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
---------------------------
All full-time employees of the Company are eligible to participate in the
Diamond Hill Investment Group Incentive Compensation Plan. The Plan provides
that a bonus fund will be established in an amount equal to 20% of the pre-tax
realized profits of the Company in excess of a 15% pre-tax return on equity. The
amount of the bonus fund is calculated each fiscal quarter on a cumulative
basis. The allocation of the bonus fund is to be made by the President of the
Company. The Company did not incur any expense under the Plan for the years
ended December 31, 2003 and 2002.
Stock Option Plan
-----------------
The Company has a Non-Qualified and Incentive Stock Option Plan that authorizes
the grant of options to purchase an aggregate of 500,000 shares of the Company's
Common Stock. The Plan provides that the Board of Directors, or a committee
appointed by the Board, may grant options and otherwise administer the Option
Plan. The exercise price of each incentive stock option or non-qualified stock
option must be at least 100% of the fair market value of the Common Stock at the
date of grant, and no such option may be exercisable for more than ten years
after the date of grant. However, the exercise price of each incentive stock
option granted to any shareholder possessing more than 10% of the combined
voting power of all classes of capital stock of the Company on the date of grant
must not be less than 110% of the fair market value on that date, and no such
option may be exercisable more than five years after the date of grant. This
Plan was adopted in 1993 and expired by its terms in November 2003. Options
issued under this Plan are not affected by the Plan's expiration.
During the year ended December 31, 2003, options to purchase 20,000 shares of
Common Stock were issued to employees at an exercise price of $4.50, vesting
immediately. Additionally, options to purchase 100,000 shares of Common Stock
were issued to employees at an exercise price of $4.50, vesting 20% each year
over five years. All of the options have ten-year terms. No options to purchase
shares of Common Stock were granted during the year ended December 31, 2002.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations (APB 25) in accounting for stock options and warrants issued to
employees and Directors. Accordingly, compensation cost is recognized, when
appropriate, based on the intrinsic value of the stock options or warrants.
21
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 11 EMPLOYEE INCENTIVE PLANS (Continued)
Stock Option Plan (Continued)
-----------------
Had compensation cost for all of the Company's stock-based awards been
determined in accordance with FAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Net income (loss) As reported $ (993,534) $ (2,463,623)
Pro forma $ (1,205,998) $ (2,894,517)
Basic earnings per share As reported $ (0.68) $ (1.73)
Pro forma $ (0.83) $ (2.03)
Diluted earnings per share As reported $ (0.68) $ (1.73)
Pro forma $ (0.83) $ (2.03)
To make the computations of pro forma results under FAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: no
dividend yield for all years and expected lives of ten years. For the year ended
December 31, 2003, the average expected volatility was approximately 27%, and
the average assumed risk-free interest rate was 1.06%. The options and warrants
granted under these plans are not registered and, accordingly, there is no
quoted market price.
A summary of the status of the Company's stock option and warrants plans as of
December 31, 2003 and December 31, 2002 and changes during the periods ending on
those dates is presented below:
Options Warrants
-------------------- -------------------
Exercise Exercise
Shares Price Shares Price
-------- ------- -------- -------
Outstanding January 1, 2002 186,902 $17.245 280,400 $12.897
Granted -- -- -- --
Expired unexercised (10,350) 23.583 -- --
Forfeited (10,650) 12.803 -- --
-------- --------
Outstanding December 31, 2002 165,902 17.124 280,400 12.897
======== ========
Exercisable December 31, 2002 100,762 $23.759 200,400 $14.852
======== ========
Outstanding January 1, 2003 165,902 $17.124 280,400 $12.897
Granted 120,000 4.500 -- --
Exercised (1,000) 3.910 --
Expired unexercised (11,510) 28.983 -- --
Forfeited (13,190) 22.008 -- --
-------- --------
Outstanding December 31, 2003 260,202 10.581 280,400 12.897
======== ========
Exercisable December 31, 2003 116,202 $17.465 240,400 $13.712
======== ========
Weighted-average fair value of options
granted during the year ended
December 31, 2003, computed in
accordance with FAS 123 $ 1.340
22
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 11 EMPLOYEE INCENTIVE PLANS (Continued)
Stock Option Plan (Continued)
-----------------
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 2003:
Options Warrants
--------------- ----------------
Range of exercise prices $ 73.750 $ 73.750
Number outstanding 16,202 14,000
Weighted-average remaining
Contractual life in years 4.367 4.359
Weighted-average exercise price $ 73.750 $ 73.750
Number exercisable 16,202 14,000
Range of exercise prices $ 7.950 - $ 14.375 $ 22.20 - $ 22.50
Number outstanding 54,000 16,400
Weighted-average remaining
Contractual life in years 3.854 5.361
Weighted-average exercise price $ 11.461 $ 22.495
Number exercisable 46,000 16,400
Range of exercise prices $ 5.250 - $ 8.450 $ 8.00 - $ 14.375
Number outstanding 70,000 250,000
Weighted-average remaining
Contractual life in years 7.504 5.794
Weighted-average exercise price $ 5.707 $8.860
Number exercisable 34,000 210,000
Range of exercise prices $ 4.500
Number outstanding 120,000
Weighted-average remaining
Contractual life in years 9.436
Weighted-average exercise price $4.500
Number exercisable 20,000
23
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 12 REGULATORY REQUIREMENTS
DHS is subject to the uniform net capital rule of the Securities and Exchange
Commission (Rule 15c3-1), which requires that the ratio of "aggregate
indebtedness" to "net capital" not exceed 15 to 1 (as those terms are defined by
the Rule). DHS had net capital of $107,386 as of December 31, 2003, which was in
excess of its required minimum net capital of $50,000. The ratio of aggregate
indebtedness to net capital was 0.16 to 1 as of December 31, 2003. DHS is also
subject to regulations of six states in which it is registered as a licensed
broker-dealer.
DHCM and DHS are registered investment advisers and subject to regulation by the
SEC pursuant to the Investment Advisors Act of 1940.
Note 13 CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
DHS, under a correspondent agreement with its clearing broker, has agreed to
indemnify the clearing broker from damages or losses resulting from customer
transactions. The Company is, therefore, exposed to off-balance sheet risk of
loss in the event that customers are unable to fulfill contractual obligations.
The Company manages this risk by requiring customers to have sufficient cash in
their account before a buy order is executed and to have the subject securities
in their account before a sell order is executed. The Company has not incurred
any losses from customers unable to fulfill contractual obligations.
In the normal course of business, the Company periodically sells securities not
yet purchased (short sales) for its own account and writes options. The
establishment of short positions and option contracts exposes the Company to
off-balance sheet market risks in the event prices change, as the Company may be
obligated to cover such positions at a loss. At December 31, 2003, the Company
had no short security positions, had not written any option contracts and did
not own any options. The Company did not experience any credit losses due to the
failure of any counterparties to perform during the year December 31, 2003.
Senior management of the Company is responsible for reviewing trading positions,
exposures, profits and losses, trading strategies and hedging strategies on a
daily basis.
Note 14 SEGMENT INFORMATION
Types of services from which each reportable segment derives its revenues
-------------------------------------------------------------------------
The Company has three reportable segments: Investment Advisory Services,
Broker-Dealer Services and Corporate Portfolio. The Investment Advisory Services
segment provides investment advisory services to the Diamond Hill Focus Fund,
Diamond Hill Small Cap Fund, Diamond Hill Large Cap Fund, Diamond Hill Bank &
Financial Fund, Diamond Hill Short Term Fixed Income Fund and Diamond Hill
Strategic Income Fund, open-end mutual funds, Diamond Hill Investment Partners,
L.P., an investment limited partnership, and offers investment advisory services
and accounts to institutional and individual investors, specializing in
diversified, domestic securities. The Broker-Dealer Services segment offers
brokerage services to institutional and individual investors and underwriting
services to the Company's mutual funds. The Corporate Portfolio segment is
represented by revenue generating investments unrelated to the other operating
segments.
Measurement of segment profit or loss and segment assets
--------------------------------------------------------
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes. The Company focuses
its attention on providing services to external customers.
24
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 14 SEGMENT INFORMATION (Continued)
Factors management used to identify the enterprises' reportable segments
The Company's reportable segments are primarily defined by legal entities that
specialize in different financial products and services. Investment Advisory
Services are provided by DHCM. Brokerage Services are provided primarily by DHS.
The Company manages the Corporate Portfolio segment. These segments are managed
separately because each entity operates in a different regulatory environment.
Financial information for each reportable segment is shown below. The Company
does not operate, or hold assets, in any foreign country. The Company does not
have any single customer generating 10% or more of revenue.
Financial information for the year ended December 31, 2003
Investment Broker-
Advisory Dealer Corporate
Services Services Portfolio Combined
--------------------------------------------------------
Investment Management Fees:
Mutual funds $ 465,549 $ -- $ -- $ 465,549
Managed accounts 606,169 -- -- 606,169
Private partnership 88,866 -- -- 88,866
--------------------------------------------------------
Total investment management fees 1,160,584 -- -- 1,160,584
--------------------------------------------------------
Operating Expenses:
Salaries, benefits & payroll taxes 1,303,892 73,227 143,031 1,520,150
Legal and audit 2,300 1,664 66,517 70,481
General and administrative 300,773 38,794 104,235 443,802
Sales and marketing 123,746 819 25,803 150,368
--------------------------------------------------------
Total operating expenses 1,730,711 114,504 339,586 2,184,801
--------------------------------------------------------
Mutual fund administration (258,226) -- -- (258,226)
--------------------------------------------------------
Mutual fund distribution -- (93,689) -- (93,689)
--------------------------------------------------------
Broker-dealer activity -- (18,062) -- (18,062)
--------------------------------------------------------
Net Operating Loss (828,353) (226,255) (339,586) (1,394,194)
--------------------------------------------------------
Investment return, net of interest expense -- -- 400,660 400,660
--------------------------------------------------------
Loss Before Taxes (828,353) (226,255) 61,074 (993,534)
Income Tax Provision (Credit) -- -- -- --
--------------------------------------------------------
Net Loss $ (828,353) $ (226,255) $ 61,074 $ (993,534)
========================================================
Total Assets $ 198,734 $ 264,497 $ 2,850,417 $ 3,313,648
========================================================
25
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
Note 14 SEGMENT INFORMATION (Continued)
Financial information for the year ended December 31, 2002
Investment Broker-
Advisory Dealer Corporate
Services Services Portfolio Combined
--------------------------------------------------------
Investment Management Fees:
Mutual funds $ 370,163 $ -- $ -- $ 370,163
Managed accounts 276,390 -- -- 276,390
Private partnership 22,505 -- -- 22,505
--------------------------------------------------------
Total investment management fees 669,058 -- -- 669,058
--------------------------------------------------------
Operating Expenses:
Salaries, benefits & payroll taxes 1,107,001 374,842 120,400 1,602,243
Legal and audit 4,307 47,969 133,106 185,382
General and administrative 353,672 96,110 61,907 511,689
Sales and marketing 149,462 50,618 22,027 222,107
--------------------------------------------------------
Total operating expenses 1,614,442 569,539 337,440 2,521,421
--------------------------------------------------------
Mutual fund administration (331,425) -- -- (331,425)
--------------------------------------------------------
Mutual fund distribution -- (69,716) -- (69,716)
--------------------------------------------------------
Broker-dealer activity -- (143,924) -- (143,924)
--------------------------------------------------------
Net Operating Loss (1,276,809) (783,179) (337,440) (2,397,428)
--------------------------------------------------------
Investment return, net of interest expense -- -- (66,195) (66,195)
--------------------------------------------------------
Loss Before Taxes (1,276,809) (783,179) (403,635) (2,463,623)
Income Tax Provision (Credit) -- -- -- --
--------------------------------------------------------
Net Loss $(1,276,809) $ (783,179) $ (403,635) $(2,463,623)
========================================================
Total Assets $ 133,915 $ 140,801 $ 3,618,756 $ 3,893,472
========================================================
26
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURES - None
ITEM 8A: CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this annual report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that material information
relating to the Company would be made hereon to them by others within the
Company and would be disclosed on a timely basis.
As of the Evaluation Date, there have been no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information regarding this Item 9 is incorporated by reference to our proxy
statement for our year 2004 annual meeting of shareholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Exchange
Act, under the Captions: "Directors and Executive Officers", "Compliance with
Section 16(a) of the Exchange Act", "Audit Committee" and "Code of Business
Conduct and Ethics".
ITEM 10: EXECUTIVE COMPENSATION
Information regarding this Item 10 is incorporated by reference to our proxy
statement for our year 2004 annual meeting of shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Exchange
Act, under the Caption: "Executive Compensation".
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding this Item 11 is incorporated by reference to our proxy
statement for our year 2004 annual meeting of shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Exchange
Act, under the Captions: "Security Ownership of Certain Beneficial Owners and
Management" and "Executive Compensation".
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this Item 12 is incorporated by reference to our proxy
statement for our year 2004 annual meeting of shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Exchange
Act, under the Caption: " Certain Relationships and Related Transactions".
27
DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits
*3.1 Amended and Restated Articles of Incorporation of the Company.
*3.2 Code of Regulations of the Company.
**10.1 Diamond Hill Investment Group (fka Heartland) Incentive
Compensation Plan.
***10.2 1993 Non-Qualified and Incentive Stock Option Plan.
****10.3 Synovus Securities, Inc., Sub-Advisory Agreement with the Diamond
Hill Capital Management, Inc. dated January 30, 2001.
**10.4 Employment Agreement between the Company and Roderick H. Dillon,
Jr. dated May 11, 2000.
**10.5 Employment Agreement between the Company and James F. Laird dated
October 24, 2001.
*****10.6 Form of Subscription Agreement for Common Shares of Diamond Hill
Investment Group, Inc. executed by subscribers as part of the
private placement on July 22, 2003.
21.1 Subsidiaries of the Company.
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a)
or Rule 15d-14(a).
31.2 Certification of Chief Financial Officer required by Rule 13a-14(a)
or Rule 15d-14(a).
32.1 Certification of Chief Executive Officer and Chief Financial
Officer required by Rule 13a-14(b) or Rule 15(d)-14(b) and Section
1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
1350).
* Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form 8-K filed on May 8, 2002 and incorporated herein by
reference.
** Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form 10-KSB filed on March 28, 2003 and incorporated herein by
reference.
*** Filed with the Securities and Exchange Commission as an exhibit to the
Company's Proxy Statement filed on July 21, 1998 and incorporated herein
by reference.
**** Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form 10-KSB filed on March 1, 2001 and incorporated herein by
reference.
***** Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form 10-QSB filed on November 14, 2003 and incorporated herein
by reference.
(b) Reports on Form 8-K
A Form 8-K was filed on November 18, 2003 to report the Company's earnings
for the nine months and three months ended September 30, 2003.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the years ended December 31, 2003 and 2002, the following fees apply:
Year Ended Year Ended
12/31/2003 12/31/2002
---------- ----------
Audit $ 30,200 $ 24,993
Audit related - -
Tax 5,500 5,000
Other - -
---------- ----------
Total $ 35,700 $ 29,993
========== ==========
It is the policy of the Audit Committee to pre-approve the services of the
independent accountants and present that approval to the Board of Directors. For
the years ended December 31, 2003 and 2002, 100% of the independent accountants'
fees were pre-approved by the Audit Committee.
28
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
DIAMOND HILL INVESTMENT GROUP, INC.
/S/ R. H. Dillon
-------------------------------
By R. H. Dillon, President and Director March 29, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------------------------------------------------------------------------------
/S/ R. H. Dillon President and Director March 29, 2004
--------------------------
R. H. Dillon
/S/ James F. Laird Chief Financial Officer March 29, 2004
--------------------------
James F. Laird
/S/ Dr. Roger D. Blackwell Director March 29, 2004
--------------------------
Dr. Roger D. Blackwell
/S/ David P. Lauer Director March 29, 2004
--------------------------
David P. Lauer
/S/ James G. Mathias Director March 29, 2004
--------------------------
James G. Mathias
/S/ David R. Meuse Director March 29, 2004
--------------------------
David R. Meuse
/S/ William G. Perkins Director March 29, 2004
--------------------------
William G. Perkins
/S/ Diane D. Reynolds Director March 29, 2004
--------------------------
Diane D. Reynolds
29