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U.S. Securities and Exchange Commission Washington, D.C. 20549
 Form 10-QSB þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 o
    
    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 
  Ohio
    
    65-0190407(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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 State the number of shares outstanding of each of the issuers classes of common equity, as of
March 31, 2005: Common Stock: 1,635,210 shares Transitional Small Business Disclosure Format (check one): Yes o; Noþ




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES  
 PAGEPart I: FINANCIAL INFORMATION
    
    
    3-21Item 1. Financial Statements:
    
    
    3-15Consolidated Statements of Financial
Condition as of March 31, 2005 (unaudited)
    
    
    4Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004
(unaudited)
    
    
    5Consolidated Statements of Cash Flow for the
Three Months Ended March 31, 2005 and 2004
(unaudited)
    
    
    6Notes to the Consolidated Financial Statements
    
    
    7-15Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    16-21Item 3. Controls and Procedures
    
    
    21Part II: OTHER INFORMATION
    
    
    21-22Item 1. Legal Proceedings
    
    
    21Item 2. Changes in Securities
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    23Certifications for Quarterly Report on Form 10-QSB
    
    
    24-25Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
 PART I FINANCIAL INFORMATION 
 ITEM 1: Financial Statements The accompanying consolidated financial statements, which should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2004, are unaudited, but have been prepared in
accordance with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending December 31, 2005. 3




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
   UNAUDITED ASSETSCash
    
    $
    90,614Investment portfolio (note 3):Mutual fund shares and private limited partnership interests
    
    
    3,342,534Accounts receivable:Investment management fees
    
    
    669,313Property and equipment, net of accumulated depreciation of $165,188
    
    
    103,680Prepaid Expenses
    
    
    313,312Refundable deposits
    
    
    10,570Total assets
    
    $
    4,530,023LIABILITIESUnearned fee income
    
    
    6,169Accrued expenses
    
    
    259,039Total liabilities
    
    
    265,208SHAREHOLDERS EQUITYCommon stock: (note 5)No par value, 7,000,000 shares authorized,
1,827,972 shares issued and 1,635,210 shares outstanding
    
    
    10,373,032Treasury stock, at cost (192,762 shares)
    
    
    (1,102,903
    )Deferred compensation
    
    
    (117,500
    )Accumulated deficit
    
    
    (4,887,814
    )Total shareholders equity
    
    
    4,264,815Total liabilities and shareholders equity

    
    $
    4,530,023
 The accompanying notes are an integral part of these consolidated financial statements. 4




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
   UNAUDITED 2005
    
    
    2004INVESTMENT MANAGEMENT REVENUE:Mutual funds
    
    $
    522,717
    
    
    $
    189,838Managed accounts
    
    
    429,592
    
    
    
    244,052Private investment partnership
    
    
    236,681
    
    
    
    32,169Total investment management revenue
    
    
    1,188,990
    
    
    
    466,059OPERATING EXPENSES:Salaries, benefits and payroll taxes
    
    
    639,415
    
    
    
    423,466Incentive
compensation (note 9)
    
    
    
    
    
    
    Legal and audit
    
    
    38,283
    
    
    
    32,898General and administrative
    
    
    132,616
    
    
    
    95,122Sales and marketing
    
    
    38,201
    
    
    
    40,616Total operating expenses
    
    
    848,515
    
    
    
    592,102NET OPERATING INCOME (LOSS)
    
    
    340,475
    
    
    
    (126,043
    )Mutual fund
administration, net (note 8)
    
    
    (74,133
    )
    
    
    (55,358
    )Investment return
    
    
    130,291
    
    
    
    101,179INCOME (LOSS) BEFORE TAXES
    
    
    396,633
    
    
    
    (80,222
    )Income Tax
Provision (note 6)
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    396,633
    
    
    $
    (80,222
    )Basic Earnings (Loss) Per Share
    
    $
    0.24
    
    
    $
    (0.05
    )Diluted Earnings (Loss) Per Share
    
    $
    0.20
    
    
    $
    (0.05
    )
 The accompanying notes are an integral part of these consolidated financial statements. 5




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
   UNAUDITED 2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    396,633
    
    
    $
    (80,222
    )Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:Depreciation and amortization
    

    
    9,276
    
    
    
    9,633Deferred compensation
    
    
    7,050
    
    
    
    1,918Unrealized (gain) loss
    
    
    (130,291
    )
    
    
    (67,668
    )(Increase) decrease in certain assets:Investment portfolio
    
    
    (1,086,114
    )
    
    
    340,815
    )Accounts receivable:Investment management fees
    
    
    (203,813
    )
    
    
    (82,384
    )Sale of securities
    
    
    900,000
    
    
    
    (441
    )Refundable income taxes
    
    
    
    
    
    
    (31,000
    )Deposits and other
    
    
    (63,474
    )
    
    
    (16,537
    )Increase (decrease) in certain liabilities-Unearned fee income
    
    
    6,169Accounts payable
    
    
    
    
    
    
    (1,589
    )Accrued expenses and other
    
    
    (142,181
    )
    
    
    (20,478
    )Net cash provided by (used in) operating activities
    
    
    (306,745
    )
    
    
    (85,121
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    
    
    
    
    CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    
    
    
    
    Sale of treasury stock
    
    
    294,793
    
    
    
    25,459Net cash provided by (used in) financing activities
    
    
    294,793
    
    
    
    25,459NET INCREASE (DECREASE) IN CASH
    
    
    (11,952
    )
    
    
    110,580CASH, BEGINNING OF PERIOD
    
    
    102,566
    
    
    
    50,985CASH, END OF PERIOD
    
    $
    90,614
    
    
    $
    161,565SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    
    
    
    $
    728Income taxes
    
    
    
    
    
    
    
 The accompanying notes are an integral part of these consolidated financial statements. 6




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
   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 one operating
subsidiary. Diamond Hill Capital Management, Inc. (DHCM), an Ohio corporation, is a wholly owned subsidiary
of the Company and a registered investment advisor. DHCM is the investment adviser to the Diamond
Hill Funds, a series of open-end mutual funds. DHCM is also the investment adviser to the Diamond
Hill Investment Partners, L.P. (DHIP), a private investment partnership, and offers advisory
services to institutional and individual investors. 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: Reclassifications Certain prior year amounts have been reclassified to conform to the current year financial
presentation. Principles of Consolidation The accompanying consolidated financial statements include the operations of the Company and DHCM.
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 three 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 March 31, 2005. Valuation of Investment Portfolio Investments in mutual funds are valued at their current net asset value. Investments in DHIP are
valued based on readily available market quotations. Realized and unrealized gains and losses are
included in investment profits and losses. 7




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 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 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 from the partnership is reflected in income as earned and distributions received are
reflected as reductions from 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 three to seven years. Revenues Securities transactions 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
sale of securities are determined utilizing the specific identification method. 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 three months ended March 31, 2005: Numerator
    
    
    Denominator
    
    
    AmountBasic Earnings
    
    $
    396,633
    
    
    
    1,622,256
    
    
    $
    0.24Diluted Earnings
    
    $
    396,633
    
    
    
    1,963,632
    
    
    $
    0.20
 For the three months ended March 31, 2004: Numerator
    
    
    Denominator
    
    
    AmountBasic Earnings
    
    $
    (80,222
    )
    
    
    1,525,460
    
    
    $
    (0.05
    )Diluted Earnings
    
    $
    (80,222
    )
    
    
    1,525,460
    
    
    $
    (0.05
    )
 Stock options and warrants have not been included in the denominator of the diluted per-share
computations for those periods with a net loss because the effect of their inclusion would be
anti-dilutive. 8




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 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 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 March 31, 2005: UnrealizedMarket
    
    
    Cost
    
    
    Gains (Losses)Diamond Hill Strategic Income Fund
    
    $
    998,894
    
    
    $
    930,185
    
    
    $
    68,709Diamond Hill Short Term Fixed Income Fund
    
    
    852,594
    
    
    
    859,751
    
    
    
    (7,157
    )Diamond Hill Large Cap Fund
    
    
    52,100
    
    
    
    50,000
    
    
    
    2,100Diamond Hill Focus Long-Short Fund
    
    
    52,899
    
    
    
    50,000
    
    
    
    2,899DHIP Private Investment Partnership
    
    
    1,386,047
    
    
    
    844,394
    
    
    
    541,653Total
    
    
    3,342,534
    
    
    
    2,734,331
    
    
    
    608,203
 Investment portfolio balances, which consist of securities classified as trading, are comprised of
the following at March 31, 2004: Unrealized
    
    
    UnrealizedMarket
    
    
    Cost
    
    
    Gains
    
    
    LossesMutual fund shares
and limited
partnership
interest
    
    $
    2,444,078
    
    
    $
    1,949,443
    
    
    $
    494,839
    
    
    $
    (204
    )Not readily
marketable equity
securities
    
    
    15,108
    
    
    
    195,125
    
    
    
    
    
    
    
    (180,017
    )Total
    
    $
    2,459,186
    
    
    $
    2,144,568
    
    
    $
    494,839
    
    
    $
    (180,221
    )
 DHCM is the managing member of the General Partner of DHIP, whose underlying assets consist
primarily of marketable securities. The General Partner is contingently liable for all of the
partnerships liabilities. 9




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 Note 3 INVESTMENT PORTFOLIO(Continued) Summary financial information, including the Companys carrying value and income from this
partnership at March 31, 2005 and 2004 and for the three months then ended, is as follows: 2005
    
    
    2004Total assets
    
    $
    87,116,252
    
    
    $
    24,996,194Total liabilities
    
    
    39,598,197
    
    
    
    11,556,902Net assets
    
    
    47,518,055
    
    
    
    13,439,292Net fair market value of earnings
    
    
    2,597,125
    
    
    
    616,566DHCMs carrying value
    
    
    1,386,047
    
    
    
    1,431,972DHCMs income
    
    
    727,766
    
    
    
    80,162
 DHCMs income from this partnership includes its pro-rata capital allocation and its share of an
incentive allocation from the limited partners. DHCM earned the following management fee and
incentive fee from the partnership for the three months ending March 31, 2005 and 2004: 2005
    
    
    2004Management Fee
    
    $
    50,568
    
    
    $
    20,529Incentive Fee
    
    
    186,113
    
    
    
    11,640
 Note 4 LINE OF CREDIT The Company has a line of credit loan with a maximum principal amount of $325,000 at an annual
percentage interest rate of prime plus 0.50%. The balance due on the line of credit loan at March
31, 2005 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, 2005, at
which time management intends to renew the line. Note 5 CAPITAL STOCK Common Stock The Company has only one class of 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 July 25, 2002 the Company purchased a total of 352,897 shares of its Common Stock at an
average price of $5.69 per share. During the three months ending March 31, 2005, the Company has
issued 22,150 shares of Treasury Stock (19,000 shares due to the exercise of options and/or
warrants, and 3,150 to fulfill the Companys match under the Companys 401k Plan). The Companys
total Treasury Stock share balance as of March 31, 2005 is 192,762. 10




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 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 preferred 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 March 31, 2005. Note 6 INCOME TAXES As of December 31, 2004, the Company and its subsidiaries had net operating loss (NOL) carry
forwards for tax purposes of approximately $7,274,000, therefore, there is no tax provision. Note 7 OPERATING LEASES The Company leases office space under an operating lease agreement effective May 1, 2002, which
terminates on May 31, 2006. Total lease expenses for the three months March 31, 2005 were
$30,000. The future minimum lease payments under the operating lease are as follows: Year Ended
    
    Amount2005
    
    
    109,2502006
    
    
    63,750
 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% for Class A and Class C shares and 0.20% for Class I shares times
each series average daily net assets. In addition, DHCM finances the up-front commissions paid
to brokers who sell C Shares of the Diamond Hill Funds. As financer, DHCM pays the commission to
the selling broker at the time of sale. This commission payment is capitalized and expensed over
12 months to correspond with the matching revenues DHCM receives from the principal underwriter to
recoup this commission payment. DHCM collected $399,446 and $204,467 for mutual fund
administration revenue for the three months ended March 31, 2005 and 2004, respectively. In
fulfilling its role under this agreement, DHCM has engaged several third-party providers, and the
cost for their services is paid by DHCM. Mutual fund administration expense for the three months
ended March 31, 2005 and 2004 was $473,579 and $259,825, respectively. Effective April 30, 2005,
DHCM reduced the fee it charges for administrative services for Class A and Class C shares from
0.45% to 0.40%. Note 9 EMPLOYEE INCENTIVE PLANS Comprehensive Compensation Program At the Companys annual shareholder meeting on May 12, 2005, shareholders approved the 2005
Employee and Director Equity Incentive Plan (2005 Plan). The 2005 Plan is intended to
facilitate the Companys ability to attract and retain staff, provide additional incentive to
employees, directors and consultants, and to promote the success of the Companys business. The
2005 Plan is to be administered by the Board of Directors. 11




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES Note 9 EMPLOYEE INCENTIVE PLANS (Continued) With the approval of the 2005 Plan, the board has initiated a review of the compensation of all
Company staff including base salary, cash incentives and equity incentives. The review will
include an assessment of the current compensation structure as compared to other organizations in
the investment management industry and the performance of the companys staff, particularly its
investment team. Based upon this review and the financial results of the Company, including
growth in assets under management and revenues, the board expects to approve, by August 2005, a
compensation program for 2005 which may include cash and equity incentives as authorized under the
2005 Plan. Equity Compensation Grants On May 13, 2004 the Companys shareholders approved terms and conditions of certain equity
compensation grants to three key employees. Under the terms approved a total of 75,000 shares of
restricted stock and restricted stock units were issued to the key employees on May 31, 2004. The
restricted stock and restricted stock units are restricted from sale and do not vest until May 31,
2009. Stock Option Plan The Company adopted a Non-Qualified and Incentive Stock Option Plan in 1993 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 expired by its terms in November 2003. Options issued under this Plan are not affected by
the Plans expiration. All outstanding options, reflected in the tables following, were issued
under this plan. Of the warrants shown in the tables following, 80,400 were issued pursuant to
this plan. 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 based on the intrinsic value of the stock options or warrants. 12




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES Note 9 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: Three Months EndedMarch 312005
    
    
    2004Net income, as reported
    
    
    396,633
    
    
    
    (80,222
    )Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (14,709
    )
    
    
    (40,021
    )Pro forma net income
    
    
    381,924
    
    
    
    (120,243
    )Earnings per share:Basic  as reported
    
    
    0.24
    
    
    
    (0.05
    )Basic  pro forma
    
    
    0.24
    
    
    
    (0.08
    )Diluted  as reported
    
    
    0.20
    
    
    
    (0.05
    )Diluted  pro forma
    
    
    0.19
    
    
    
    (0.08
    )
 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.
The options and warrants granted under these plans are not registered and, accordingly, there is
no quoted market price. 13




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES Note 9 EMPLOYEE INCENTIVE PLANS (Continued) Stock Option Plan (Continued) A summary of the status of the Companys stock option and warrants plans as of March 31, 2005 and
2004 and changes during the three months ending on those dates are presented below: Options
    
    
    WarrantsExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding December 31, 2003
    
    
    260,202
    
    
    $
    10.581
    
    
    
    280,400
    
    
    $
    12.897Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired unexercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding March 31, 2004
    
    
    260,202
    
    
    
    10.581
    
    
    
    280,400
    
    
    
    12.897Exercisable March 31, 2004
    
    
    116,202
    
    
    $
    17.465
    
    
    
    200,400
    
    
    $
    14.852Outstanding December 31, 2004
    
    
    260,202

    
    
    $
    10.581
    
    
    
    280,400
    
    
    $
    12.897Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    9,000
    
    
    
    10.625
    
    
    
    10,000
    
    
    
    14.375Expired unexercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding March 31, 2005
    
    
    251,202
    
    
    
    10.580
    
    
    
    270,400
    
    
    
    12.385Exercisable March 31, 2005
    
    
    143,202
    
    
    $
    14.847
    
    
    
    270,400
    
    
    $
    12.385
 14




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005 Note 9 EMPLOYEE INCENTIVE PLANS (Continued) Stock Option Plan (Continued) The following table summarizes information about fixed stock options and warrants outstanding at
March 31, 2005: Options
    
    
    WarrantsNumber Outstanding
    
    
    16,202
    
    
    
    14,000Number Exercisable
    
    
    16,202
    
    
    
    14,000Exercise Price
    
    
    73.75
    
    
    
    73.75Remaining life in years
    
    
    3.12
    
    
    
    3.12Number Outstanding
    
    
    25,000
    
    
    
    11,000Number Exercisable
    
    
    25,000
    
    
    
    11,000Exercise Price
    
    
    14.38
    
    
    
    14.38Remaining life in years
    
    
    0.50
    
    
    
    0.50Number Outstanding
    
    
    
    
    
    
    14,000Number Exercisable
    
    
    
    
    
    
    14,000Exercise Price
    
    
    
    
    
    
    11.25Remaining life in years
    
    
    
    
    
    
    4.92Number Outstanding
    
    
    90,000
    
    
    
    16,400Number Exercisable
    
    
    62,000
    
    
    
    16,400Range of exercise prices
    
    
    5.25 - 8.45
    
    
    
    22.20 - 22.50Weighted average exercise price
    
    
    6.26
    
    
    
    22.49Remaining life in years
    
    
    6.10
    
    
    
    4.00Number Outstanding
    
    
    120,000
    
    
    
    215,000Number Exercisable
    
    
    40,000
    
    
    
    215,000Range of exercise prices
    
    
    4.50
    
    
    
    8.00 - 10.625Weighted average exercise price
    
    
    4.50
    
    
    
    8.17Remaining life in years
    
    
    8.19
    
    
    
    4.77
 Note 10 REGULATORY REQUIREMENTS DHCM is a registered investment adviser and is subject to regulation by the SEC pursuant to the
Investment Advisors Act of 1940. 15




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
 ITEM 2: 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 Diamond Hill Investment Group, Inc. (the Company) was incorporated as a Florida corporation
in April 1990 and reincorporated as an Ohio corporation in May 2002. The Company has one operating
subsidiary company. 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 Funds, a series of open-end mutual funds, Diamond Hill Investment Partners, L.P. (DHIP), a
private investment partnership, and also offers advisory services to institutional and individual
investors. Assets Under Management As of March 31, 2005, assets under management totaled $678.7 million, a 30% increase from December
31, 2004. Assets under management grew by 125% as of March 31, 2005 in comparison to March 31,
2004. Asset growth for the three months and year ended March 31, 2005 is not necessarily
indicative of the results that may be expected for the entire fiscal year ended December 31, 2005.
The table below provides a summary of assets under management: 3/31/2005
    
    
    12/31/2004
    
    
    3/31/2004Individually Managed Accounts
    
    $
    309,994,262
    
    
    $
    265,428,049
    
    
    $
    173,152,284Mutual Funds
    
    
    321,252,657
    
    
    
    237,625,466
    
    
    
    115,482,398Private Investment Partnership
    
    
    47,511,904
    
    
    
    20,739,964
    
    
    
    13,439,292Total Assets Under Management
    
    $
    678,758,823
    
    
    $
    523,793,479
    
    
    $
    302,073,974
 Three months ended March 31, 2005 compared to three months ended March 31, 2004 Investment management revenues for the three months ended March 31, 2005 increased to $1,188,990
compared to $466,059 for the three months ended March 31, 2004, a 155% 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 revenue from all three of its investment products 
mutual funds, managed accounts and a private investment partnership, DHIP. Revenue from mutual
funds for the three months ended March 31, 2005 and 2004 were $522,717 and $189,838, respectively,
a 175% increase. Revenue from managed accounts increased 76% for the three months ended March 31,
2005 compared to the three months ended March 31, 2004. Investment management revenue collected
from DHIP improved by 635% for the three months ended March 31, 2005 compared to the three months
ended March 16




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 31, 2004. The primary driver of this significant increase was incentive fees earned due to the
strong investment performance achieved during the quarter. The incentive fee revenue is based on
investment performance and therefore there can be no assurance that this will be recurring revenue.
Assets under management increased to $678,758,823 as of March 31, 2005, a 125% increase since
March 31, 2004. However, there can be no assurance that the Company will be able to achieve or
maintain the critical threshold of assets under management to support future operations. Operating expenses for the three months ended March 31, 2005 increased to $848,515 compared to
$592,102 for the three months ended March 31, 2004, an increase of 43%. The majority of this
increase was due to an increase in salaries, benefits and payroll taxes which grew by 50% to
$639,415 in 2005 versus $423,466 in 2004. Mutual fund administration, which represents administrative and financing fees collected in
connection with the Companys mutual fund products net of all mutual fund administrative and
financing expenses paid by the Company, increased from a net expense of $55,358 for the three
months ended March 31, 2004 to a net expense of $74,133 for the three months ended March 31, 2005.
This net expense increase in primarily due to the a one time expense related to the offering of new
Class I shares, which are offered to institutions and advisors. DHCM has an administrative, fund
accounting, transfer agency, and financing agreement with the Diamond Hill Funds, where DHCM
performs certain services for each series of the trust. DHCM collected $399,447 and $204,467 for
mutual fund administration revenue for the three months ended March 31, 2005 and 2004,
respectively. In fulfilling its role under this agreement, DHCM has engaged several third-party
providers and the cost for their services is paid by DHCM. Mutual fund administration expense for
the three months ended March 31, 2005 and 2004 were $473,578 and $259,825, 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 increase but not as quickly as fees are collected;
therefore, causing the net mutual fund administration expense to decrease. The Companys net operating income improved from a net loss of $126,043 for the three months ended
March 31, 2004 to a net income of $340,475 for the three months ended March 31, 2005. This
improvement is primarily due to the significant increase in assets under management. Investment return, net of interest expense, increased to a gain of $130,291 for the three months
ended March 31, 2005 from a gain of $101,179 for the three months ended March 31, 2004. This
increase in investment gain results primarily from increases in market values of investments in the
private investment partnership. Management is unable to predict how future fluctuations in market
values will impact the performance of the Companys investment portfolios. Liquidity and Capital Resources The Companys entire investment portfolio is in readily marketable securities, which, provide for
cash liquidity, if needed, within three business days. Investments in mutual funds are valued at
their current net asset value. Investments in DHIP are valued based on readily available market
quotations. On July 21, 2004, the Company sold 60,000 shares of the Companys common stock, from Treasury Stock
through a private placement at a price of $7.00, thereby increasing the liquidity and capital
resources by approximately $420,000. As of March 31, 2005, the Company had working capital of approximately $3.8 million compared to
$3.2 million at December 31, 2004 and compared to $2.8 million at March 31, 2004. The increase is
primarily due to the private placement issuance of $420,000 and the exercise of previously issued
stock options and warrants. 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 $11,953 during the three months ended March 31, 2005.
Net cash used by operating activities was $306,745. Financing activities provided $294,793 of cash
during the three months ended March 31, 2005, primarily from the sale of treasury stock. 17




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES The Companys net cash balance increased by $110,580 during the three months ended March 31, 2004.
Net cash used by operating activities was $85,121. The primary use of cash flow was the net loss
of $80,222. Financing activities provided $25,459 of cash during the three months ended March 31,
2004, primarily from the sale of treasury 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.
The Companys profitability is affected by general economic and market conditions. 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. 
 ITEM 3: Controls and Procedures Management, including the Chief Executive Officer and the Chief Financial Officer have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation. 
 PART II: OTHER INFORMATION 
 ITEM 1: Legal Proceedings None 
 ITEM 2: Changes in Securities  None 
 ITEM 3: Defaults Upon Senior Securities None 
 ITEM 4: Submission of Matters to a Vote of Security Holders The annual meeting of the shareholders of the Company was held on May 12, 2005 at the Companys
office. A majority of the Companys voting shares were present at the meeting, either by person or
by proxy. At such meeting, the shareholders elected the following individuals to serve on the Board of
Directors for a one year term. Name
    
    Votes For
    
    
    Votes WithheldR.H. Dillon
    
    
    1,464,360
    
    
    
    1,158David P. Lauer
    
    
    1,464,100
    
    
    
    1,418James G. Mathias
    
    
    1,464,100
    
    
    
    1,418David R. Meuse
    
    
    1,464,300
    
    
    
    1,218Diane D. Reynolds
    
    
    1,464,600
    
    
    
    918
 18




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES Also at the meeting, the shareholders approved the 2005 Employee and Director Equity Incentive
Plan. Votes For
    
    Votes Against
    
    
    Abstain
    
    
    Not Voted575,917
    
    
    265,846
    
    
    
    16,905
    
    
    
    606,850
 
 ITEM 5: Other Information None 
 ITEM 6: Exhibits (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
    
    1993 Non-Qualified and Incentive Stock Option Plan.****10.2
    
    Synovus Securities, Inc., Sub-Advisory Agreement with the Diamond Hill Capital
Management, Inc. dated January 30, 2001.**10.3
    
    Employment Agreement between the Company and Roderick H. Dillon, Jr. dated May 11, 2000.**10.4
    
    Employment Agreement between the Company and James F. Laird dated October 24, 2001.*****10.5
    
    Form of Subscription Agreement for common Shares of Diamond Hill Investment Group, Inc.
executed by subscribers as part of the private placement dated July 21, 2004.******14.1
    
    Code of Business Conduct and Ethics.31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15-d-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 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 15, 2004 and incorporated herein by reference. ****** Filed with the Securities and Exchange Commission as an exhibit to the Companys Proxy
Statement filed on April 9, 2004 and incorporated herein by reference. 19




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DIAMOND HILL INVESTMENT GROUP, INC. AND SUBSIDIARIES 
 SIGNATURES In accordance with the requirements 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. Signature
    
    Title
    
    Date/s/R. H. Dillon
    
    President and Director
    
    May 16, 2005R. H. Dillon/s/James F. Laird
    
    Chief Financial Officer
    
    May 16, 2005James F. Laird
 21