DIAMOND HILL INVESTMENT GROUP INC
10-Ks and 10-Qs
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Table of Contents
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 000-24498
DIAMOND HILL INVESTMENT GROUP, INC.
(Exact name of registrant as specified in its charter)
| Ohio | 65-0190407 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| 325 John H. McConnell Blvd., Suite 200, Columbus, Ohio 43215 | 614-255-3333 | |
| (Address of principal executive offices) (Zip Code) | (Registrant’s telephone number) |
Securities registered under Section 12(b) of the Exchange Act:
| Title of each class | Name of each exchange on which registered | |
| Common shares, no par value | The NASDAQ Stock Market LLC |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not 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-K
or any amendment to this Form 10-K
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant, based on the closing price of $40.18 on June 30, 2009 (end of the 2
nd
fiscal
quarter) on the NASDAQ Global Select Market was $73,603,729. Calculation of holdings by
non-affiliates is based upon the assumption, for these purposes only, that executive officers,
directors, and persons holding five percent or more of the registrant’s voting and non-voting
common shares are affiliates.
2,764,408 Common Shares outstanding as of March 3, 2010.
Documents incorporated by reference: In Part III, the Definitive Proxy Statement for the 2010
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
Diamond Hill Investment Group, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2009
Index
Form 10-K
For the Fiscal Year Ended December 31, 2009
Index
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| Exhibit 21.1 | ||||||||
| Exhibit 23.1 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
2
Table of Contents
| Item 1. |
Business
|
Forward-Looking Statements
Throughout this Form 10-K, Diamond Hill Investment Group, Inc. (the “Company”) may make
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 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. The words “believe,” “expect,”
“anticipate,” “estimate,” “should,” “hope,” “seek,” “plan,” “intend” and similar expressions
identify forward-looking statements that speak only as of the date thereof. While the Company
believes that the assumptions underlying its forward-looking statements are reasonable, investors
are cautioned that 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; changes in interest rates; a
general or prolonged downturn in the economy; changes in government policy and regulation,
including monetary policy; 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 U. S. Securities and Exchange Commission (“SEC”), including
those discussed below in Item 1A.
General
The Company, an Ohio corporation organized in April 1990, derives its consolidated revenue and net
income from investment advisory and fund administration services provided by its subsidiaries
Diamond Hill Capital Management, Inc. (“DHCM”), Beacon Hill Fund Services, Inc. (“BHFS”), and BHIL
Distributors, Inc. (“BHIL”). BHFS and BHIL collectively operate as Beacon Hill. DHCM is a
registered investment adviser under the Investment Advisers Act of 1940 providing investment
advisory services to individuals and institutional investors through Diamond Hill Funds, separate
accounts, and private investment funds (generally known as “hedge funds”). Beacon Hill was
incorporated during the first quarter of 2008, and provides certain fund administration services
and underwriting services to mutual fund companies, including Diamond Hill Funds.
The Company sponsors, markets, and provides investment advisory and related services to various
clients including mutual funds, separate accounts, and private investment funds. The Company’s
principal source of revenue is investment advisory fee income earned pursuant to investment
advisory contracts with each client. This fee income is based primarily upon the net assets of the
funds or separate accounts. The Company’s investment advisory revenue depends largely on the total
value and composition of assets under management (“AUM”). Accordingly, fluctuations in financial
markets and in the composition of AUM impact our revenues and results of operations.
Investment Advisory Activities
DHCM executes its investment strategies through fundamental research and valuation disciplines.
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 an
estimate of “intrinsic value”. Intrinsic value is the present value of estimated future cash flows,
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 the current market price to evaluate whether, in the opinion of DHCM, an attractive
investment opportunity exists. A proprietary valuation model, which takes into account projected
cash flows for five years including a “terminal value” (the expected stock price in five years),
assists in many of these intrinsic value estimations. DHCM also applies an intrinsic value
philosophy to the analysis of fixed income securities.
3
Table of Contents
DHCM believes that although securities markets are competitive, pricing inefficiencies often exist
allowing for attractive investment opportunities. Furthermore, DHCM believes that investing in
securities whose market prices are significantly below DHCM’s estimate of intrinsic value (or
selling short securities whose market prices are above intrinsic value) is a reliable method to
achieve above average relative returns as well as mitigate risk.
Current portfolio strategies managed include Small Cap, Small-Mid Cap, Large Cap, Select,
Long-Short, Financial Long-Short, and Strategic Income. These strategies are available on a
separately managed basis and/or through a mutual fund. The Long-Short strategy is also available
through private investment funds that are offered to accredited and qualified investors in the
United States and around the world. The Company believes its desire to grow AUM should never come
before its fiduciary obligation to clients. Once the size of any of the Company’s strategies
hinders its ability to either differentiate its product or add value for its clients, the Company
will close those strategies to new clients, which may impact the Company’s ability to grow AUM.
The Small Cap strategy was closed to new investors as of December 31, 2005 and re-opened on
September 1, 2007. The Long-Short strategy was closed to new investors as of June 30, 2008 and
re-opened on December 31, 2008.
Marketing
DHCM primarily generates business for all three of its product lines (mutual funds, separately
managed accounts, and private investment funds) through wholesaling to financial intermediaries,
including independent registered investment advisors, brokers, financial planners, investment
consultants and third party marketing firms.
Assets Under Management
As of December 31, 2009, AUM totaled $6.3 billion, a 39% increase from December 31, 2008. The
following tables show AUM by product and investment objective for the dates indicated and a
roll-forward of the change in AUM for the years ended December 31, 2009, 2008, and 2007:
| Assets Under Management by Product | ||||||||||||
| As of December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
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Mutual funds
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$ | 3,640 | $ | 3,114 | $ | 2,910 | ||||||
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Separate accounts
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2,423 | 1,175 | 998 | |||||||||
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Private investment funds
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220 | 221 | 495 | |||||||||
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Total
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$ | 6,283 | $ | 4,510 | $ | 4,403 | ||||||
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| Assets Under Management by Objective | ||||||||||||
| As of December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
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Small and Small-Mid Cap
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$ | 771 | $ | 505 | $ | 597 | ||||||
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Large Cap and Select
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3,054 | 1,524 | 1,031 | |||||||||
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Long-Short
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2,300 | 2,331 | 2,500 | |||||||||
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Strategic and fixed income
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158 | 150 | 275 | |||||||||
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Total
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$ | 6,283 | $ | 4,510 | $ | 4,403 | ||||||
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4
Table of Contents
| Change in Assets Under Management | ||||||||||||
| For the Year Ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
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AUM at beginning of the period
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$ | 4,510 | $ | 4,403 | $ | 3,708 | ||||||
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Net cash inflows (outflows)
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mutual funds
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(109 | ) | 1,328 | 362 | ||||||||
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separate accounts
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740 | 812 | 70 | |||||||||
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private investment funds
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(52 | ) | (162 | ) | 170 | |||||||
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579 | 1,978 | 602 | |||||||||
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Net market appreciation (depreciation) and income
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1,194 | (1,871 | ) | 93 | ||||||||
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Increase during the period
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1,773 | 107 | 695 | |||||||||
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AUM at end of the period
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$ | 6,283 | $ | 4,510 | $ | 4,403 | ||||||
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Diamond Hill Funds
The Diamond Hill Funds (the “Funds”) are used by over 6,500 financial representatives at over 1,300
financial intermediary firms. Below is a summary of the assets by distribution channel as of
December 31, 2009, 2008 and 2007:
| Diamond Hill Funds | ||||||||||||
| Assets by Distribution Channel | ||||||||||||
| As of December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Independent registered investment advisors
and broker/dealers
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$ | 1,986 | $ | 1,792 | $ | 1,405 | ||||||
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Wirehouse and regional broker/dealers
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1,116 | 951 | 1,020 | |||||||||
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Defined contribution (401k)
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338 | 226 | 229 | |||||||||
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Institutions
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12 | 8 | 105 | |||||||||
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Other
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— | — | 35 | |||||||||
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Total
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$ | 3,452 | $ | 2,977 | $ | 2,794 | ||||||
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Institutional Accounts
DHCM continues to develop institutional relationships for separately managed accounts primarily
through consultant relationships and database research screens. During 2009 and 2008, the Company
added additional resources to focus on further developing its relationships with institutional
consultants.
Growth Prospects
DHCM’s investment strategies have produced long-term investment returns that the Company views as
strong and believes compare very favorably to competitors. Investment returns have been a key
driver in the success the Company has achieved in growing AUM.
As a result, the Company has continued to invest in marketing throughout 2009 in an effort to
expand distribution. Such expenditures included:
| • |
adding additional marketing and support staff,
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| • |
attending and sponsoring key industry conferences, and
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| • |
adding systems infrastructure to support client service and portfolio
administration.
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The cost of these efforts was significant, but the Company believes the cost will be proportional
to the increase in revenue during 2010 and future years. There can be no assurance that these
efforts will prove successful; however, given the strong investment results of the Funds and
separately managed accounts, the Company believes the additional resources devoted to marketing are
warranted.
5
Table of Contents
Also recognizing that the Company’s primary responsibility is to investors in its Funds and its
separate account clients, the Company will continue to invest in its investment team and close
investment strategies to new investors when appropriate. In 2007, 2008, and 2009 the Company
substantially increased its equity investment team by growing the team from 17 at the end of 2006
to 31 at the end of 2009. Most of the additional investment team staff has been on the research
team, which now totals 17.
The Company believes that one of the most important characteristics exhibited by the best
investment firms is excellent investment returns for their clients over a long period of time. The
Company is pleased that during its history as an investment advisory firm, it has delivered what it
believes are excellent investment returns for its clients. However, the Company is mindful that if
it fails to do so in the future, its business growth will likely be negatively impacted. There are
certain additional business risks that may prevent the Company from achieving the above growth
prospects. These risks are detailed in Item 1A.
Fund Administration Activities
DHCM and Beacon Hill provide fund administration services to Diamond Hill Funds and other third
party mutual fund companies. Fund administration services are broadly defined as portfolio and
regulatory compliance, treasury and financial oversight, underwriting, and general oversight of
other back-office services
providers such as the custodian, fund accountant, and transfer agent. During the past three years,
there has been a continuing consolidation in the mutual fund servicing industry, whereby large
financial services firms purchased independent mutual fund service providers. These larger
financial services firms have made the decision not to offer statutory underwriting services to
mutual funds, due to regulatory and other business conflicts. This consolidation, along with a
growing desire for transparent and independent oversight of mutual fund financial reporting and
compliance program activities, has provided opportunities in the marketplace for the Company to
grow its fund administration services. During 2008, Beacon Hill completed the build out of its
infrastructure and began operations. During 2009, Beacon Hill continued to grow its client base.
The Company expects Beacon Hill to generate a profit in 2010.
Competition
Competition in the area of investment management services and mutual funds is intense, and the
Company’s competitors include investment management firms, broker-dealers, banks and insurance
companies, some of whom offer various investment alternatives. Many competitors are better known
than the Company, 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.
Corporate Investment Portfolio
From time to time the Company will hold investment positions in Diamond Hill Funds, its private
investment funds, and other equity securities.
Regulation
DHCM is registered with the Securities and Exchange Commission (the “SEC”) under the Investment
Advisers Act of 1940 (the “Advisers Act”) and operates in a highly regulated environment. The
Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary
duties, recordkeeping requirements, operational requirements and disclosure obligations. All
Diamond Hill Funds are registered with the SEC under the Investment Company Act of 1940 and are
required to make notice filings with all states where it is offered for sale. Virtually all
aspects of the Company’s investment management business are subject to various federal and state
laws and regulations. BHIL is registered with the SEC as a broker/dealer and is a member of the
Financial Industry Regulatory Authority (“FINRA”).
Generally, these laws and regulations are intended to benefit shareholders of the funds and
separately managed account investment clients and grant supervisory agencies and bodies broad
administrative powers, including the power to limit or restrict the Company from carrying on its
investment management and mutual fund underwriting business in the event that it fails to comply
with such laws and regulations. In such event, possible sanctions which may be imposed include the
suspension of individual employees, limitations on engaging in various activities for specified
periods of time, the revocation of broker-dealer or investment adviser registration, and other
censures or fines.
6
Table of Contents
Contractual Relationships with the Diamond Hill Funds
The Company is very dependent on its contractual relationships with the Funds. In the event the
Company’s advisory or administration agreements with the Funds are terminated, not renewed, or
amended to reduce fees, the Company would be materially and adversely affected. Generally, these
agreements are terminable upon 60 days written notice without penalty. The agreements are subject
to annual approval by either (i) the Board of Trustees of the Funds or (ii) a vote of the majority
of the outstanding voting securities of each Fund. The agreements shall also terminate in the
event of their assignment. The Company generated approximately 69%, 72% and 69% of its 2009, 2008
and 2007 revenues, respectively, from its advisory and administrative contracts with the Funds,
including 38% specifically from the advisory contract with the Diamond Hill Long-Short Fund. The
loss of this contract would have a material adverse effect on the Company. The Company considers
its relationship with the Funds and their Board of Trustees to be good, and it has no reason to
believe that these advisory or administration contracts will not be renewed in the future; however,
there is no assurance that the Funds will choose to continue their relationships with the Company.
Employees
As of December 31, 2009, the Company and its subsidiaries employed 66 full-time and part-time
employees. As of December 31, 2008, the comparable number was 57. The Company generally believes
that its relationship with its employees is good and does not anticipate any material change in the
number of employees.
SEC Filings
This Form 10-K includes financial statements for the years ended December 31, 2009, 2008, and 2007.
The Company files Forms 10-K annually with the SEC and files Forms 10-Q after each of the first
three fiscal quarters. A copy of this Form 10-K, as filed with the SEC, will be furnished without
charge to any shareholder who contacts the Company’s Secretary at 325 John H. McConnell Blvd.,
Suite 200, Columbus, OH 43215 or 614.255.3333. The Company also makes its SEC filings available,
free of charge, on its web site at www.diamond-hill.com.
7
Table of Contents
| ITEM 1A: |
Risk Factors
|
An investment in the Company’s common shares involves various risks, including those
mentioned below and those that are discussed from time-to-time in the Company’s other periodic
filings with the SEC. Investors should carefully consider these risks, along with the other
information contained in this report, before making an investment decision regarding the Company’s
common shares. There may be additional risks of which the Company is currently unaware, or which it
currently considers immaterial. All of these risks could have a material adverse effect on its
financial condition, results of operations, and value of its common shares.
Poor investment performance of our products could affect our sales or reduce the amount of
assets under management, potentially negatively impacting revenue and net income.
If the Company fails to deliver excellent investment performance for its clients, both in the short
and long term, it will likely experience diminished investor interest and potentially a diminished
level of AUM.
The Company’s AUM, which impact revenue, are subject to significant fluctuations.
Substantially all revenue for the Company is calculated as a percentage of AUM or is based on the
general performance of the equity securities market. A decline in securities prices (such as that
experienced during the last half of 2008 and first quarter of 2009) or in the sale of investment
products, or an increase in fund redemptions, generally would reduce fee income. Financial market
declines would generally negatively impact the level of the Company’s AUM and consequently its
revenue and net income. A recession or other economic or political events could also adversely
impact the Company’s revenue, if it led to a decreased demand for products, a higher redemption
rate, or a decline in securities prices.
The Company’s success depends on its key personnel, and its financial performance could be
negatively affected by the loss of their services.
The Company’s success depends on highly skilled personnel, including portfolio managers, research
analysts, and management, many of whom have specialized expertise and extensive experience in the
industry. Financial services professionals are in high demand, and the Company faces significant
competition for qualified employees. With the exception of the Chief Executive Officer, key
employees do not have employment contracts and generally can terminate their employment at any
time. The Company cannot assure that it will be able to retain or replace key personnel. In order
to retain or replace its key personnel, the Company may be required to increase compensation, which
would decrease net income. The loss of key personnel could damage the Company’s reputation and make
it more difficult to retain and attract new employees and clients. Loss of client assets would
decrease the Company’s revenues and net income, possibly materially.
The Company is subject to substantial competition in all aspects of its business.
The Company’s investment products compete against a number of investment products and services
from:
| • |
asset management firms,
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| • |
mutual fund companies,
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| • |
commercial banks and thrift institutions,
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insurance companies,
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hedge funds, and
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| • |
brokerage and investment banking firms.
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Many of these financial institutions have substantially greater resources than the Company and may
offer a broader range of products or operate in more markets. Some operate in a different
regulatory environment, which may give them certain competitive advantages in the investment
products and portfolio structures that they offer. The Company competes with other providers of
investment advisory services primarily based upon its investment performance. Some institutions
have proprietary products and distribution channels that make it more difficult for the Company to
compete with them. If current or potential customers decide to use one of the Company’s
competitors, the Company could face a significant decline in market share, AUM, revenues, and net
income. If the Company is required to lower its fees in order to remain competitive, its net income
could be significantly reduced because some of its expenses are fixed, especially over shorter
periods of time, and other expenses may not decrease in proportion to the decrease in revenues.
8
Table of Contents
A significant portion of the Company’s revenues are based on contracts with the Diamond Hill
Funds that are subject to termination without cause and on short notice.
The Company is very dependent on its contractual relationships with the Funds. In the event the
advisory or administration agreements with Funds are terminated, not renewed, or amended to reduce
fees, the Company would be materially and adversely affected. Generally, these agreements are
terminable by the Funds upon 60 days’ written notice without penalty. Each of these agreements is
subject to annual approval by either (i) the Board of Trustees of the applicable Fund or (ii) a
vote of the majority of the outstanding voting securities of the Fund. The agreements
automatically terminate in the event of their assignment by either the Company or the Fund. The
Company considers its relationship with the Funds and their Board of Trustees to be good, and it
has no reason to believe that these advisory or administration contracts will not be renewed in the
future; however, there can be no assurance that the Funds will choose to continue their
relationships with the Company. The Company generated approximately 69%, 72% and 69% of its 2009,
2008 and 2007 revenues, respectively, from its advisory and administrative contracts with the
Funds.
The Company’s business is subject to substantial governmental regulation.
The Company’s business is subject to a variety of federal securities laws including the Investment
Advisers Act of 1940, the Investment Company Act of 1940, the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002, and the U.S. Patriot Act of 2001. In addition, the Company is subject
to significant regulation and oversight by the SEC and FINRA. Changes in legal, regulatory,
accounting, tax and compliance requirements could have a significant effect on the Company’s
operations and results, including but not limited to increased expenses and reduced investor
interest in certain funds and other investment products offered by the Company. The Company
continually monitors legislative, tax, regulatory, accounting, and compliance developments that
could impact its business.
The Company will continue to seek to understand, evaluate and when possible, manage and control
these and other business risks.
| ITEM 1B: |
Unresolved Staff Comments
- None
|
| ITEM 2: |
Properties
|
The Company leases approximately 19,000 square feet of office space at its principal office
under an operating lease agreement which terminates on July 31, 2016. In addition, the Company
leases approximately 2,200 square feet of office space for a subsidiary company under an operating
lease agreement which terminates on February 28, 2011.
The Company’s current policy is not to invest in real estate or interests in real estate primarily
for possible capital gain or primarily for income.
| ITEM 3: |
Legal Proceedings
|
From time to time, the Company is party to various claims that are incidental to
its business. The Company believes these claims will not have a material adverse effect on its
consolidated financial condition, liquidity or results of operations.
| 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.
9
Table of Contents
| ITEM 5: |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
The following performance graph compares the total shareholder return of an investment in
Diamond Hill’s Common Stock to that of the Russell Microcap
TM
Index, and to a peer group
index of publicly traded asset management firms for the five-year period ending on December 31,
2009. The graph assumes that the value of the investment in Diamond Hill’s Common Stock and each
index was $100 on December 31, 2004. Total return includes reinvestment of all dividends. According
to Russell, the Microcap
TM
Index makes up less than 3% of the U.S. equity market and is
a market-value-weighted index of the smallest 1,000 securities in the small-cap Russell 2000 Index
plus the next 1,000 smallest securities. Peer Group returns are weighted by the market
capitalization of each firm at the beginning of the measurement period. The historical information
set forth below is not necessarily indicative of future performance. Diamond Hill does not make or
endorse any predictions as to future stock performance.
| 12/31/2004 | 12/31/2005 | 12/31/2006 | 12/31/2007 | 12/31/2008 | 12/31/2009 | |||||||||||||||||||
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Diamond Hill Investment Group, Inc.
|
100.0 | 186.9 | 499.9 | 436.4 | 444.4 | 512.1 | ||||||||||||||||||
|
Russell Microcap
TM
Index
|
100.0 | 102.6 | 119.5 | 110.0 | 66.2 | 84.4 | ||||||||||||||||||
|
Peer Group*
|
100.0 | 130.1 | 143.9 | 151.6 | 55.9 | 84.7 | ||||||||||||||||||
| * |
The following companies are included in the Peer Group: Westwood Holdings Group, Inc.; Epoch
Holding Corp.; Eaton Vance Corp.; Waddell & Reed Financial, Inc.; Federated Investors, Inc.; GAMCO
Investors, Inc.; Affiliated Managers Group, Inc.; Legg Mason, Inc.; U.S. Global Investors, Inc.;
Alliance Bernstein Holding L.P.; Janus Capital Group, Inc.; SEI Investments, Co.; Cohen & Steers,
Inc.; Calamos Asset Management, Inc.
|
10
Table of Contents
The Company’s common shares trade on the NASDAQ Global Select Market under the symbol DHIL.
The following table sets forth the high and low sale and closing prices during each quarter of 2009
and 2008:
| 2009 | 2008 | |||||||||||||||||||||||
| High | Low | Dividend | High | Low | Dividend | |||||||||||||||||||
| Price | Price | Per Share | Price | Price | Per Share | |||||||||||||||||||
|
Quarter ended:
|
||||||||||||||||||||||||
|
March 31
|
$ | 67.74 | $ | 28.51 | $ | 82.99 | $ | 66.88 | ||||||||||||||||
|
June 30
|
$ | 45.50 | $ | 36.26 | $ | 100.00 | $ | 72.30 | ||||||||||||||||
|
September 30
|
$ | 62.00 | $ | 38.48 | $ | 100.00 | $ | 73.30 | ||||||||||||||||
|
December 31
|
$ | 71.95 | $ | 52.33 | $ | 10.00 | $ | 91.00 | $ | 46.25 | $ | 10.00 | ||||||||||||
Due to the relatively low volume of traded shares, quoted prices cannot be considered
indicative of any viable market for such shares. During the years ended December 31, 2009, and
2008, approximately 2,957,900 and 1,571,000, respectively, of the Company’s common shares were
traded. The dividends indicated above were special dividends. The Company has not paid quarterly
dividends for any other quarters in the past two years, and has no present intention of paying
regular dividends in the future. The approximate number of registered holders of record of the
Company’s common shares at December 31, 2009 was 241.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The Company did not purchase any shares of its common stock during the three months ended December
31, 2009. There remain 333,895 shares available to be purchased under a repurchase program
approved by the Board of Directors and announced on August 9, 2007. This stock repurchase program
is not subject to an expiration date.
| ITEM 6: |
Selected Financial Data
|
The following selected financial data should be read in conjunction with the Company’s
Consolidated Financial Statements and related notes and Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in this Form 10-K.
| For the Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Income
Statement Data
(in thousands): |
||||||||||||||||||||
|
Total revenues
|
$ | 43,562 | $ | 47,019 | $ | 41,308 | $ | 31,905 | $ | 10,246 | ||||||||||
|
Net operating income
|
12,112 | 13,729 | 14,078 | 9,769 | 1,394 | |||||||||||||||
|
Net income
|
11,374 | 3,276 | 9,932 | 8,065 | 3,651 | |||||||||||||||
|
|
||||||||||||||||||||
|
Per Share Information:
|
||||||||||||||||||||
|
Basic earnings
|
$ | 4.40 | $ | 1.36 | $ | 4.61 | $ | 4.51 | $ | 2.21 | ||||||||||
|
Diluted earnings
|
4.40 | 1.36 | 4.39 | 3.63 | 1.83 | |||||||||||||||
|
Cash dividend declared
|
10.00 | 10.00 | — | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Weighted Average Shares Outstanding
|
||||||||||||||||||||
|
Basic
|
2,582,998 | 2,400,142 | 2,155,829 | 1,787,390 | 1,654,935 | |||||||||||||||
|
Diluted
|
2,587,751 | 2,408,476 | 2,264,234 | 2,219,580 | 1,996,176 | |||||||||||||||
| At December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Balance Sheet Data
(in thousands): |
||||||||||||||||||||
|
Total assets
|
$ | 40,505 | $ | 44,540 | $ | 53,284 | $ | 37,236 | $ | 12,748 | ||||||||||
|
Long-term debt
|
— | — | — | — | — | |||||||||||||||
|
Shareholders equity
|
22,981 | 30,246 | 39,308 | 20,483 | 10,861 | |||||||||||||||
|
|
||||||||||||||||||||
|
Assets Under Management
(in millions): |
$ | 6,283 | $ | 4,510 | $ | 4,403 | $ | 3,708 | $ | 1,531 | ||||||||||
11
Table of Contents
| ITEM 7: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
In this section, the Company discusses and analyzes the consolidated results of operations
for the past three fiscal years and other factors that may affect future financial performance.
This discussion should be read in conjunction with the consolidated Financial Statements, Notes to
the Consolidated Financial Statements, and Selected Financial Data.
The Company’s revenue is derived primarily from investment advisory and administration fees.
Investment advisory and administration fees paid to the Company are generally based on the value of
the investment portfolios managed by the Company and fluctuate with changes in the total value of
the AUM. Such fees are recognized in the period that the Company manages these assets. Performance
incentive fees are generally 20% of the amount of client annual investment performance in excess of
a specified hurdle. Because performance incentive fees are based primarily on the performance of
client accounts, they can be volatile from period to period. The Company’s primary expense is
employee compensation and benefits.
Revenues are highly dependent on both the value and composition of AUM. The following is a summary
of the firm’s AUM for each of the years ended December 31, 2009, 2008, and 2007:
| Assets Under Management by Product | ||||||||||||
| As of December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
Mutual funds
|
$ | 3,640 | $ | 3,114 | $ | 2,910 | ||||||
|
Separate accounts
|
2,423 | 1,175 | 998 | |||||||||
|
Private investment funds
|
220 | 221 | 495 | |||||||||
|
|
||||||||||||
|
Total AUM
|
$ | 6,283 | $ | 4,510 | $ | 4,403 | ||||||
|
|
||||||||||||
| Change in Assets Under Management | ||||||||||||
| For the Year Ended December 31, | ||||||||||||
| (in millions) | 2009 | 2008 | 2007 | |||||||||
|
AUM at beginning of year
|
$ | 4,510 | $ | 4,403 | $ | 3,708 | ||||||
|
Net cash inflows (outflows)
|
||||||||||||
|
mutual funds
|
(109 | ) | 1,328 | 362 | ||||||||
|
separate accounts
|
740 | 812 | 70 | |||||||||
|
private investment funds
|
(52 | ) | (162 | ) | 170 | |||||||
|
|
||||||||||||
|
|
579 | 1,978 | 602 | |||||||||
|
Net market appreciation / (depreciation) and income
|
1,194 | (1,871 | ) | 93 | ||||||||
|
|
||||||||||||
|
Increase during the year
|
1,773 | 107 | 695 | |||||||||
|
|
||||||||||||
|
AUM at end of year
|
$ | 6,283 | $ | 4,510 | $ | 4,403 | ||||||
|
|
||||||||||||
12
Table of Contents
Consolidated Results of Operations
The following is a discussion of the consolidated results of operations of the Company and a
detailed discussion of the Company’s revenues and expenses.
| (in thousands, except per share data) | 2009 | 2008 | % Change | 2008 | 2007 | % Change | ||||||||||||||||||
|
Net operating income
|
$ | 12,112 | $ | 13,729 | -12 | % | $ | 13,729 | $ | 14,078 | -2 | % | ||||||||||||
|
Net operating income after tax
(a)
|
$ | 8,158 | $ | 9,256 | -12 | % | $ | 9,256 | $ | 9,345 | -1 | % | ||||||||||||
|
Net income
|
$ | 11,374 | $ | 3,276 | 247 | % | $ | 3,276 | $ | 9,932 | -67 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net operating income after tax per share
(a)
|
||||||||||||||||||||||||
|
Basic
|
$ | 3.16 | $ | 3.86 | -18 | % | $ | 3.86 | $ | 4.33 | -11 | % | ||||||||||||
|
Diluted
|
$ | 3.15 | $ | 3.84 | -18 | % | $ | 3.84 | $ | 4.13 | -7 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Net income per share
|
||||||||||||||||||||||||
|
Basic
|
$ | 4.40 | $ | 1.36 | 224 | % | $ | 1.36 | $ | 4.61 | -70 | % | ||||||||||||
|
Diluted
|
$ | 4.40 | $ | 1.36 | 224 | % | $ | 1.36 | $ | 4.39 | -69 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Weighted average shares outstanding
|
||||||||||||||||||||||||
|
Basic
|
2,583 | 2,400 | 2,400 | 2,156 | ||||||||||||||||||||
|
Diluted
|
2,588 | 2,408 | 2,408 | 2,264 | ||||||||||||||||||||
| (a) |
– Net operating income after tax is a non-GAAP performance measure. See Use of
Supplemental Data as Non-GAAP Performance Measure on page 19 of this report.
|
Year Ended December 31, 2009 compared with Year Ended December 31, 2008
The Company posted net income of $11.4 million ($4.40 per diluted share) for the year ended
December 31, 2009, compared with net income of $3.3 million ($1.36 per diluted share) for the year
ended December 31, 2008. Net income increased due to a $5.4 million positive return on the
Company’s corporate investment portfolio in 2009 compared to an $8.2 million negative return in
2008. This improvement was partially offset by a decrease in operating income of $1.6 million, due
to a shift in the composition of AUM from higher fee products to lower fee products, combined with
the operating loss from Beacon Hill.
Operating expenses decreased by 6% in 2009 primarily driven by the following:
| • |
Employee compensation expense decreased by 8%, or $2.0 million, reflecting a decrease of
$2.6 million in restricted stock expense due to an overall decrease in the total amount of
long-term equity awards outstanding during 2009 compared to 2008 and a decrease of $700
thousand in incentive compensation during 2009 compared to 2008, partially offset by an
increase in overall staff from 57 to 66, resulting in an increase in overall salaries and
related benefits of $1.3 million.
|
| • |
General and administrative expense increase 19%, or $490 thousand, to support the
Company’s investment team research effort, continued general growth, and additional legal
expenses.
|
| • |
Third party distribution expense decreased by 23%, or $340 thousand due to the decrease
in AUM requiring third party distribution support.
|
Year Ended December 31, 2008 compared with Year Ended December 31, 2007
The Company posted net income of $3.3 million ($1.36 per diluted share) for the year ended
December 31, 2008, compared with net income of $9.9 million ($4.39 per diluted share) for the year
ended December 31, 2007. Net income decreased despite a 2% increase in AUM due to a negative
return on the Company’s corporate investment portfolio and a loss from Beacon Hill of approximately
$1.4 million as it started up its operation.
Operating expenses increased by 22% in 2008 primarily driven by the following:
| • |
Employee compensation expense increased by 31%, or $6.1 million, primarily due to an
increase in overall staff from 42 to 57, long-term equity awards, and an acceleration of
vesting of certain restricted stock awards.
|
| • |
Sales and marketing expenses increased by 26%, or $165 thousand, primarily due to an
increase in travel and other marketing expenses related to new business growth during 2008.
Despite only a 2% increase in AUM in 2008 compared to 2007, the Company generated over
$1.9 billion in net new client assets during 2008.
|
||
| • |
Despite continued growth in mutual fund assets under management during 2008, mutual fund
administration expense decreased by 6%, or $142 thousand, due to a renegotiation of certain
vendor contracts resulting in both expense reductions and a shifting of certain expense
obligations directly to the Diamond Hill Funds.
|
13
Table of Contents
Revenue
| (in Thousands) | 2009 | 2008 | % Change | 2008 | 2007 | % Change | ||||||||||||||||||
|
Investment advisory
|
$ | 37,472 | $ | 40,865 | -8 | % | $ | 40,865 | $ | 35,339 | 16 | % | ||||||||||||
|
Mutual fund administration, net
|
6,090 | 6,154 | -1 | % | 6,154 | 5,969 | 3 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
43,562 | 47,019 | -7 | % | 47,019 | 41,308 | 14 | % | ||||||||||||||||
Revenue for the Year Ended December 31, 2009 compared with Year Ended December 31, 2008
As a percent of total 2009 revenues, investment advisory fees accounted for 86% and mutual
fund administration fees made up the remaining 14%. This compared to 87% and 13%, respectively,
for 2008.
Investment Advisory Fees.
The overall decrease of $3.4 million in investment advisory was
primarily due to a shift in AUM composition from long-short strategies to long only strategies,
resulting in a lower average advisory fee. Investment advisory fees are generally calculated as a
percentage of average net AUM at various levels, depending on the investment product. The
Company’s average advisory fee rate for the year ended December 31, 2009 was 0.76% compared to
0.81% for the year ended December 31, 2008. During 2009, the Long-Short Fund, which has a 0.90%
advisory fee, experienced cash outflows resulting in a decrease in assets of $366 million. This
factor contributed to the decrease in the average advisory fee rate for 2009 compared to 2008.
Mutual Fund Administration Fees.
Mutual fund administration fees were relatively flat year over
year. Fund administration revenue on the Company’s sponsored Diamond Hill Funds decreased $825
thousand from 2008 to 2009, due in part to a 12% decrease in average AUM. This decrease in revenue
was offset by a $761 thousand increase in Beacon Hill’s revenue from 2008 to 2009.
Revenue for the Year Ended December 31, 2008 compared with Year Ended December 31, 2007
As a percent of total 2008 revenues, investment advisory fees accounted for 87% and mutual
fund administration fees made up the remaining 13%. This compared to 86% and 14%, respectively,
for 2007.
Investment Advisory Fees.
Investment advisory fees are generally calculated as a percentage of
average net AUM at various levels, depending on the investment product. The Company’s average
advisory fee rate for the year ended December 31, 2008 was 0.81% compared to 0.83% for the year
ended December 31, 2007. Effective June 30, 2008, the Diamond Hill Long-Short Fund, which has a
0.90% advisory fee, was closed to new investors. As a result, there was a decrease in the cash
flows into that fund during the second half of 2008. In addition, there were cash outflows from the
Long-Short Fund during the second half of the year, resulting in a decrease in assets for that Fund
of 26%. These factors contributed to the slight decrease in the average advisory fee rate for 2008
compared to 2007. The overall increase in investment advisory fees year over year was primarily
due to an increase in AUM throughout 2008. Despite the modest increase in AUM from $4.4 billion at
December 31, 2007 to $4.5 billion at December 31, 2008, average AUM for the entire year was
approximately $4.9 billion, which was the primary driver of the increase in investment advisory
fees in 2008 compared to 2007.
14
Table of Contents
Mutual Fund Administration Fees.
Mutual fund administration fees are calculated as a percentage of
average net assets under administration in the Diamond Hill Funds. The Company earns 0.30% on
Class A and Class C shares and 0.18% on Class I shares. As assets in the Funds have grown, the
Company has realized certain economies of scale and, as a result, the Company lowered its
administration fees each of the last four years to pass on those economies of scale to Fund
shareholders. Despite these fee reductions, fund
administration revenues increased by $185 thousand over 2007, due to the increase in assets under
administration.
Expenses
| (in Thousands) | 2009 | 2008 | % Change | 2008 | 2007 | % Change | ||||||||||||||||||
|
Compensation and related costs
|
$ | 24,114 | $ | 26,120 | -8 | % | $ | 26,120 | $ | 20,007 | 31 | % | ||||||||||||
|
General and administrative
|
3,133 | 2,643 | 19 | % | 2,643 | 2,659 | -1 | % | ||||||||||||||||
|
Sales and marketing
|
751 | 796 | -6 | % | 796 | 632 | 26 | % | ||||||||||||||||
|
Third party distribution
|
1,112 | 1,452 | -23 | % | 1,452 | 1,512 | -4 | % | ||||||||||||||||
|
Mutual fund administration
|
2,340 | 2,279 | 3 | % | 2,279 | 2,420 | -6 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
31,450 | 33,290 | -6 | % | 33,290 | 27,230 | 22 | % | ||||||||||||||||
Expenses for the Year Ended December 31, 2009 compared with Year Ended December 31, 2008
Compensation and Related Costs.
Employee compensation and benefits decreased by $2 million,
or 8%, in 2009, primarily due to a decrease of $2.6 million in restricted stock expense due to an
overall decrease in the total amount of long-term equity awards outstanding in 2009 compared to
2008, partially offset by an increase in base salaries and related benefits of $1.3 million, due to
a 16% increase in employee headcount. Incentive compensation decreased $700 thousand in 2009
compared to 2008.
General and Administrative.
General and administrative expenses increased by $490 thousand, or
19%. This increase was primarily due to additional research expenses to support the Company’s
investment team, expansion of the Company’s office space, and additional legal costs incurred
during 2009 compared to 2008.
Sales and Marketing.
Sales and marketing expenses decreased by $45 thousand, or 6%, during 2009.
This decrease was primarily due to one-time marketing projects that were completed during 2008,
partially offset by an increase in expense related to marketing materials and additional travel
expense incurred related to new business attained during the year.
Third Party Distribution.
Third party distribution expense represents payments made to third party
intermediaries directly related to sales made by those parties of the Company’s investment
products. This expense directly correlates with level of sales and AUM in these investment
products. The period over period increase or decrease directly corresponds to the increase or
decrease in investment advisory fees earned by the Company.
Mutual Fund Administration.
Mutual fund administration expenses increased by $61 thousand, or 3%,
during 2009, primarily due to an increase of $150 thousand related to a fee increase from the
sub-administrator, partially offset by decreases in prospectus fulfillment and other printing.
15
Table of Contents
Expenses for the Year Ended December 31, 2008 compared with Year Ended December 31, 2007
Compensation and Related Costs.
Employee compensation and benefits increased by $6.1
million, or 31%, in 2008, primarily due to a 36% increase in the number of staff, long-term equity
awards, and the accelerated vesting of certain restricted stock awards.
Incentive compensation for 2008 totaled $13 million, which represented an increase of $550
thousand, or 4%, from 2007. Under the Company’s 2006 Performance Based Compensation Plan, the
compensation committee of the board of directors established annual operating profit margin (OPM)
targets to be used to determine the amount of the incentive pool and officer awards. For 2008, the
OPM target was approximately 35% based on actual revenue of approximately $47 million. Under the
plan, the operating results of Beacon Hill are excluded from this determination. After
consideration of a number of factors, management
recommended, and the compensation committee approved, a reduction of the OPM for 2008 to 32.3%,
which increased the incentive pool by approximately $1.3 million and reduced the incentive awards
made to officers by 10.4%. Management felt that certain unusual expenses, particularly the impact
of accelerated vesting for non-officer restricted stock awards from 2009 to 2008, resulted in a
pool that was inadequate. The accelerated vesting increased compensation expense by approximately
$1 million and was done in part to generate a $6.7 million tax deduction, which reduced the
company’s tax liability for 2008 and also contributed towards generating sufficient negative tax
earnings and profits for 2008 such that the character of the special cash dividend paid in the
fourth quarter was 100% return of capital.
General and Administrative.
General and administrative expenses decreased by $16 thousand, or 1%.
During 2007, the Company experienced a $452 thousand loss due to a trading error causing an
increase in the general and administrative expenses during that period. Excluding the trading
error, general and administrative expenses increased by $436 thousand, or 19%, period over period
to support the continued growth of the Company.
Sales and Marketing.
Sales and marketing expenses increased by $164 thousand, or 26%, during
2008. This increase is commensurate with the increase in investment advisory revenue and was
primarily due to increased expense related to marketing materials and additional travel expense
incurred related to new business attained during the year.
Third Party Distribution.
Third party distribution expense represents payments made to third party
intermediaries directly related to sales made by those parties of the Company’s investment
products. 94% and 99% of this expense in 2008 and 2007, respectively, was related to client
investments in the Company’s private investment funds. The remainder represented payments related
to sales in the Company’s mutual fund products. The period over period increase or decrease
directly corresponds to the increase or decrease in investment advisory fees earned by the Company.
Mutual Fund Administration.
Mutual fund administration expenses decreased by $141 thousand during
2008. A large portion of mutual fund administration expense is calculated based on a percent of
assets under administration in the Diamond Hill Funds. Despite the increase in mutual fund assets
under administration in 2008 compared to 2007, the decrease was attributable to a renegotiation of
certain vendor contracts resulting in both expense reductions and a shifting of certain expense
obligations directly to the Diamond Hill Funds. Absent this contract re-negotiation, mutual fund
administration expenses generally correlate with an increase or decrease in mutual fund assets
under administration.
16
Table of Contents
Beacon Hill Fund Services
Beacon Hill is currently staffed with twelve full-time equivalent employees, up from seven
at December 31, 2008, and provides compliance, treasurer, and other fund administration services to
mutual fund clients and their investment advisors. In addition, through its registered
broker/dealer, Beacon Hill also serves as the underwriter for a number of mutual funds. Beacon
Hill has been actively marketing its services and has commitments from several clients to commence
services at various starting dates in 2010. Most of these commitments are annually recurring
engagements. The Company expects Beacon Hill to generate an operating profit in 2010. The
following is a summary of Beacon Hill’s performance for the year ended December 31, 2009 compared
to 2008, excluding 12b-1 / service fees and commission revenue and expenses, which net to zero:
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Revenue
1
|
$ | 1,023,662 | $ | 116,516 | ||||
|
Expenses
|
1,999,922 | 1,513,731 | ||||||
|
|
||||||||
|
|
||||||||
|
Net loss
|
$ | (976,260 | ) | $ | (1,397,215 | ) | ||
| 1 |
Beacon Hill’s 2009 and 2008 revenue includes $146,067, and $0, respectively, of
inter-company revenue earned from services provided to DHCM. This amount has been eliminated
from the Consolidated Statements of Income.
|
Liquidity and Capital Resources
The Company’s entire investment portfolio is in readily marketable securities, which provide
for cash liquidity, if needed. Investments in mutual funds are valued at their quoted current net
asset value. Investments in private investment funds are valued independently based on readily
available market quotations. Inflation is expected to have no material impact on the Company’s
performance.
As of December 31, 2009, the Company had working capital of approximately $20.5 million compared to
$24.1 million at December 31, 2008. Working capital includes cash, securities owned and accounts
receivable, net of all liabilities. The Company has no debt, and its available working capital is
expected to be sufficient to cover current expenses. The Company does not expect any material
capital expenditures during 2010.
Operating activities during 2009 provided cash flows of $16.9 million, down $409 thousand from
2008, including a decrease in the change in non-cash stock based compensation expense of $2.7
million, a decrease in the change in accounts receivable of $5.2 million, and a decrease in the
change in investment gain/loss of $7.4 million, offset by an increase in net income of $8.1
million, an increase in the change in deferred taxes of $4.0 million, and an increase in the change
in other assets and liabilities of $3.6 million. Net cash provided in investing activities
totaled $4.3 million, compared to net cash provided in investing activities of $13 million in 2008.
Capital spending for property and equipment increased to $605 thousand in 2009, an increase of
$242 thousand from 2008, and proceeds from the sales of investments decreased to $13.9 million in
2009, a decrease of $9.6 million from 2008. Net cash used by financing activities was $25.5 million
in 2009, compared to net cash used by financing activities of $26.6 million in 2008. The decrease
of $1.1 million in cash used by financing activities included a decrease in taxes withheld on
employee stock transactions of $2.6 million, partially offset by an increase in the dividend
payment of $1.7 million in 2009.
Operating activities during 2008 provided cash flows of $17.4 million, up $7.4 million from 2007,
including a decrease in net income of $6.6 million and a decrease in the change in deferred taxes
of $1.2 million, offset by an increase in change in non-cash stock-based compensation expense of
$2.9 million, an increase in the change in investment gain/loss of $2.9 million and an increase in
the change in accrued liabilities of $9.7 million. Net cash provided in investing activities
totaled $13 million, compared to net cash used in investing activities of $15 million in 2007.
Capital spending for property and equipment decreased to $363 thousand in 2008, a decline of $59
thousand from 2007. Net cash used by financing activities was $26.6 million in 2008, compared to
net cash provided by financing activities of $7.5 million in 2007. Substantially all of this
increase in cash used by financing activities related to the $24.4 million dividend payment made in
2008.
17
Table of Contents
Selected Quarterly Information
Unaudited quarterly results of operations for the years ended December 31, 2009 and 2008 is
summarized below:
| At or For the Quarter Ended | ||||||||||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||||||||||
| (in thousands) | 12/31 | 09/30 | 06/30 | 03/31 | 12/31 | 09/30 | 06/30 | 03/31 | ||||||||||||||||||||||||
|
Assets Under Management
(in millions) |
$ | 6,283 | $ | 5,489 | $ | 4,733 | $ | 3,909 | $ | 4,510 | $ | 5,548 | $ | 5,486 | $ | 4,665 | ||||||||||||||||
|
Total revenue
|
13,715 | 11,372 | 9,592 | 8,883 | 10,372 | 13,348 | 12,396 | 10,903 | ||||||||||||||||||||||||
|
Total operating expenses
|
9,110 | 8,523 | 7,061 | 6,756 | 8,447 | 9,126 | 8,340 | 7,378 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Operating income
|
4,605 | 2,849 | 2,531 | 2,127 | 1,925 | 4,222 | 4,056 | 3,525 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Investment Return
|
881 | 2,064 | 4,032 | (1,579 | ) | (4,180 | ) | (2,319 | ) | (1,331 | ) | (375 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss)
|
$ | 3,504 | $ | 3,204 | $ | 4,315 | $ | 351 | $ | (1,713 | ) | $ | 1,224 | $ | 1,779 | $ | 1,986 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Diluted EPS
|
$ | 1.34 | $ | 1.23 | $ | 1.66 | $ | 0.14 | $ | (0.70 | ) | $ | 0.50 | $ | 0.73 | $ | 0.82 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Diluted shares outstanding
|
2,621 | 2,612 | 2,603 | 2,516 | 2,455 | 2,444 | 2,447 | 2,426 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
The net loss in the fourth quarter of 2008 was due to significant deterioration in the
overall market in the fourth quarter of 2008, which caused an 18.7% decrease in AUM in the fourth
quarter of 2008 compared to third quarter 2008. This decrease in AUM had a direct correlation with
the decrease in revenue during the fourth quarter of 2008 compared to third quarter 2008, as
revenue is generated based upon AUM. In addition, the corporate investment portfolio had a net loss
of $4.1 million in fourth quarter 2008, which further contributed to the decrease in net income for
the quarter ended December 31, 2008.
Contractual Obligations
The following table presents a summary of the Company’s future obligations under the terms
of an operating lease and other contractual purchase obligations at December 31, 2009. Other
purchase obligations include contractual amounts that will be due for the purchase of services to
be used in the Company’s operations such as mutual fund sub-administration and portfolio accounting
software. These obligations may be cancelable at earlier times than those indicated and, under
certain conditions, may involve termination fees. Because these obligations are of a normal
recurring nature, the Company expects that it will fund them from future cash flows from
operations. The information presented does not include operating expenses or capital expenditures
that will be committed in the normal course of operations in 2010 and future years:
| Payments Due by Period | ||||||||||||||||||||
| Total | 2010 | 2011-2012 | 2013-2014 | Later | ||||||||||||||||
|
Operating lease obligations
|
$ | 2,331,000 | $ | 358,000 | $ | 688,000 | $ | 714,000 | $ | 571,000 | ||||||||||
|
Purchase obligations
|
3,008,000 | 2,946,000 | 62,000 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 5,339,000 | $ | 3,304,000 | $ | 750,000 | $ | 714,000 | $ | 571,000 | ||||||||||
|
|
||||||||||||||||||||
18
Table of Contents
Use of Supplemental Data as Non-GAAP Performance Measure
Net Operating Income After Tax
As supplemental information, we are providing performance measures that are based on
methodologies other than generally accepted accounting principles (“non-GAAP”) for “Net Operating
Income After Tax”. Management uses these performance measures as benchmarks in evaluating and
comparing the period-to-period operating performance of the Company and its subsidiaries.
The Company defines “net operating income after tax” as the Company’s net operating income less
income tax provision, excluding investment return and the tax impact related to the investment
return. The Company believes that “net operating income after tax” provides a good representation
of the Company’s operating performance, as it excludes the impact of investment return on financial
results. The amount of the investment portfolio and the market impact on the investment portfolio
can fluctuate significantly from one period to another. These fluctuations can distort the
underlying earnings potential of a company. We also believe “net operating income after tax” is an
important metric in estimating the value of an asset management business. This measure is provided
in addition to net income and net operating income and is not a substitute for net income or net
operating income and may not be comparable to non-GAAP performance measures of other companies.
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net Operating Income, GAAP basis
|
$ | 12,112,352 | $ | 13,728,814 | $ | 14,078,489 | ||||||
|
Non-GAAP Adjustments:
|
||||||||||||
|
Tax Provision excluding impact of Investment Return
|
3,954,536 | 4,473,170 | 4,733,329 | |||||||||
|
Net operating income after tax, non-GAAP basis
|
8,157,816 | 9,255,644 | 9,345,160 | |||||||||
|
|
||||||||||||
|
Net operating income after tax per basic share, non-GAAP basis
|
$ | 3.16 | $ | 3.86 | $ | 4.33 | ||||||
|
Net operating income after tax per diluted share, non-GAAP basis
|
$ | 3.15 | $ | 3.84 | $ | 4.13 | ||||||
|
|
||||||||||||
|
Basic weighted average shares outstanding, GAAP basis
|
2,582,998 | 2,400,142 | 2,155,829 | |||||||||
|
Diluted weighted average shares outstanding, GAAP basis
|
2,587,751 | 2,408,476 | 2,264,234 | |||||||||
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements. It does not have any obligation under a
guarantee contract, or a retained or contingent interest in assets or similar arrangement that
serves as credit, liquidity or market risk support for such assets, or any other obligation,
including a contingent obligation, under a contract that would be accounted for as a derivative
instrument or arising out of a variable interest.
Critical Accounting Policies and Estimates
Provisions for Income Taxes.
The objectives of accounting for income taxes are to recognize
the amount of taxes payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an entity’s financial
statements or tax returns. Judgment is required in assessing the future tax consequences of events
that have been recognized in the Company’s financial statements or tax returns.
Revenue Recognition on Incentive-Based Advisory Contracts.
The Company has certain investment
advisory contracts in which a portion of the fees are based on investment performance achieved in
the respective client portfolio in excess of a specified hurdle rate. For management fees based on
a formula, there are two methods by which incentive revenue may be recorded. Under “Method 1,”
incentive fees are recorded at the end of the contract year. Under “Method 2,” incentive fees are
recorded periodically and calculated as the amount that would be due under the formula at any point
in time as if the contract was terminated at that date. Management has chosen the more conservative
Method 1, in which performance fees are recorded at the end of the contract period provided for by
the contract terms.
19
Table of Contents
Revenue Recognition when Acting as an Agent vs. Principal.
The Funds have selected and
contractually engaged certain vendors to fulfill various services to benefit the Funds’
shareholders or to satisfy regulatory requirements of the Funds. These services include, among
others, required fund shareholder mailings, registration fees, legal and audit fees. DHCM, in
fulfilling a portion of its role under the administration agreement with the Funds, acts as agent
to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of
the services it has been engaged to provide and negotiates fees and terms with the management and
board of trustees of the Funds. The fee that the Funds pay to DHCM is reviewed annually by the
Funds’ board of trustees and specifically takes into account the contractual expenses that DHCM
pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these
services and bears no risk related to these services. Revenue has been recorded net of these Fund
expenses, as it is the appropriate accounting treatment for this agency relationship.
Beacon Hill has underwriting agreements with certain clients, including registered mutual funds.
Part of Beacon Hill’s role as underwriter is to act as an agent on behalf of its mutual fund
clients to receive 12b-1/service fees and commission revenue and facilitate the payment of those
fees and commissions to third parties who provide services to the funds and their shareholders. The
amount of 12b-1/service fees and commissions are determined by each mutual fund client and Beacon
Hill bears no financial risk related to these services. As a result, 12b-1/service fees and
commission revenue has been recorded net of the expense payments to third parties, as it is the
appropriate accounting treatment for this agency relationship.
| ITEM 7A. |
Quantitative and Qualitative Disclosures about Market Risk
|
The Company’s revenues and net income are based primarily on the value of AUM. Accordingly,
declines in financial market values directly and negatively impact its investment advisory revenues
and net income.
The Company invests in Diamond Hill Funds and its private investment funds, which are market risk
sensitive financial instruments. These investments have inherent market risk in the form of equity
price risk; that is, the potential future loss of value that would result from a decline in their
fair value. The bond fund is also subject to market risk which may arise from changes in equity
prices, credit ratings and interest rates. Market prices fluctuate and the amount realized upon
subsequent sale may differ significantly from the reported market value.
The table below summarizes the Company’s market risks as of December 31, 2009, and shows the
effects of a hypothetical 10% increase and decrease in equity and bond investments.
| Fair Value Assuming a | Fair Value Assuming a | |||||||||||
| Fair Value as of | Hypothetical 10% | Hypothetical 10% | ||||||||||
| December 31, 2009 | Increase | Decrease | ||||||||||
|
Equity investments
|
$ | 15,814,536 | $ | 17,395,990 | $ | 14,233,082 | ||||||
|
Bond fund investments
|
615,431 | 676,974 | 553,888 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 16,429,967 | $ | 18,072,964 | $ | 14,786,970 | ||||||
|
|
||||||||||||
20
Table of Contents
| ITEM 8. |
Financial Statements and Supplementary Data
|
Report of Independent Registered Public
Accounting Firm on Consolidated Financial Statements
The Shareholders and Board of Directors of
Diamond Hill Investment Group, Inc.:
Diamond Hill Investment Group, Inc.:
We have audited the accompanying balance sheets of Diamond Hill Investment Group, Inc. and its
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended December
31, 2009. We also have audited the Company’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is
responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying financial statements. Our responsibility is to express an
opinion on these financial statements and an opinion on the company’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
21
Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Diamond Hill Investment Group, Inc. and its subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Diamond Hill Investment
Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Plante & Moran, PLLC
Columbus, Ohio
March 1, 2010
Columbus, Ohio
March 1, 2010
22
Table of Contents
Consolidated Balance Sheets
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$ | 11,513,194 | $ | 15,788,560 | ||||
|
Investment portfolio
|
16,429,967 | 17,185,611 | ||||||
|
Accounts receivable
|
10,144,004 | 5,339,558 | ||||||
|
Prepaid expenses
|
724,825 | 1,067,388 | ||||||
|
Fixed assets, net of depreciation, and other assets
|
1,171,670 | 835,314 | ||||||
|
Income tax receivable
|
— | 2,334,836 | ||||||
|
Deferred taxes
|
520,965 | 1,989,016 | ||||||
|
|
||||||||
|
|
||||||||
|
Total assets
|
$ | 40,504,625 | $ | 44,540,283 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Liabilities
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 4,465,011 | $ | 1,294,396 | ||||
|
Accrued incentive compensation
|
12,300,650 | 13,000,000 | ||||||
|
Income tax payable
|
758,257 | — | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities
|
17,523,918 | 14,294,396 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and contingencies
|
— | — | ||||||
|
|
||||||||
|
Shareholders’ Equity
|
||||||||
|
Common stock, no par value
|
||||||||
|
7,000,000 shares authorized;
|
||||||||
|
2,677,577 issued and outstanding at December 31, 2009;
|
||||||||
|
2,447,299 issued and outstanding at December 31, 2008
|
26,922,484 | 16,233,501 | ||||||
|
Preferred stock, undesignated, 1,000,000 shares
authorized and unissued
|
— | — | ||||||
|
Deferred compensation
|
(8,070,697 | ) | (4,908,215 | ) | ||||
|
Retained earnings
|
4,128,920 | 18,920,601 | ||||||
|
|
||||||||
|
|
||||||||
|
Total shareholders’ equity
|
22,980,707 | 30,245,887 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 40,504,625 | $ | 44,540,283 | ||||
|
|
||||||||
|
|
||||||||
|
Book value per share
|
$ | 8.58 | $ | 12.36 | ||||
|
|
||||||||
The accompanying notes are an integral part of these financial statements.
23
Table of Contents
Consolidated Statements of Income
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
REVENUES:
|
||||||||||||
|
Investment advisory
|
$ | 37,472,407 | $ | 40,865,296 | $ | 35,339,335 | ||||||
|
Mutual fund administration, net
|
6,089,979 | 6,153,919 | 5,968,603 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total revenue
|
43,562,386 | 47,019,215 | 41,307,938 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
OPERATING EXPENSES:
|
||||||||||||
|
Compensation and related costs
|
24,113,631 | 26,120,040 | 20,006,542 | |||||||||
|
General and administrative
|
3,133,359 | 2,643,274 | 2,658,649 | |||||||||
|
Sales and marketing
|
751,040 | 796,438 | 631,911 | |||||||||
|
Third party distribution
|
1,112,460 | 1,452,087 | 1,512,095 | |||||||||
|
Mutual fund administration
|
2,339,544 | 2,278,562 | 2,420,252 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total operating expenses
|
31,450,034 | 33,290,401 | 27,229,449 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
NET OPERATING INCOME
|
12,112,352 | 13,728,814 | 14,078,489 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Investment return
|
5,398,636 | (8,205,051 | ) | 909,134 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
INCOME BEFORE TAXES
|
17,510,988 | 5,523,763 | 14,987,623 | |||||||||
|
|
||||||||||||
|
Income tax provision
|
(6,137,045 | ) | (2,247,685 | ) | (5,055,308 | ) | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
NET INCOME
|
$ | 11,373,943 | $ | 3,276,078 | $ | 9,932,315 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings per share
|
||||||||||||
|
Basic
|
$ | 4.40 | $ | 1.36 | $ | 4.61 | ||||||
|
|
||||||||||||
|
Diluted
|
$ | 4.40 | $ | 1.36 | $ | 4.39 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted average shares outstanding
|
||||||||||||
|
Basic
|
2,582,998 | 2,400,142 | 2,155,829 | |||||||||
|
|
||||||||||||
|
Diluted
|
2,587,751 | 2,408,476 | 2,264,234 | |||||||||
|
|
||||||||||||
The accompanying notes are an integral part of these financial statements.
24
Table of Contents
Diamond Hill Investment Group, Inc.
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Shareholders’ Equity
| Retained | ||||||||||||||||||||||||
| Shares | Common | Treasury | Deferred | Earnings | ||||||||||||||||||||
| Outstanding | Stock | Stock | Compensation | (Deficit) | Total | |||||||||||||||||||
|
Balance at January 1, 2007
|
1,838,435 | $ | 16,515,256 | $ | (95,736 | ) | $ | (2,355,499 | ) | $ | 6,419,236 | $ | 20,483,257 | |||||||||||
|
Deferred compensation
|
36,000 | 3,089,280 | — | (3,089,280 | ) | — | — | |||||||||||||||||
|
Recognition of current year
deferred compensation
|
— | — | — | 1,388,764 | — | 1,388,764 | ||||||||||||||||||
|
Issuance of stock grants
|
57,254 | 5,628,641 | — | — | — | 5,628,641 | ||||||||||||||||||
|
Issuance of stock related to
401k plan match
|
2,582 | 202,019 | — | — | — | 202,019 | ||||||||||||||||||
|
FAS 123R compensation expense
|
— | 8,152 | — | — | — | 8,152 | ||||||||||||||||||
|
Tax benefit from options and
warrants exercised
|
— | 6,015,186 | — | — | — | 6,015,186 | ||||||||||||||||||
|
Payment of taxes withheld related
to option exercises
|
(85,518 | ) | (8,020,273 | ) | — | — | — | (8,020,273 | ) | |||||||||||||||
|
Purchase of treasury stock related
to option exercises
|
(15,797 | ) | — | (1,344,958 | ) | — | — | (1,344,958 | ) | |||||||||||||||
|
Sale of treasury stock for
issuance of stock grant
|
614 | 25,874 | 38,903 | — | — | 64,777 | ||||||||||||||||||
|
Sale of treasury stock for
401k plan match
|
2,423 | 57,061 | 177,435 | — | — | 234,496 | ||||||||||||||||||
|
Sale of treasury stock related
to option exercises
|
22,585 | 57,084 | 1,224,356 | — | (707,028 | ) | 574,412 | |||||||||||||||||
|
Exercise of options/warrants for
common stock
|
390,017 | 4,500,478 | — | — | — | 4,500,478 | ||||||||||||||||||
|
Repurchase of common stock
|
(4,942 | ) | (359,734 | ) | — | — | — | (359,734 | ) | |||||||||||||||
|
Net income
|
— | — | — | — | 9,932,315 | 9,932,315 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2007
|
2,243,653 | $ | 27,719,024 | $ | — | $ | (4,056,015 | ) | $ | 15,644,523 | $ | 39,307,532 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Deferred compensation
|
63,450 | 5,184,801 | — | (5,184,801 | ) | — | — | |||||||||||||||||
|
Recognition of current year
deferred compensation
|
— | — | — | 4,332,601 | — | 4,332,601 | ||||||||||||||||||
|
Issuance of stock grants
|
85,796 | 6,021,482 | — | — | — | 6,021,482 | ||||||||||||||||||
|
Issuance of common stock related
to 401k plan match
|
8,506 | 638,796 | — | — | — | 638,796 | ||||||||||||||||||
|
FAS 123R compensation expense
|
— | 2,233 | — | — | — | 2,233 | ||||||||||||||||||
|
Tax benefit from equity transactions
|
— | 3,997,348 | — | — | — | 3,997,348 | ||||||||||||||||||
|
Payment of taxes withheld
related to employee stock transactions
|
(33,991 | ) | (2,777,545 | ) | — | — | — | (2,777,545 | ) | |||||||||||||||
|
Purchase of common stock
related to option exercises
|
(4,452 | ) | (381,843 | ) | — | — | — | (381,843 | ) | |||||||||||||||
|
Exercise of options/warrants
for common stock
|
95,500 | 1,132,204 | — | — | — | 1,132,204 | ||||||||||||||||||
|
Repurchase of common stock
|
(11,163 | ) | (862,115 | ) | — | — | — | (862,115 | ) | |||||||||||||||
|
Dividend Paid of $10.00 per share
|
— | (24,440,884 | ) | — | — | — | (24,440,884 | ) | ||||||||||||||||
|
Net income
|
— | — | — | — | 3,276,078 | 3,276,078 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2008
|
2,447,299 | $ | 16,233,501 | $ | — | $ | (4,908,215 | ) | $ | 18,920,601 | $ | 30,245,887 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Deferred compensation
|
78,092 | 4,836,595 | — | (4,836,595 | ) | — | — | |||||||||||||||||
|
Recognition of current year
deferred compensation
|
— | — | — | 1,674,113 | — | 1,674,113 | ||||||||||||||||||
|
Issuance of stock grants
|
135,313 | 5,032,290 | — | — | — | 5,032,290 | ||||||||||||||||||
|
Issuance of common stock related
to 401k plan match
|
15,610 | 758,459 | — | — | — | 758,459 | ||||||||||||||||||
|
Tax benefit from equity transactions
|
— | 134,741 | — | — | — | 134,741 | ||||||||||||||||||
|
Payment of taxes withheld
related to employee stock transactions
|
(2,737 | ) | (140,602 | ) | — | — | — | (140,602 | ) | |||||||||||||||
|
Exercise of options/warrants
for common stock
|
4,000 | 67,500 | — | — | — | 67,500 | ||||||||||||||||||
|
Dividend Paid of $10.00 per share
|
— | — | — | — | (26,165,624 | ) | (26,165,624 | ) | ||||||||||||||||
|
Net income
|
— | — | — | — | 11,373,943 | 11,373,943 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at December 31, 2009
|
2,677,577 | $ | 26,922,484 | $ | — | $ | (8,070,697 | ) | $ | 4,128,920 | $ | 22,980,707 | ||||||||||||
|
|
||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
25
Table of Contents
Consolidated Statements of Cash Flow
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net Income
|
$ | 11,373,943 | $ | 3,276,078 | $ | 9,932,315 | ||||||
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
|
||||||||||||
|
Depreciation on property and equipment
|
268,572 | 181,908 | 147,059 | |||||||||
|
Amortization of deferred compensation
|
1,674,113 | 4,332,601 | 1,388,764 | |||||||||
|
(Increase) decrease in accounts receivable
|
(4,804,446 | ) | 354,716 | 1,229,734 | ||||||||
|
Increase (decrease) in deferred income taxes
|
1,438,658 | (2,535,960 | ) | (1,352,162 | ) | |||||||
|
Stock option expense
|
— | 2,233 | 8,152 | |||||||||
|
Noncash director fee expense
|
180,074 | 167,281 | — | |||||||||
|
Investment gain/loss, net
|
(4,055,840 | ) | 3,298,360 | 389,771 | ||||||||
|
Increase (decrease) in accrued liabilities
|
7,323,481 | 8,281,581 | (1,424,647 | ) | ||||||||
|
Other changes in assets and liabilities
|
3,599,790 | 48,340 | (246,227 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
16,998,345 | 17,407,138 | 10,072,759 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchase of property and equipment
|
(604,928 | ) | (362,722 | ) | (304,262 | ) | ||||||
|
Cost of investments purchased and other portfolio activity
|
(9,149,453 | ) | (10,076,234 | ) | (15,317,252 | ) | ||||||
|
Proceeds from sale of investments
|
13,960,937 | 23,628,426 | — | |||||||||
|
|
||||||||||||
|
Net cash provided by (used in) investing activities
|
4,206,556 | 13,189,470 | (15,621,514 | ) | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Payment for repurchase of common shares
|
— | (862,115 | ) | (359,734 | ) | |||||||
|
Payment of taxes withheld on employee stock transactions
|
(140,602 | ) | (2,777,545 | ) | (8,020,273 | ) | ||||||
|
Proceeds from common stock issuance
|
825,959 | 1,489,218 | 15,779,315 | |||||||||
|
Payment of dividends
|
(26,165,624 | ) | (24,440,884 | ) | — | |||||||
|
Purchase of treasury stock
|
— | — | (1,344,958 | ) | ||||||||
|
Sale of treasury stock
|
— | — | 1,440,694 | |||||||||
|
|
||||||||||||
|
Net cash provided by (used in) financing activities
|
(25,480,267 | ) | (26,591,326 | ) | 7,495,044 | |||||||
|
|
||||||||||||
|
|
||||||||||||
|
CASH AND CASH EQUIVALENTS
|
||||||||||||
|
Net change during the period
|
(4,275,366 | ) | 4,005,282 | 1,946,289 | ||||||||
|
At beginning of period
|
15,788,560 | 11,783,278 | 9,836,989 | |||||||||
|
|
||||||||||||
|
At end of period
|
$ | 11,513,194 | $ | 15,788,560 | $ | 11,783,278 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | — | $ | — | $ | — | ||||||
|
Income taxes
|
2,625,900 | 3,005,000 | 435,682 | |||||||||
|
|
||||||||||||
|
Noncash Transactions during the period for:
|
||||||||||||
|
Common Stock Issued as Incentive Compensation
|
4,852,216 | 5,754,140 | 5,478,718 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
26
Table of Contents
Diamond Hill Investment Group, Inc.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
Note 1
Business and Organization
Diamond Hill Investment Group, Inc. (the “Company”) derives its consolidated revenues and
net income primarily from investment advisory and fund administration services that it provides to
individual and institutional investors. The Company has four operating subsidiaries.
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 (the “Funds”), a series of open-end mutual funds, private investment funds (“Private
Funds”), and also offers advisory services to institutional and individual investors.
Diamond Hill GP (Cayman) Ltd. (“DHGP”) was incorporated in the Cayman Islands as an exempted
company on May 18, 2006 for the purpose of acting as the general partner of a Cayman Islands
exempted limited partnership, which partnership acts as a master fund for Diamond Hill Offshore
Ltd., a Cayman Islands exempted company; and Diamond Hill Investment Partners II, L.P., an Ohio
limited partnership. DHGP has no operating activity.
Beacon Hill Fund Services, Inc. (“BHFS”), an Ohio corporation, is a wholly owned subsidiary of the
Company incorporated on January 29, 2008. BHFS provides certain compliance, treasury, and fund
administration services to mutual fund companies. BHIL Distributors, Inc. (“BHIL”), an Ohio
corporation, is a wholly owned subsidiary of BHFS incorporated on February 19, 2008. BHIL provides
underwriting and distribution services to mutual fund companies. BHFS and BHIL collectively
operate as Beacon Hill.
Note 2
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. Certain prior year amounts and disclosures have
been reclassified to conform to the current year financial presentation. Book value per share is
computed by dividing total shareholders’ equity by the number of shares issued and outstanding at
the end of the measurement period. 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 and its
subsidiaries. All material inter-company transactions and balances have been eliminated in
consolidation.
Segment Information
Management has determined that the Company operates in one business segment, namely providing
investment management and administration services to mutual funds, separate accounts, and private
investment funds. Therefore, no disclosures relating to operating segments are required in annual
or interim financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market funds.
27
Table of Contents
Note 2
Significant Accounting Policies (Continued)
Accounts Receivable
Accounts receivable are recorded when they are due and are presented in the balance sheet, 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 based on the Company’s
historical losses, existing conditions in the industry, and the financial stability of those
individuals or entities that owe the receivable. No allowance for doubtful accounts was deemed
necessary at December 31, 2009 and 2008.
Valuation of Investment Portfolio
Investments held by the Company are valued based upon the definition of Level 1 inputs and Level 2
inputs. Level 1 inputs are defined as fair values which use quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access. Level 2 inputs are
defined as quoted prices in markets that are not considered to be active for identical assets or
liabilities, quoted prices in active markets for similar assets or liabilities, and inputs other
than quoted prices that are directly observable or indirectly through corroboration with
observable market data. At December 31, 2009, $4,108,170 and $12,321,797 in Company investments
are valued based upon Level 1 and Level 2 inputs, respectively. At December 31, 2008, $5,923,202
and $11,262,409 in Company investments are valued based upon Level 1 and Level 2 inputs,
respectively.
The changes in market values on the investments are recorded in the Consolidated Statement of
Income as investment returns.
Limited Partnership Interests
DHCM is the managing member of Diamond Hill General Partner, LLC, the General Partner of Diamond
Hill Investment Partners, LP (“DHIP”), Diamond Hill Investment Partners II, LP (“DHIP II”), and
Diamond Hill Research Partners, LP (“DHRP”), (collectively the “Partnerships”), each a limited
partnership whose underlying assets consist of marketable securities. DHCM, in its role as the
managing member of the General Partner, exerts significant influence over the financial and
operating policies of the Partnerships but does not exercise control. Therefore, DHCM’s
investment in the Partnerships 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. Several board members,
officers and employees of the Company invest in DHIP and DHIP II through Diamond Hill General
Partner, LLC. These individuals receive no remuneration as a result of their personal investment
in the Partnerships. The capital of Diamond Hill General Partner, LLC is not subject to a
management fee or an incentive fee.
Furniture and Equipment
Furniture 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.
Revenue Recognition — General
The Company earns substantially all of its revenue from investment advisory and fund
administration services. Mutual fund investment advisory and administration fees, generally
calculated as a percentage of assets under management, are recorded as revenue as services are
performed. Managed account and private investment fund clients provide for monthly or quarterly
management fees, in addition to quarterly or annual performance fees.
28
Table of Contents
Note 2
Significant Accounting Policies (Continued)
Revenue Recognition – Performance Incentive Revenue
The Company’s private investment funds and certain managed accounts provide for performance
incentive fees. For management fees based on a formula, there are two methods by which incentive
revenue may be recorded. Under “Method 1”, incentive fees are recorded at the end of the contract
period; under “Method 2”, the incentive fees are recorded periodically and calculated as the
amount that would be due under the formula at any point in time as if the contract was terminated
at that date. Management has chosen Method 1, in which incentive fees are recorded at the end of
the contract period for the specific client in which the incentive fee applies. The table below
shows assets under management (“AUM”) subject to performance incentive fees and the performance
incentive fees, as calculated under each of the above methods:
| As Of December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
AUM — Contractual Period Ends Quarterly
|
$ | 108,974,458 | $ | 218,503,205 | $ | 193,342,530 | ||||||
|
AUM — Contractual Period Ends Annually
|
196,469,025 | 159,514,591 | 387,466,713 | |||||||||
|
|
||||||||||||
|
Total AUM Subject to Performance Incentive
|
$ | 305,443,483 | $ | 378,017,796 | $ | 580,809,243 | ||||||
|
|
||||||||||||
| For The Period Ending December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Performance Incentive Fees — Method 1
|
$ | 1,050,895 | $ | 378,881 | $ | 174,292 | ||||||
|
Performance Incentive Fees — Method 2
|
1,262,922 | 378,881 | 174,292 | |||||||||
Revenue Recognition – Mutual Fund Administration
DHCM has an administrative and transfer agency services agreement with the Funds, under which DHCM
performs certain services for each fund. These services include mutual fund administration,
transfer agency and other related functions. For performing these services, each fund compensates
DHCM a fee at an annual rate of 0.34% for Class A and Class C shares and 0.20% for Class I shares
times each series’ average daily net assets. Effective April 30, 2009, the fee for administrative
services was increased from 0.30% to 0.34% for Class A and Class C shares. The Funds have
selected and contractually engaged certain vendors to fulfill various services to benefit the
Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include,
among others, required fund shareholder mailings, federal and state registrations, legal and
audit. DHCM, in fulfilling a portion of its role under the administration agreement with the
Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently
responsible for fulfillment of the services it has been engaged to provide and negotiates fees and
terms with the management and board of trustees of the Funds. The fee that the Funds pay to DHCM
is reviewed annually by the Funds’ board of trustees and specifically takes into account the
contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in
the delivery or pricing of these services and bears no risk related to these services. Revenue
has been recorded net of these Fund expenses, as it is the appropriate accounting treatment for
this agency relationship. In addition, DHCM finances the upfront commissions which are paid by
the Fund’s principal underwriter to brokers who sell Class C shares of the Funds. As financer,
DHCM advances to the underwriter the commission amount to be paid to the selling broker at the
time of sale. These advances are capitalized and amortized over 12 months to correspond with the
repayments DHCM receives from the principal underwriter to recoup this commission advancement.
Beacon Hill has underwriting and administrative service agreements with certain clients, including
registered mutual funds. The fee arrangements vary from client to client based upon services
provided and are recorded as revenue under Mutual Fund Administration. Part of Beacon Hill’s role
as underwriter is to act as an agent on behalf of its mutual fund clients to receive 12b-1/service
fees and commission revenue and facilitate the payment of those fees and commissions to third
parties who provide services to the funds and
their shareholders. The amount of 12b-1/service fees and commissions are determined by each mutual
fund client and Beacon Hill bears no financial risk related to these services. As a result,
12b-1/service fees and
29
Table of Contents
Note 2 Significant Accounting Policies (Continued)
Revenue Recognition – Mutual Fund Administration (Continued)
commission revenue have been recorded net of the expense payments to third parties, as it is the
appropriate accounting treatment for this agency relationship.
Mutual fund administration gross and net revenue are summarized below:
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Mutual fund administration:
|
||||||||||||
|
Administration Revenue, gross
|
$ | 9,257,464 | $ | 9,194,973 | $ | 8,226,438 | ||||||
|
12b-1/service fees and commission
revenue received from Fund clients
|
5,260,383 | — | — | |||||||||
|
12b-1/service fees and commission expense payments to third parties
|
(5,260,383 | ) | — | — | ||||||||
|
Fund related expense
|
(3,141,229 | ) | (3,061,646 | ) | (2,393,732 | ) | ||||||
|
|
||||||||||||
|
Revenue, net of fund related expenses
|
6,116,235 | 6,133,327 | 5,832,706 | |||||||||
|
|
||||||||||||
|
DHCM C-Share financing:
|
||||||||||||
|
Broker commission advance repayments
|
763,383 | 1,776,206 | 1,970,006 | |||||||||
|
Broker commission amortization
|
(789,639 | ) | (1,755,614 | ) | (1,834,109 | ) | ||||||
|
|
||||||||||||
|
Financing activity, net
|
(26,256 | ) | 20,592 | 135,897 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Mutual fund administration revenue, net
|
$ | 6,089,979 | $ | 6,153,919 | $ | 5,968,603 | ||||||
|
|
||||||||||||
Third Party Distribution Expense
Third party distribution expenses are earned by various third party financial services firms based
on sales and/or assets of the Company’s investment products generated by the respective firm.
Expenses recognized represent actual payments made to the third party firms and are recorded in
the period earned based on the terms of the various contracts.
Income Taxes
The Company accounts for income taxes through an asset and liability approach. A net deferred tax
asset or liability is determined based on the tax effects of the various temporary differences
between the book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
The Company has analyzed its tax positions taken on federal income tax returns for all open tax
years (tax years ended December 31, 2006 through 2009) to determine any uncertainty in income
taxes and has recognized no adjustment in the net asset or liability.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of EPS that could occur if options and warrants were exercised.
30
Table of Contents
Note 3
Investment Portfolio
As of December 31, 2009, the Company held investments worth $16.4 million and a cost basis
of $12.4 million. The following table summarizes the market value of these investments over the
last two fiscal years:
| Year Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Diamond Hill Small Cap Fund
|
$ | 709,881 | $ | — | ||||
|
Diamond Hill Small-Mid Cap Fund
|
785,714 | — | ||||||
|
Diamond Hill Large Cap Fund
|
684,554 | — | ||||||
|
Diamond Hill Select Fund
|
705,790 | — | ||||||
|
Diamond Hill Long-Short Fund
|
606,800 | — | ||||||
|
Diamond Hill Strategic Income Fund
|
615,431 | — | ||||||
|
Diamond Hill Investment Partners, L.P.
|
2,653,856 | 7,494,929 | ||||||
|
Diamond Hill Investment Partners II, L.P.
|
2,649,665 | 3,767,480 | ||||||
|
Diamond Hill Research Partners, L.P.
|
7,018,276 | — | ||||||
|
Other marketable equity securities
|
— | 5,923,202 | ||||||
|
|
||||||||
|
Total Investment Portfolio
|
$ | 16,429,967 | $ | 17,185,611 | ||||
|
|
||||||||
DHCM is the managing member of the Diamond Hill General Partner LLC, which is the General
Partner of the Partnerships. The underlying assets of the Partnerships are cash and marketable
equity securities. The Company, as the parent entity to DHCM, is not contingently liable for the
Partnerships’ liabilities but rather is only liable for its proportionate share, based on its
membership interest. DHCM, as the managing member of the General Partner, is also not
contingently liable for the Partnerships’ liabilities. Summary financial information, including
the Company’s carrying value and income from the Partnerships is as follows:
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Total partnership assets
|
$ | 188,716,374 | $ | 196,021,226 | $ | 360,372,685 | ||||||
|
Total partnership liabilities
|
40,583,059 | 33,056,747 | 80,007,267 | |||||||||
|
Net partnership assets
|
148,133,315 | 162,964,479 | 280,365,418 | |||||||||
|
Net partnership income (loss)
|
35,193,357 | (75,625,562 | ) | 6,581,829 | ||||||||
|
|
||||||||||||
|
DHCM’s portion of net assets
|
12,321,797 | 11,262,409 | 15,128,723 | |||||||||
|
DHCM’s portion of net income (loss)
|
4,634,391 | (3,866,314 | ) | 562,469 | ||||||||
DHCM’s income from the Partnerships includes its pro-rata capital allocation and its share
of an incentive allocation, if any, from the limited partners.
31
Table of Contents
Note 4
Capital Stock
Common Shares
The Company has only one outstanding class of securities, Common Shares.
Authorization of Preferred Shares
The Company’s Articles of Incorporation authorize the issuance of 1,000,000 shares of “blank
check” preferred shares 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 authorized, 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
Shares. There were no shares of preferred stock issued or outstanding at December 31, 2009 or
December 31, 2008.
Note 5
Stock-Based Compensation
Equity Incentive Plans
2005 Employee and Director Equity Incentive Plan
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 authorizes the issuance of Common Shares of the Company in various forms of stock or
option grants. As of December 31, 2009 there were 394,358 shares available for issuance under the
2005 Plan. The 2005 Plan provides that the Board of Directors, or a committee appointed by the
Board, may grant awards and otherwise administer the 2005 Plan. Restricted stock grants issued
under the 2005 Plan, which vest over time, are recorded as deferred compensation in the equity
section of the balance sheet on grant date and then recognized as compensation expense based on
the grant date price over the vesting period of the respective grant.
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 approved terms, a total of 75,000 shares of
restricted stock and restricted stock units were issued to the key employees on May 31, 2004.
These shares vested on October 3, 2008.
Accelerated Vesting of Certain Equity Incentive Plans and Compensation Grants
The Board of Directors of the Company approved the accelerated vesting of 82,064 shares of
restricted stock from various vesting dates during the first five months of 2009 to October 3,
2008. This acceleration resulted in additional compensation expense of $1.0 million in the fourth
quarter of 2008 that otherwise would have been recorded in the first and second quarters of 2009.
In addition, as a result of this acceleration, the Company received a $6.3 million tax deduction
in 2008.
401(k) Plan
The Company sponsors a 401(k) plan in which all employees participate. Employees may
contribute a portion of their compensation subject to certain limits based on federal tax laws.
The Company makes matching contributions of Common Shares of the Company with a value equal to 200
percent of the first six percent of an employee’s compensation contributed to the plan. Employees
become fully vested in the matching contributions after six plan years of employment. For the
years ended December 31, 2009, 2008, and 2007, expenses attributable to the plan were $758,522,
$638,796 and $437,413, respectively.
32
Table of Contents
Note 5
Stock-Based Compensation (Continued)
Stock Options and Warrants
The Company recognizes all share-based payments to employees and directors, including
grants of stock options, as expense in the income statement based on their fair values. The amount
of compensation is measured at the fair value of the options when granted, and this cost is
expensed over the required service period, which is normally the vesting period of the options.
Stock option and warrant transactions under the various plans for the past three fiscal years are
summarized below:
| Options | Warrants | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
|
Outstanding December 31, 2006
|
283,102 | $ | 14.60 | 249,400 | $ | 12.57 | ||||||||||
|
|
||||||||||||||||
|
Exercisable December 31, 2006
|
243,102 | $ | 16.26 | 249,400 | $ | 12.57 | ||||||||||
|
|
||||||||||||||||
|
Granted
|
— | — | — | — | ||||||||||||
|
Expired / Forfeited
|
— | — | 2,000 | — | ||||||||||||
|
Exercised
|
190,602 | 16.64 | 222,000 | 8.65 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Outstanding December 31, 2007
|
92,500 | $ | 10.40 | 25,400 | $ | 47.00 | ||||||||||
|
|
||||||||||||||||
|
Exercisable December 31, 2007
|
72,500 | $ | 12.03 | 25,400 | $ | 47.00 | ||||||||||
|
|
||||||||||||||||
|
Granted
|
— | — | — | — | ||||||||||||
|
Expired / Forfeited
|
— | — | 12,400 | 72.09 | ||||||||||||
|
Exercised
|
92,500 | 10.40 | 3,000 | 56.67 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Outstanding December 31, 2008
|
— | $ | — | 10,000 | $ | 13.00 | ||||||||||
|
|
||||||||||||||||
|
Exercisable December 31, 2008
|
— | $ | — | 10,000 | $ | 13.00 | ||||||||||
|
|
||||||||||||||||
|
Granted
|
— | — | — | — | ||||||||||||
|
Expired / Forfeited
|
— | — | — | — | ||||||||||||
|
Exercised
|
— | — | 4,000 | 16.88 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Outstanding December 31, 2009
|
— | $ | — | 6,000 | $ | 10.42 | ||||||||||
|
|
||||||||||||||||
|
Exercisable December 31, 2009
|
— | $ | — | 6,000 | $ | 10.42 | ||||||||||
|
|
||||||||||||||||
Warrants outstanding and exercisable at December 31, 2009 are as follows:
| Warrants | ||||||||||||||
| Remaining | ||||||||||||||
| Number | Life | Number | ||||||||||||
| Outstanding | In Years | Exercisable | Exercise Price | |||||||||||
| 4,000 |
|
0.16 | 4,000 | $ | 11.25 | |||||||||
| 2,000 |
|
0.36 | 2,000 | $ | 8.75 | |||||||||
|
|
||||||||||||||
| 6,000 |
|
0.23 | 6,000 | |||||||||||
|
|
||||||||||||||
The aggregate intrinsic value of warrants outstanding as of December 31, 2009 is $322,880.
33
Table of Contents
Note 6
Operating Leases
The Company leases approximately 19,000 square feet of office space at its principal office
under an operating lease agreement which terminates on July 31, 2016. In addition, the Company
leases approximately 2,200 square feet of office space for a subsidiary company under an operating
lease agreement which terminates on February 28, 2011. Total lease and operating expenses for the
years ended December 31, 2009, 2008, and 2007 were $501,209, $390,196, and $306,337,
respectively. The approximate future minimum lease payments under the operating leases are as
follows:
| 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||||
| $ | 358,000 |
|
$ | 340,000 | $ | 348,000 | $ | 356,000 | $ | 358,000 | $ | 571,000 | ||||||||||
In addition to the above rent, the Company is also responsible for normal operating
expenses of the properties. Such operating expenses were approximately $9.79 per square foot in
2009, on a combined basis, and are expected to be approximately $9.97 per square foot in 2010.
Note 7
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. The federal
income tax benefit for 2008 includes interest and penalties paid of $11 thousand.
| 2009 | 2008 | 2007 | ||||||||||
|
Current city income tax provision
|
$ | 266,711 | $ | 375,821 | $ | 197,760 | ||||||
|
Current state income tax provision
|
44,000 | 11,000 | — | |||||||||
|
Current federal income tax provision
|
4,358,283 | 4,396,824 | — | |||||||||
|
Deferred federal income tax provision (benefit)
|
1,468,051 | (2,535,960 | ) | 4,857,548 | ||||||||
|
|
||||||||||||
|
Provision for income taxes
|
$ | 6,137,045 | $ | 2,247,685 | $ | 5,055,308 | ||||||
|
|
||||||||||||
A reconciliation of income tax expense at the statutory federal rate to the Company’s
income tax expense is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Income tax computed at statutory rate
|
$ | 5,990,509 | $ | 1,898,479 | $ | 5,095,792 | ||||||
|
City and state income taxes, net of federal benefit
|
204,417 | 255,302 | 197,760 | |||||||||
|
Other
|
(57,881 | ) | 93,904 | (238,244 | ) | |||||||
|
|
||||||||||||
|
Income tax expense
|
$ | 6,137,045 | $ | 2,247,685 | $ | 5,055,308 | ||||||
|
|
||||||||||||
Deferred tax assets and liabilities consist of the following at December 31, 2009 and 2008:
| 2009 | 2008 | |||||||
|
Stock-based compensation
|
$ | 926,222 | $ | 515,914 | ||||
|
Unrealized (gains) losses
|
(1,742,009 | ) | 316,249 | |||||
|
Capital loss carry forward
|
1,547,804 | 1,182,044 | ||||||
|
Other assets and liabilities
|
(211,052 | ) | (25,191 | ) | ||||
|
|
||||||||
|
Net deferred tax assets
|
$ | 520,965 | $ | 1,989,016 | ||||
|
|
||||||||
For the years ended December 31, 2009 and 2008, the Company received net federal tax
benefits from the exercise of stock-based compensation of $119,204 and $3,805,977 respectively,
which resulted in an increase to equity. As of December 31, 2007, the Company and its
subsidiaries had a net operating loss (“NOL”) carry forward for tax purposes of approximately
$5,800,000. The NOL related to the exercise of stock options and warrants. The tax benefit of
the NOL was fully utilized in 2008 and was recognized in equity in 2008.
34
Table of Contents
Note 8
Earnings Per Share
The following table sets forth the computation for basic and diluted earnings per share
(“EPS”):
| Year Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Basic and Diluted net income
|
$ | 11,373,943 | $ | 3,276,078 | $ | 9,932,315 | ||||||
|
Weighted average number of outstanding shares
|
||||||||||||
|
Basic
|
2,582,998 | 2,400,142 | 2,155,829 | |||||||||
|
Diluted
|
2,587,751 | 2,408,476 | 2,264,234 | |||||||||
|
Earnings per share
|
||||||||||||
|
Basic
|
$ | 4.40 | $ | 1.36 | $ | 4.61 | ||||||
|
|
||||||||||||
|
Diluted
|
$ | 4.40 | $ | 1.36 | $ | 4.39 | ||||||
|
|
||||||||||||
Note 9
Regulatory Requirements
BHIL, a wholly owned subsidiary of the Company and principal underwriter for mutual funds, is
subject to the Securities and Exchange Commission uniform net capital rule, which requires the
maintenance of minimum net capital. For purposes of this rule, BHIL had net capital of $279,718,
which exceeds its minimum net capital requirement of $132,199 at December 31, 2009. BHIL’s ratio
of aggregate indebtedness to net capital at December 31, 2009 was 7.09 to 1.
Note 10
Commitments and Contingencies
The Company indemnifies its directors and certain of its officers and employees for certain
liabilities that might arise from their performance of their duties to the Company. Additionally,
in the normal course of business, the Company enters into agreements that contain a variety of
representations and warranties and which provide general indemnifications. Certain agreements do
not contain any limits on the Company’s liability and would involve future claims that may be made
against the Company that have not yet occurred. Therefore, it is not possible to estimate the
Company’s potential liability under these indemnities. Further, the Company maintains insurance
policies that may provide coverage against certain claims under these indemnities.
35
Table of Contents
| ITEM 9: |
Changes In and Disagreements With Accountants on Accounting and Financial Disclosures
|
None
| ITEM 9A: |
Controls and Procedures
|
Management, including the Chief Executive Officer and the Chief Financial Officer, has
conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of the end
of the period covered by this annual report (the “Evaluation Date”). Based on such evaluation, the
Chief Executive Officer and the Chief Financial Officer have concluded that as of the Evaluation
Date, the Company’s disclosure controls and procedures are effective to ensure that the information
required to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and forms, and to
ensure that the information required to be disclosed by the Company in the reports it files or
submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s
management, including the Chief Executive Officer and Chief Financial Officer, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
There have not been any changes in the Company’s internal control over financial reporting during
the quarter ended December 31, 2009 that have materially affected or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Management’s report on the Company’s internal control over financial reporting follows.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Diamond Hill Investment Group, Inc. (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting, as defined in Rule
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of its consolidated financial statements
for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Chief Executive Officer and the Chief
Financial Officer, management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009 based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2009.
The Company’s independent registered public accounting firm, Plante & Moran, PLLC, has audited the
Company’s 2009 and 2008 consolidated financial statements included in this Annual Report on Form
10-K and the Company’s internal control over financial reporting as of December 31, 2009, and has
issued its report of Independent Registered Public Accounting Firm on Consolidated Financial
Statements, which is included in this Annual Report on Form 10-K.
36
Table of Contents
| ITEM 9B: |
Other Information
|
None
| ITEM 10: |
Directors, Executive Officers and Corporate Governance
|
Information regarding this Item 10 is incorporated by reference to the Company’s proxy
statement for its 2010 annual meeting of shareholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Exchange Act (the “2010 Proxy Statement”), under the
Captions: “Proposal 1 – Election of Directors”, “Executive Officers and Compensation Information”,
“Corporate Governance”, and “Section 16(a) Beneficial Ownership Reporting Compliance”.
| ITEM 11: |
Executive Compensation
|
Information regarding this Item 11 is incorporated by reference to the Company’s 2010 Proxy
Statement under the Captions: “Executive Officers and Compensation Information” and “Corporate
Governance”.
| ITEM 12: |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The following table sets forth certain information concerning our equity compensation plans
at December 31, 2009:
Equity Compensation Plan Information
| (a) 1 | (b) | (c) 2 | ||||||||||
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities to | future issuance under | |||||||||||
| be issued upon the | Weighted-average | equity compensation | ||||||||||
| exercise of outstanding | exercise price of | plans (excluding | ||||||||||
| options, warrants and | outstanding options, | securities reflected in | ||||||||||
| Plan category | rights | warrants and rights | column (a)) | |||||||||
|
Equity compensation plans approved
by security holders
|
— | — | 394,358 | |||||||||
|
|
||||||||||||
|
Equity compensation plans not approved
by security holders
|
6,000 | $ | 10.42 | — | ||||||||
|
|
||||||||||||
|
Total
|
6,000 | $ | 10.42 | 394,358 | ||||||||
|
|
||||||||||||
| 1 |
The amount appearing under the “Number of securities to be issued upon the exercise of
outstanding options, warrants and rights” represents shares underlying warrants issued to
former members of the Board of Directors for compensatory purposes.
|
|
| 2 |
The amount appearing under “Number of securities remaining available for future issuance
under equity compensation plans” relates to our 2005 Employee and Director Equity Incentive
Plan. The maximum aggregate number of shares that may be granted and/or sold under our 2005
Employee and Director Equity Incentive Plan is annually increased on December 31 by an amount
equal to the lesser of (i) 100,000 shares, (ii) 5% of the Company’s total outstanding shares
on such date, or (iii) a lesser amount determined by the Board of Directors.
|
The other information regarding this Item 12 is incorporated by reference to the Company’s
2010 Proxy Statement under the Captions: “Security Ownership of Certain Beneficial Owners and
Management” and “Executive Officers and Compensation Information”.
37
Table of Contents
| ITEM 13: |
Certain Relationships and Related Transactions, and Director Independence
|
Information regarding this Item 13 is incorporated by reference to the Company’s 2010 Proxy
Statement under the Caption: “Corporate Governance”.
| ITEM 14: |
Principal Accounting Fees and Services
|
Information regarding this Item 14 is incorporated by reference to the Company’s 2010 Proxy
Statement under the Caption: “Independent Registered Public Accounting Firm”.
38
Table of Contents
| ITEM 15: |
Exhibits, Financial Statement Schedules
|
| (1) |
Financial Statements: See “Part II. Item 8, Financial Statements and Supplementary
Data”.
|
|
| (2) |
Financial Statement Schedules are omitted because they are not required or the required
information is included in the financial statements or notes thereto.
|
|
| (3) |
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, 2002 filed with the SEC on May 7, 2002; File No. 000-24498.)
|
||
| 10.1 |
Representative Investment Management Agreement between Diamond Hill Capital Management, Inc. and the
Diamond Hill Funds. (Incorporated by reference from Exhibit 23d(viii) to Post-Effective Amendment Nos.
22 and 23 to Registration Statement on Form N1-A (File Nos. 333-22075 and 811-08061) filed by Diamond
Hill Funds on December 30, 2005)
|
||
| 10.2 |
Seventh Amended and Restated Administrative and Transfer Agency Services Agreement dated as of May 31,
2002, as amended, between Diamond Hill Capital Management, Inc. and the Diamond Hill Funds.
(Incorporated by reference from Exhibit 28h(ix) to Post-Effective Amendment Nos. 28 and 29 to
Registration Statement on Form N1-A (File Nos. 333-22075 and 811-08061) filed by Diamond Hill Funds on
April 30, 2009)
|
||
| 10.3 |
2005 Employee and Director Equity Incentive Plan, as amended January 1, 2008. (Incorporated by
reference from Exhibit 10.6 to Form 10-K filed with the SEC on March 14, 2008; File No. 000-24498.)
|
||
| 10.4 |
2006 Performance-Based Compensation Plan, as amended January 1, 2008. (Incorporated by reference from
Exhibit 10.7 to Form 10-K filed with the SEC on March 14, 2008; File No. 000-24498.)
|
||
| 10.5 |
Employment Agreement between the Company and Roderick H. Dillon, Jr. dated August 10, 2006, as amended
February 28, 2008. (Incorporated by reference from Exhibit 10.8 to Form 10-K filed with the SEC on
March 14, 2008; File No. 000-24498.)
|
||
| 10.6 |
First Amendment to the Amended and Restated Employment Agreement between the Company and Roderick H.
Dillon, Jr. dated December 2, 2008. (Incorporated by reference from Exhibit 10.6 to Form 10-K filed with
the SEC on March 13, 2009; File No. 000-24498.)
|
||
| 14.1 |
Amended Code of Business Conduct and Ethics. (Incorporated by reference from Exhibit 14.1 to Form 10-K
filed with the SEC on March 13, 2009; File No. 000-24498.)
|
||
| 21.1 |
Subsidiaries of the Company. (Filed herewith)
|
||
| 23.1 |
Consent of Independent Registered Public Accounting Firm, Plante & Moran, PLLC. (Filed herewith)
|
||
| 31.1 |
Certification of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). (Filed herewith)
|
||
| 31.2 |
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a). (Filed herewith)
|
||
| 32.1 |
Section 1350 Certifications. (Furnished herewith)
|
39
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized:
| DIAMOND HILL INVESTMENT GROUP, INC. | ||||
|
|
||||
|
By:
|
/S/ R. H. Dillon | |||
|
|
|
March 5, 2010 | ||
|
|
President, Chief Executive Officer and a Director | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, 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, Chief Executive Officer,
and a Director |
March 5, 2010 | ||
|
|
||||
|
/S/ James F. Laird
|
Chief Financial Officer, Treasurer,
and Secretary |
March 5, 2010 | ||
|
|
||||
|
/S/ Gary R. Young
|
Controller | March 5, 2010 | ||
|
|
||||
|
/S/ Lawrence E. Baumgartner
|
Director | March 5, 2010 | ||
|
|
||||
|
/S/ David P. Lauer
|
Director | March 5, 2010 | ||
|
|
||||
|
/S/ James G. Mathias
|
Director | March 5, 2010 | ||
|
|
||||
|
/S/ David R. Meuse
|
Director | March 5, 2010 | ||
|
|
||||
|
/S/ Diane D. Reynolds
|
Director | March 5, 2010 | ||
|
|
||||
|
/S/ Donald B. Shackelford
|
Director | March 5, 2010 |
40
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A: Risk FactorsItem 1B: Unresolved Staff Comments - NoneItem 2: PropertiesItem 3: Legal ProceedingsItem 4: Submission Of Matters To A Vote Of Security HoldersPart IIItem 5: Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6: Selected Financial DataItem 7: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Business and OrganizationNote 2 Significant Accounting PoliciesNote 2 Significant Accounting Policies (continued)Note 3 Investment PortfolioNote 4 Capital StockNote 5 Stock-based CompensationNote 5 Stock-based Compensation (continued)Note 6 Operating LeasesNote 7 Income TaxesNote 8 Earnings Per ShareNote 9 Regulatory RequirementsNote 10 Commitments and ContingenciesItem 9: Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresItem 9A: Controls and ProceduresItem 9B: Other InformationPart IIIItem 10: Directors, Executive Officers and Corporate GovernanceItem 11: Executive CompensationItem 12: Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13: Certain Relationships and Related Transactions, and Director IndependenceItem 14: Principal Accounting Fees and ServicesPart Iv:Item 15: Exhibits, Financial Statement Schedules