##### Table of Contents



U.S. Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 Commission file number 000-24498
 DIAMOND HILL INVESTMENT GROUP, INC
  Ohio
    
    65-0190407(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 325 John H. McConnell Blvd, Suite 200, Columbus, Ohio 43215
 (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



PAGEPart I: FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Consolidated Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operation
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19Part II: OTHER INFORMATION
    
    
    19Item 1.
    
    Legal Proceedings
    
    
    19Item 1A.
    
    Risk Factors
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and use of Proceeds
    
    
    19Item 3.
    
    Defaults Upon Senior Securities
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.
    
    Other Information
    
    
    19Item 6.
    
    Exhibits
    
    
    20Signatures
    
    
    
    
    21EX-31.1EX-31.2EX-32.1
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PART I            FINANCIAL INFORMATION
 
 ITEM 1: Financial Statements
 Diamond Hill Investment Group, Inc.
Consolidated Balance Sheets (unaudited)
 3/31/2007
    
    
    12/31/2006ASSETSCash and cash equivalents
    
    $
    4,230,734
    
    
    $
    9,836,989Investment portfolio
    
    
    18,990,962
    
    
    
    19,108,682Accounts receivable
    
    
    5,247,928
    
    
    
    6,924,008Prepaid expenses
    
    
    1,139,981
    
    
    
    869,501Furniture and equipment, net of depreciation and other assets
    
    
    587,899
    
    
    
    497,297Total assets
    
    $
    30,197,504
    
    
    $
    37,236,477LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable and accrued expenses
    
    
    1,128,344
    
    
    
    1,217,114Accrued incentive compensation
    
    
    2,388,330
    
    
    
    13,637,000Current and deferred taxes
    
    
    1,899,106
    
    
    
    1,899,106Total Liabilities
    
    
    5,415,780
    
    
    
    16,753,220Commitments and contingeies
    
    
    
    
    
    
    Shareholders EquityCommon stock, no par value
7,000,000 shares authorized; 2,140,319 issued
2,138,881 outstanding at March 31, 2007
1,838,435 outstanding at December 31, 2006
    
    
    19,650,661
    
    
    
    16,515,256Preferred stock, undesignated, 1,000,000 shares
authorized and unissued
    
    
    
    
    
    
    Treasury stock, at cost
1,438 shares at March 31, 2007
10,037 shares at December 31, 2006
    
    
    (116,022
    )
    
    
    (95,736
    )Deferred compensation
    
    
    (2,461,193
    )
    
    
    (2,355,499
    )Retained earnings
    
    
    7,708,278
    
    
    
    6,419,236Total shareholders equity
    
    
    24,781,724
    
    
    
    20,483,257Total
liabilities and shareholders equity
    
    $
    30,197,504
    
    
    $
    37,236,477
  3




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Diamond Hill Investment Group, Inc.
Consolidated Statements of Income (unaudited)
 Three Months Ended March 31,2007
    
    
    2006REVENUES:Investment advisory
    
    $
    7,881,405
    
    
    $
    3,381,657Performance incentive
    
    
    4,297
    
    
    
    1,613,227Mutual fund administration, net
    
    
    1,469,041
    
    
    
    585,232Total revenue
    
    
    9,354,743
    
    
    
    5,580,116OPERATING EXPENSES:Compensation and related costs
    
    
    4,667,463
    
    
    
    3,372,511General and administrative
    
    
    566,412
    
    
    
    247,935Sales and marketing
    
    
    101,494
    
    
    
    57,444Third party distribution
    
    
    379,334
    
    
    
    91,030Mutual fund administration
    
    
    552,974
    
    
    
    316,941Total operating expenses
    
    
    6,267,677
    
    
    
    4,085,861NET OPERATING INCOME
    
    
    3,087,066
    
    
    
    1,494,255Investment return
    
    
    (30,460
    )
    
    
    425,118INCOME BEFORE TAXES
    
    
    3,056,606
    
    
    
    1,919,373Income tax provision
    
    
    (1,062,193
    )
    
    
    (666,761
    )NET INCOME
    
    $
    1,994,413
    
    
    $
    1,252,612Earnings per shareBasic
    
    $
    0.98
    
    
    $
    0.71Diluted
    
    $
    0.91
    
    
    $
    0.58Weighted average shares outstandingBasic
    
    
    2,029,958
    
    
    
    1,762,818Diluted
    
    
    2,195,772
    
    
    
    2,172,183
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Diamond Hill Investment Group, Inc.
Consolidated Statement of Shareholders Equity (unaudited)
 RetainedShares
    
    
    Common
    
    
    Treasury
    
    
    Deferred
    
    
    EarningsOutstanding
    
    
    Stock
    
    
    Stock
    
    
    Compensation
    
    
    (Deficit)
    
    
    TotalBalance at January 1, 2007
    
    
    1,838,435
    
    
    $
    16,515,256
    
    
    $
    (95,736
    )
    
    $
    (2,355,499
    )
    
    $
    6,419,236
    
    
    $
    20,483,257Deferred compensation
    
    
    3,000
    
    
    
    333,720
    
    
    
    
    
    
    
    (333,720
    )
    
    
    
    
    
    
    Recognition of current year
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228,026
    
    
    
    
    
    
    
    228,026Issuance of stock grants
    
    
    57,254
    
    
    
    5,628,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,628,641FAS 123R compensation expense
    
    
    
    
    
    
    3,015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,015Tax benefit from options and
warrants exercised
    
    
    
    
    
    
    1,062,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,062,192Payment of taxes withheld
related to option exercises
    
    
    (81,833
    )
    
    
    (7,675,676
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,675,676
    )Purchase of treasury stock
related to option exercises
    
    
    (15,554
    )
    
    
    
    
    
    
    (1,342,148
    )
    
    
    
    
    
    
    
    
    
    
    (1,342,148
    )Sale of treasury stock
    
    
    24,153
    
    
    
    122,811
    
    
    
    1,321,862
    
    
    
    
    
    
    
    (705,371
    )
    
    
    739,302Exercise of options/warrants
for common stock
    
    
    313,426
    
    
    
    3,660,702
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,660,702Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,994,413
    
    
    
    1,994,413Balance at March 31, 2007
    
    
    2,138,881
    
    
    $
    19,650,661
    
    
    $
    (116,022
    )
    
    $
    (2,461,193
    )
    
    $
    7,708,278
    
    
    $
    24,781,724
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Diamond Hill Investment Group, Inc.
Consolidated Statements of Cash Flow (unaudited)
 Three Months Ended March 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    1,994,413
    
    
    $
    1,252,612Adjustments to reconcile net income to net cash used in
operating activities:Depreciation on furniture and equipment
    
    
    27,140
    
    
    
    10,161Amortization of deferred compensation
    
    
    228,026
    
    
    
    21,394(Increase) decrease in accounts receivable
    
    
    1,676,080
    
    
    
    (649,339
    )Increase in deferred taxes
    
    
    1,062,193
    
    
    
    666,761Stock option expense
    
    
    3,015
    
    
    
    15,411(Increase) decrease in unrealized gains
    
    
    155,820
    
    
    
    (378,792
    )Increase (decrease) in accrued liabilities
    
    
    (11,337,440
    )
    
    
    1,074,328Other changes in assets and liabilities
    
    
    (270,480
    )
    
    
    (78,644
    )Net cash provided by (used in) operating
activities
    
    
    (6,461,233
    )
    
    
    1,933,892CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (117,742
    )
    
    
    (10,200
    )Investment portfolio activity
    
    
    (38,100
    )
    
    
    (2,117,903
    )Net cash used in investing activities
    
    
    (155,842
    )
    
    
    (2,128,103
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payment of taxes withheld on option/warrant exercises
    
    
    (7,675,676
    )Proceeds from common stock issuance
    
    
    8,706,782
    
    
    
    176,157Purchase of treasury stock
    
    
    (1,342,148
    )Sale of treasury stock
    
    
    1,321,862
    
    
    
    64,619Net cash provided by financing activities
    
    
    1,010,820
    
    
    
    240,776CASH AND CASH EQUIVALENTSNet change during the period
    
    
    (5,606,255
    )
    
    
    46,565At beginning of period
    
    
    9,836,989
    
    
    
    2,532,334At end of period
    
    $
    4,230,734
    
    
    $
    2,578,899Cash paid during the period for:Interest
    
    
    
    
    
    
    Income taxes
    
    
    
    
    
    
    
  6




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Diamond Hill Investment Group, Inc.  Notes to Consolidated Financial Statements (unaudited)
 Organization
    Significant Accounting Policies
  Reclassifications
  Principles of Consolidation
  Segment Information
  Cash and Cash Equivalents
  Accounts Receivable
  7




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Significant Accounting Policies (Continued)
 Valuation of Investment Portfolio
  Limited Partnership Interests
  Property and Equipment
  Treasury Stock
  Revenue Recognition
   8




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Significant Accounting Policies (Continued)
 Revenue Recognition  Mutual Fund Administration
  Three Months Ended March 31,2007
    
    
    2006Mutual fund admin revenue, gross
    
    $
    2,036,346
    
    
    $
    1,043,371Mutual fund admin, fund related expense
    
    
    576,821
    
    
    
    477,451Mutual fund admin revenue, net of fund related expenses
    
    
    1,459,525
    
    
    
    565,920C-Share broker commission advance repayments
    
    
    412,200
    
    
    
    245,520C-Share broker commission amortization
    
    
    402,684
    
    
    
    226,208C-Share financing activity, net
    
    
    9,516
    
    
    
    19,312Mutual fund administration revenue, net
    
    $
    1,469,041
    
    
    $
    585,232
 Income Taxes
   Earnings Per Share
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Investment Portfolio
  March 31,
    
    
    December 31,2007
    
    
    2006Diamond Hill Small Cap Fund
    
    $
    65,084
    
    
    $
    65,371Diamond Hill Small-Mid Cap Fund
    
    
    333,879
    
    
    
    330,546Diamond Hill Large Cap Fund
    
    
    293,795
    
    
    
    292,369Diamond Hill Select Fund
    
    
    343,960
    
    
    
    342,121Diamond Hill Long-Short Fund
    
    
    292,934
    
    
    
    295,953Diamond Hill Financial Long-Short Fund
    
    
    294,689
    
    
    
    300,000Diamond Hill Strategic Income Fund
    
    
    3,004,922
    
    
    
    2,916,069Diamond Hill Investment Partners, L.P.
    
    
    9,612,083
    
    
    
    9,744,285Diamond Hill Investment Partners II, L.P.
    
    
    4,749,616
    
    
    
    4,821,968Total Investment Portfolio
    
    $
    18,990,962
    
    
    $
    19,108,682
  March 31,
    
    December 31,2007
    
    2006Total assets
    
    $
    397,790,171
    
    
    $
    357,375,152Total liabilities
    
    
    131,782,049
    
    
    
    146,918,057Net assets
    
    
    266,008,122
    
    
    
    210,457,095Net income
    
    
    (4,148,973
    )
    
    
    35,961,019DHCMs portion of net assets
    
    
    14,361,699
    
    
    
    14,566,253DHCMs portion of net income
    
    
    (204,555
    )
    
    
    6,515,194
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Capital Stock
 Common Shares
  Authorization of Preferred Shares
  Stock-Based Compensation
 Equity Incentive Plans
 2005 Employee and Director Equity Incentive Plan
 1993 Non-qualified and Incentive Stock Option Plan
 Equity Compensation Grants
  401(k) Plan
  11




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Stock-Based Compensation (Continued)
   12




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Stock-Based Compensation (Continued)
  Options
    
    
    WarrantsWeighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOustanding December 31, 2005
    
    
    303,002
    
    
    
    14.48
    
    
    
    259,400
    
    
    
    12.78Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    5,000
    
    
    
    14.38
    
    
    
    2,000
    
    
    
    11.25Oustanding March 31, 2006
    
    
    298,002
    
    
    $
    14.48
    
    
    
    257,400
    
    
    $
    12.79Oustanding December 31, 2006
    
    
    283,102
    
    
    
    14.60
    
    
    
    249,400
    
    
    
    12.57Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Forfeited
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    10.63Exercised
    
    
    114,002
    
    
    
    20.29
    
    
    
    222,000
    
    
    
    8.65Oustanding March 31, 2007
    
    
    169,100
    
    
    $
    10.76
    
    
    
    25,400
    
    
    $
    47.00~~~~~~~        ~~~~~~~Exercisable March 31, 2007
    
    
    129,100
    
    
    $
    12.70
    
    
    
    25,400
    
    
    $
    47.00
   Options
    
    
    WarrantsRemaing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    RemaingNumber
    
    Life
    
    
    Number
    
    
    
    
    
    
    Number
    
    
    Life
    
    
    NumberOutstanding
    
    In Years
    
    
    Exercisable
    
    
    Exercise Price
    
    
    Outstanding
    
    
    In Years
    
    
    Exercisable
    
    
    Exercise Price10,000
    
    
    3.36
    
    
    
    10,000
    
    
    
    7.95
    
    
    
    14,000
    
    
    
    1.12
    
    
    
    14,000
    
    
    
    73.7510,000
    
    
    3.72
    
    
    
    10,000
    
    
    
    8.44
    
    
    
    400
    
    
    
    1.76
    
    
    
    400
    
    
    
    22.2039,100
    
    
    3.73
    
    
    
    39,100
    
    
    
    28.10
    
    
    
    3,000
    
    
    
    2.12
    
    
    
    3,000
    
    
    
    22.5010,000
    
    
    4.01
    
    
    
    10,000
    
    
    
    8.45
    
    
    
    6,000
    
    
    
    2.92
    
    
    
    6,000
    
    
    
    11.2530,000
    
    
    4.30
    
    
    
    30,000
    
    
    
    5.25
    
    
    
    2,000
    
    
    
    3.12
    
    
    
    2,000
    
    
    
    8.7570,000
    
    
    6.19
    
    
    
    30,000
    
    
    
    4.50169,100
    
    
    4.84
    
    
    
    129,100
    
    
    
    
    
    
    
    25,400
    
    
    
    1.83
    
    
    
    25,400
  
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Operating Leases
  2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    2013$181,592
    
    $223,870
    
    $230,964
    
    $238,057
    
    $245,151
    
    $254,018
    
    $129,669
  Income Taxes
  
 Earnings Per Share
  Three Months Ended March 31,2007
    
    
    2006Basic and Diluted net income
    
    $
    1,994,413
    
    
    $
    1,252,612Weighted average number of outstanding sharesBasic
    
    
    2,029,958
    
    
    
    1,762,818Diluted
    
    
    2,195,772
    
    
    
    2,172,183Earnings per shareBasic
    
    $
    0.98
    
    
    $
    0.71Diluted
    
    $
    0.91
    
    
    $
    0.58
  Commitments and Contingencies
  14




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ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operation
 Forward-looking Statements
  General
    15




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Assets Under Management by ProductAs of March 31,(in millions)
    
    2007
    
    2006
    
    % ChangeMutual funds
    
    $
    2,829
    
    
    $
    1,338
    
    
    
    111
    %Separate accounts
    
    
    923
    
    
    
    711
    
    
    
    30
    %Private investment funds
    
    
    417
    
    
    
    133
    
    
    
    214
    %Total
    
    $
    4,169
    
    
    $
    2,182
    
    
    
    91
    %
 Assets Under Management by ObjectiveAs of March 31,(in millions)
    
    2007
    
    2006
    
    % ChangeSmall and Small-Mid Cap
    
    $
    762
    
    
    $
    707
    
    
    
    8
    %Large Cap and Select
    
    
    980
    
    
    
    524
    
    
    
    87
    %Long-Short
    
    
    2,137
    
    
    
    720
    
    
    
    197
    %Strategic and fixed income
    
    
    290
    
    
    
    231
    
    
    
    26
    %Total
    
    $
    4,169
    
    
    $
    2,182
    
    
    
    91
    %
 Consolidated Results of Operations
  Three Months EndedMarch 31,2007
    
    2006
    
    % ChangeNet income (in thousands)
    
    $
    1,994
    
    
    $
    1,253
    
    
    
    59
    %Net income (loss) per shareBasic
    
    $
    0.98
    
    
    $
    0.71
    
    
    
    38
    %Diluted
    
    $
    0.91
    
    
    $
    0.58
    
    
    
    57
    %Weighted average shares
outstanding (in thousands)Basic
    
    
    2,030
    
    
    
    1,763Diluted
    
    
    2,196
    
    
    
    2,172
 Three Months ended March 31, 2007 compared with Three Months Ended March 31, 2006
   §
    
    Employee compensation expense increased by 38%, or $1.3 million due primarily to an
increase of staff, primarily on the investment team.§
    
    Consistent with continued growth in mutual fund assets under management, mutual fund
administration expense increased by 74%, or $236 thousand.
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§
    
    Consistent with higher investment advisory fees, third party distribution expenses
increased by 316%, or $288 thousand. A large portion of this increase was fees paid to a
third party placement firm hired beginning in mid-2006 to distribute the private investment
funds.
 Revenue
 Three Months EndedMarch 31,(in Thousands)
    
    2007
    
    2006
    
    % ChangeInvestment advisory
    
    $
    7,882
    
    
    $
    3,382
    
    
    
    133
    %Performance incentive
    
    
    4
    
    
    
    1,613
    
    
    
    -100
    %Mutual fund administration, net
    
    
    1,469
    
    
    
    585
    
    
    
    151
    %Total
    
    $
    9,355
    
    
    $
    5,580
    
    
    
    68
    %
  Investment Advisory Fees.
 Performance Incentive Fees.
 Mutual Fund Administration Fees.
 17




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##### Table of Contents



Expenses
 Three Months EndedMarch 31,(in Thousands)
    
    2007
    
    2006
    
    % ChangeCompensation and related costs
    
    $
    4,668
    
    
    $
    3,373
    
    
    
    38
    %General and administrative
    
    
    566
    
    
    
    248
    
    
    
    128
    %Sales and marketing
    
    
    102
    
    
    
    57
    
    
    
    79
    %Third party distribution
    
    
    379
    
    
    
    91
    
    
    
    316
    %Mutual fund administration
    
    
    553
    
    
    
    317
    
    
    
    74
    %Total
    
    $
    6,268
    
    
    $
    4,086
    
    
    
    53
    %
 Compensation and Related Costs.
 General and Administrative.
 Sales and Marketing.
 Third Party Distribution.
 Mutual Fund Administration.
 Liquidity and Capital Resources
   18




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ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4: Controls and Procedures
  
 PART II: OTHER INFORMATION
 
 ITEM 1: Legal Proceedings 
 
 ITEM 1A: Risk Factors
  
 ITEM 2: Unregistered Sales of Equity Securities and use of Proceeds
 
 ITEM 3: Defaults Upon Senior Securities 
 
 ITEM 4: Submission of Matters to a Vote of Security Holders
 
 ITEM 5: Other Information 
 19




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##### Table of Contents



ITEM 6: Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation of the Company. (Incorporated by
reference from Form 8-K Current Report for the event on May 2, 2002 filed with the SEC
on May 7, 2002; File No. 000-24498.)3.2
    
    Code of Regulations of the Company. (Incorporated by reference from Form 8-K Current
Report for the event on May 2, 2002 filed with the SEC on May 7, 2002; File No.
000-24498.)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
    
    Section 1350 Certifications.
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##### Table of Contents



SIGNATURES
   Signature
    
    Title
    
    Date/s/ R. H. Dillon

R. H. Dillon
    
    President, Chief Executive Officer,
   and a Director
    
    May 9, 2007/s/ James F. Laird

James F. Laird
    
    Chief Financial Officer, Treasurer,
   and Secretary
    
    May 9, 2007
 21