10-Q 1 y00478e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 333-33572 -------------- DIAMOND TRIUMPH AUTO GLASS, INC. (Exact name of registrant as specified in its charter) DELAWARE 23-2758853 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 DIVISION STREET, KINGSTON, PENNSYLVANIA 18704 (Address, including zip code of principal executive offices) (570) 287-9915 (Telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or Section 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 Yes [ ] No [X] As of August 16, 2004, there were 1,011,366 shares outstanding of Diamond's Common Stock ($.01 par value) and 35,000 shares outstanding of Diamond's Series A 12% Senior Cumulative Preferred Stock ($.01 par value). DIAMOND TRIUMPH AUTO GLASS, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004 INDEX

2 PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands except per share amounts)

See notes to condensed consolidated financial statements 3 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in Thousands except per share amounts) Three Months Ended Three Months Ended June 30, 2004 June 30, 2003 ------------------ ------------------ Net sales $ 56,930 $ 59,790 Cost of sales 16,281 18,536 -------- -------- Gross profit 40,649 41,254 Operating expenses 35,988 36,492 -------- -------- Income from operations 4,661 4,762 Other (income) expense: Interest income -- (6) Interest expense 2,060 1,180 -------- -------- 2,060 1,174 -------- -------- Income before provision for income taxes 2,601 3,588 Provision for income taxes 2,158 1,399 -------- -------- Net Income 443 2,189 Preferred stock dividends 2,135 1,896 -------- -------- Net (loss) income applicable to common stockholders $ (1,692) $ 293 ======== ======== See notes to condensed consolidated financial statements 4 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in Thousands except per share amounts) Six Months Ended Six Months Ended June 30, 2004 June 30, 2003 ---------------- ---------------- Net sales $ 110,306 $ 113,923 Cost of sales 31,467 34,773 --------- --------- Gross profit 78,839 79,150 Operating expenses 72,474 70,887 --------- --------- Income from operations 6,365 8,263 Other (income) expense: Interest income -- (21) Interest expense 4,149 3,578 --------- --------- 4,149 3,557 --------- --------- Income before provision for income taxes 2,216 4,706 Provision for income taxes 1,839 1,835 --------- --------- Net income 377 2,871 Preferred stock dividends 4,207 3,737 --------- --------- Net loss applicable to common stockholders $ (3,830) $ (866) ========= ========= See notes to condensed consolidated financial statements 5 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in Thousands except per share amounts)

See notes to condensed consolidated financial statements 6 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in thousands except per share amounts) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES These interim financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the data for the interim periods presented. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in Diamond's Annual Report on Form 10-K for the year ended December 31, 2003. Diamond's results for interim periods are not normally indicative of results to be expected for the fiscal year. Weather has historically affected Diamond's sales and net income, with severe weather generating increased sales and net income, and mild weather resulting in lower sales and net income. In addition, Diamond's business is somewhat seasonal, with the first and fourth calendar quarters traditionally its slowest periods of activity. Preferred Stock: At June 30, 2004 and December 31, 2003, the liquidation value of the Preferred Stock recorded on Diamond's Balance Sheet was $73,282 and $69,076, respectively, which includes dividends of $38,282 and $34,076, respectively. Borrowings: Credit Facility - On March 27, 2000, Diamond entered into a revolving credit facility (the "Credit Facility"), which had an initial term of four years and provides for revolving advances of up to the lesser of: (1) $25,000; (2) the sum of 85% of Diamond's Eligible Accounts Receivable (as defined in the Credit Facility) plus 85% of Diamond's Eligible Inventory (as defined in the Credit Facility), less certain reserves; or (3) an amount equal to 1.5 times Diamond's EBITDA (as defined in the Credit Facility) for the prior twelve months. On November 26, 2003, Diamond amended the Credit Facility, which, among other things extended the term for an additional three year period through March 27, 2007. A portion of the Credit Facility, not to exceed $10,000, is available for the issuance of letters of credit, which generally have an initial term of one year or less. Diamond had $6,141 in outstanding letters of credit at June 30, 2004. Borrowings under the Credit Facility bear interest, at Diamond's discretion, at either the JP Morgan Chase Manhattan Bank Rate (as defined in the Credit Facility) or LIBOR, plus a margin of 0.50% for the JP Morgan Chase Manhattan Rate and 2.25% for the LIBOR Rate. In addition, a commitment fee of 0.25% is charged against any unused balance of the Credit Facility. Interest rates are subject to increases or reductions based upon Diamond meeting certain EBITDA levels. The proceeds of the Credit Facility are available for working capital requirements and for general corporate purposes. The Credit Facility is secured by first priority security interests in all of Diamond's tangible and intangible assets. In addition, the Credit Facility contains certain restrictive covenants including, among other things, the maintenance of a minimum EBITDA level as of June 30, 2004 of $8,500 for the prior twelve months (the "EBITDA Covenant"), as well as restrictions on additional indebtedness, dividends and certain other significant transactions. Diamond was in compliance with the EBITDA Covenant for the fiscal period ended June 30, 2004. Diamond had no outstanding balance under the Credit Facility at June 30, 2004. Stock Option Plan: In September 1998, the Board of Directors and stockholders of Diamond approved and adopted the Diamond Triumph Auto Glass 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for the issuance of a total of 30,000 authorized and un-issued shares of common stock. As of June 30, 2004, the 7 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in thousands except per share amounts) Board of Directors had granted 22,175 options to key employees of Diamond with an exercise price of $20.00 per share, which approximates fair value at the date of grant. The options vest evenly over five years and may not be exercised until the earlier of (a) 90 days after Diamond's Common Stock has become publicly traded or (b) 91 days prior to the tenth anniversary of the date of the grant. The 1998 Plan expires in September 2008. 500 options were granted in July 2003 and no options were granted during the six months ended June 30, 2004. Diamond accounts for its stock option plan under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized for options issued to employees at fair market value on the date of grant. In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 established a fair value based method of accounting for stock-based compensation plans. SFAS No. 123 requires that a company's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. As allowed by SFAS No. 123, Diamond has elected to continue to account for its employee stock-based compensation plans under APB Opinion No. 25, and adopted only the disclosure requirements of SFAS No. 123. Had compensation cost for Diamond's common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", Diamond's net income (loss) would have been reduced to the following pro forma amounts:

The fair value of the options granted in 2003 was $2.63 using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 2.82%, volatility of 0% and expected dividend yield of 0%. NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS In December 2002, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). The Interpretation requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 are effective for all variable interest entities created or acquired after January 31, 2003. In December 2003, the 8 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in thousands except per share amounts) Financial Accounting Standards Board issued a revision to FIN 46 referred to as Interpretation No. 46(R). Among other provisions, the revision extended the adoption date of FIN 46(R) to the first quarter of 2004 for variable interest entities created prior to February 1, 2003. The adoption of this interpretation had no impact on Diamond's consolidated financial statements. NOTE 3. EXECUTIVE COMPENSATION On June 1, 2002 (the "Grant Date"), Norman Harris (the "Executive") and Diamond entered into a Restricted Stock Agreement (the "Agreement") pursuant to which the Executive purchased from Diamond 26,366 shares (the "Restricted Shares") of Diamond's common stock, par value $0.01 per share, for nominal consideration. The Agreement generally restricts the sale or transferability of shares of Common Stock held by the Executive before the Restrictions (as defined in the Agreement) have lapsed. The Executive has all rights and privileges of a stockholder with respect to the Restricted Shares, including voting rights and the right to receive dividends paid with respect to the Restricted Shares. Generally, the Restricted Shares vest and the Restrictions lapse: (i) with respect to 20% of the Restricted Shares on the Grant Date; and (ii) with respect to 20% of the Restricted Shares on each subsequent anniversary of the Grant Date until the Restricted Shares are fully vested. Compensation expense, unearned restricted stock compensation, and proceeds from common stock issued have been recognized based on the vesting periods and an estimated fair market value of $20 per share. On November 17, 2003, Diamond entered into an employment agreement with each of Kenneth Levine and Richard Rutta, pursuant to which Messrs. Levine and Rutta agreed to serve as the Co-Chairmen of Diamond at an annual salary of $320 each subject to annual review based on Diamond's and Messrs. Levine and Rutta's performance. The employment agreements provide for a term commencing on November 17, 2003 and ending on November 16, 2004. On March 15, 2004, the employment agreements were amended to reduce the annual salary for Messrs. Levine and Rutta to $52 each. In addition to their annual salary, Messrs. Levine and Rutta are eligible to receive a bonus based upon the achievement of certain criteria. The employment agreements also contain various severance, non-competition, non-solicitation provisions, non-disclosure and assignment of inventions provisions. NOTE 4. LEGAL PROCEEDINGS On May 2, 2002, Diamond filed an amended Complaint with the United States District Court, Middle District of Pennsylvania against Safelite Glass Corporation (the "Defendant"). Diamond alleges, among other things, that the Defendant's conduct as (i) an operator of national telephone call centers which takes first notice of loss calls from insureds of several of the largest automobile insurers in the United States (the "Insurers"); (ii) a provider of various claims processing services to the Insurers as a third-party administrator; and (iii) an operator of a network of retail repair and replacement facilities who perform work for the Insurers as Safelite affiliates, violated certain federal and state laws and gave rise to other legal and equitable claims against the Defendant. Diamond alleges that the Defendant engaged in various practices designed to divert customers away from Diamond to the Defendant, and that Diamond has suffered damages as a result of this conduct in an amount to be determined at trial. On November 1, 2002, the Defendant filed a counter claim against Diamond, alleging, among other things, that Diamond has engaged and continues to engage in publishing certain false and defamatory statements about the Defendant to automobile insurance companies that are the Defendant's clients. Defendant alleges that this alleged conduct has injured the Defendant's goodwill and business reputation with its insurance 9 DIAMOND TRIUMPH AUTO GLASS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Dollars in thousands except per share amounts) clients and in the auto glass repair and replacement industry. Among other things, the Defendant is seeking damages in an amount to be determined at trial. On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr., on behalf of themselves and all others similarly situated (the "Plaintiffs"), filed a class action Complaint in the Court of Common Pleas of Luzerne County, Pennsylvania against Diamond. Plaintiffs allege, among other things, Diamond violated certain sections of the Pennsylvania Unfair Trade Practices and Consumer Protection Law and common law. Plaintiffs allege that this alleged conduct has caused monetary damages to Plaintiffs. Among other things, Plaintiffs are seeking damages in an amount to be determined at trial. Diamond believes Plaintiffs' allegations are without merit and plans to vigorously contest this complaint. Diamond is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Diamond's financial condition, results of operations or financial position. No amounts have been recorded in the consolidated financial statements for any of these legal actions. NOTE 5. INCOME TAXES As disclosed in the Company's 10-K for the year ended December 31, 2003, the Internal Revenue Service has concluded its audit of the tax periods ended December 31, 1998, 1999, and 2000. As a result of this audit, the Internal Revenue Service issued a notice of proposed adjustments on February 20, 2002, which included a disallowance of the tax-deductible goodwill resulting from Diamond's March 31, 1998 Recapitalization Transaction (as defined in Diamond's 10-K for the year ended December 31, 2003). The Internal Revenue Service has asserted that the Recapitalization Transaction did not qualify as a stock purchase, and accordingly, that the election under Internal Revenue Code Section 338(h)(10) was not valid. As a result, if the IRS position is sustained, tax-deductible goodwill would not be recognizable by Diamond. The proposed adjustments by the Internal Revenue Service would result in $7.6 million of federal tax deficiencies owed by Diamond for the period December 31, 1998 through December 31, 2003, plus possible interest and penalties and any resultant increases in current state tax expense for this period. Additionally, the deferred tax asset established in 1998 would be eliminated, as well as net operating loss carryforwards from previous deductions of the tax goodwill. The carrying amount of these assets at December 31, 2003 was approximately $37.0 million. Diamond strongly believes that the Recapitalization Transaction is properly accounted for, and has appealed the Internal Revenue Service's proposed adjustment. If such appeal is ultimately unsuccessful, the Internal Revenue Service's proposed adjustment would have a material adverse affect on Diamond's liquidity, cash flows, balance sheet and results of operations. NOTE 6. CONTINGENT GUARANTEED COMMITMENTS Diamond leases certain vehicles under operating leases having lease terms of 367 days. The leases have monthly renewal options. The vehicle lease agreement provides for terminal lease payments for guaranteed residual values reduced by actual proceeds from the vehicle sale in the event the lease is not renewed. The contingent guaranteed residual value payment commitment was $11.5 million at June 30, 2004. No amounts have been accrued related to this contingent obligation because Diamond does not believe it is probable that the payments will be required. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Diamond is a leading provider of automotive glass replacement and repair services in the United States. At June 30, 2004, Diamond operated a network of 257 automotive glass service centers, approximately 1,100 mobile installation vehicles and six distribution centers in 45 states. Diamond serves all of its customers' automotive glass replacement and repair needs, offering windshields, tempered glass and other related products. Sales, net income and EBITDA for the six months ended June 30, 2004 were $110.3 million, $0.4 million and $7.5 million, respectively. Sales, net income and EBITDA for the three months ended June 30, 2004 were $56.9 million, $0.4 million and $5.2 million, respectively. Weather has historically affected Diamond's sales and net income, with severe weather generating increased sales and net income and mild weather resulting in lower sales and net income. In addition, Diamond's business is somewhat seasonal, with the first and fourth quarters traditionally its slowest period of activity. Diamond believes these seasonal trends will continue for the foreseeable future. The price of replacement automotive glass is based in part on list prices developed by the National Auto Glass Specification ("NAGS"), an independent third party. Prices charged by participants in the automotive glass replacement industry are independently determined using varying percentage discounts from the NAGS price list. The impact of NAGS price changes on Diamond's financial results depends on the level of discounts Diamond grants to its customers and the level of discounts that Diamond can obtain from its glass suppliers. Effective January 1, 1999, NAGS significantly modified its published list prices in order to bring actual prices more in line with published list prices. Although NAGS has not materially modified its published list prices since January 1, 1999, NAGS has made periodic modifications to its published list prices subsequent to that date, including a series of price changes effective January 2003 that resulted in a 4% to 5% decrease in overall list prices. NAGS modified its published list prices in January 2004 which resulted in moderate decreases in overall list prices. Diamond believes that, due to its sole focus on automotive glass replacement and repair, it has one of the lowest cost structures in the automotive glass replacement and repair industry. Diamond's low cost structure enables it to serve all markets of the industry, which is comprised of: (1) individual consumers; (2) commercial customers, including commercial fleet leasing companies, rental car companies, car dealerships, body shops, utilities and government agencies; and (3) insurance customers, including referrals from local agents, claims offices and centralized call centers. While the largest participant in the industry primarily focuses on servicing automotive glass insurance claims (including providing related insurance claims processing services) and also manufactures automotive glass, Diamond has strategically positioned itself solely as a provider of automotive glass replacement and repair services to a balanced mix of individual, commercial and insurance customers. RESULTS OF OPERATIONS The following table summarizes Diamond's historical results of operations and historical results of operations as a percentage of sales for the six and three months ended June 30, 2004 and 2003.

(1) EBITDA represents net income before interest, taxes, depreciation and amortization. EBITDA and the related ratios presented in this table are measures of Diamond's performance that are not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of Diamond's financial performance under GAAP and should not be considered an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. Diamond presents EBITDA because it considers it an important supplemental measure of its performance and believes it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry, many of which present EBITDA when reporting their results. Diamond believes issuers of "high yield" securities also present EBITDA because investors, analysts and rating agencies consider it useful in measuring the ability of those issuers to meet debt service obligations. Diamond believes EBITDA is an appropriate supplemental measure of debt service capacity, because cash expenditures on interest are, by definition, available to pay interest, and tax expense is inversely correlated to interest expense because tax expense goes down as deductible interest expense goes up; depreciation and amortization are non-cash charges. Diamond also uses EBITDA for the following purposes: (i) its executives' compensation plans base incentive compensation payments on its EBITDA performance measured against budgets; and (ii) its 12 credit agreement and its indenture for its Notes use EBITDA to measure Diamond's compliance with covenants such as interest coverage and debt incurrence. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of Diamond's results as reported under GAAP. Some of these limitations are: - EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; - EBITDA does not reflect changes in, or cash requirements for, our working capital needs; - EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; - Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and - Other companies in Diamond's industry may calculate EBITDA differently than Diamond does, limiting its usefulness as a comparative measure. Because of these limitations, EBITDA should not be considered as a measure of discretionary cash available to Diamond to invest in the growth of its business. Diamond compensates for these limitations by relying primarily on its GAAP results and using EBITDA only supplementally. See the Statements of Cash Flows included in our financial statements. Reconciliation of EBITDA to net income follows for the periods indicated:

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 Net Sales. Net sales for the six-month period ended June 30, 2004 decreased 3.2% to $110.3 million from $113.9 million as compared to the six-month period ended June 30, 2003. Installation units sold through June 30, 2004 decreased 0.6% compared to the six-month period ended June 30, 2003. Diamond's revenue per installation unit for the six-month period ended June 30, 2004 was 3.1% below the revenue per installation unit for the six-month period ended June 30, 2003. The decrease in sales and revenue per installation unit sold was primarily due to pricing pressures experienced throughout the industry. 13 Gross Profit. Gross profit was $78.8 million for the six months ended June 30, 2004 and $79.1 million for the six months ended June 30, 2003. Gross profit increased as a percentage of sales to 71.5% for the six months ended June 30, 2004 from 69.5% for the six months ended June 30, 2003. The decrease in gross profit is due to a decrease in average revenue per installation unit. The increase in gross profit percentage is primarily due to decreased product costs, which is due to the continued leveraging of Diamond's purchasing power and to enhanced inventory management as a result of increased system functionality from our recently upgraded MIS platform. Operating Expenses. Operating expenses increased by $1.6 million or 2.3% to $72.5 million during the six-month period ended June 30, 2004 from $70.9 million for the six-month period ended June 30, 2003. The increase in operating expenses was due to an increase in wages and wage related expenses primarily at the service center level, due to increased installation capacity, wage rate pressures and general wage increases. The increase in operating expenses was also due to an increase in occupancy costs primarily due to normal rental rate increases and an increase in vehicle fuel costs due to rising prices. We also experienced an increase in vehicle lease expense due to the continued retirement of owned vehicles that are replaced with leased vehicles, and accelerated amortization of leased vehicle lives in order to more closely align our lease obligation upon termination of the lease with expected vehicle market values. These increases were partially offset by a decrease in vehicle maintenance expense, which is partially the result of continued efforts in our fleet management to more aggressively recycle leased vehicles out of the fleet on an earlier basis and attempt to reduce significant repair expenditures related to those vehicles. Depreciation and amortization expense for the six-month period ended June 30, 2004 decreased by $0.2 million or 14.3% to $1.2 million from $1.4 for the six-month period ended June, 2003. This was primarily due to decreases in depreciation expense for computer hardware, sales audit software, and POS software that became fully depreciated. Income From Operations. Income from operations for the six months ended June 30, 2004 decreased by $1.9 million, or 22.9%, to $6.4 million from $8.3 million for the six months ended June 30, 2003. This decrease was primarily due to the increased operating costs which were partially offset by increased gross profit discussed above. Interest Expense. Interest expense for the six months ended June 30, 2004 increased $0.5 million, or 13.9%, to $4.1 million from $3.6 million for the six months ended June 30, 2003. The increase in interest expense is primarily due to the recording of a net gain of $1.1 million from the repurchase of senior notes during the six months ended June 30, 2003, which reduced interest expense for that period. There was no similar repurchase activity during the six months ended June 30, 2004. The increase for the six months ended June 30, 2004 was partially offset by decreased interest expense as a direct result of the repurchase of $13.2 million face amount of senior notes during 2003. Net Income. Net income for the six months ended June 30, 2004 decreased by $2.5 million to $0.4 million of net income from $2.9 million of net income for the six months ended June 30, 2003. Net income as a percentage of sales decreased 2.1% for the six months ended June 30, 2004 compared to the six months ended June 30, 2003. The decrease in net income and net income margin during the six months ended June 30, 2004 compared to the six months ended June 30, 2003 was primarily due to the increased operating expenses discussed above, and also due to recording a net gain of $1.1 million in 2003 from the repurchase of senior notes discussed above. THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 Net Sales. Net sales for the three-month period ended June 30, 2004 decreased 4.8% to $56.9 million from $59.8 million as compared to the three-month period ended June 30, 2003. Installation units 14 sold for the three months ended June 30, 2004 decreased 3.7% compared to the three months ended June 30, 2003. Diamond's revenue per installation unit for the three-month period ended June 30, 2004 was 1.6% below the revenue per installation unit for the three-month period ended June 30, 2003. The decrease in installation units sold is primarily due to weaker industry demand. The decrease in revenue per installation unit sold is primarily due to pricing pressures experienced throughout the industry. The decrease in sales is due to the decreases in installation units sold and revenue per installation unit. Gross Profit. Gross profit was $40.6 million for the three months ended June 30, 2004 and $41.3 million for the three months ended June 30, 2003. Gross profit increased as a percentage of sales to 71.4% for the three months ended June 30, 2004 from 69.1% for the three months ended June 30, 2003. The decrease in gross profit is due to a decrease in average revenue per installation unit. The increase in gross profit percentage is primarily due to decreased product costs, which is due to the continued leveraging of our purchasing power and to enhanced inventory management as a result of increased system functionality from our recently upgraded MIS platform. Operating Expenses. Operating expenses decreased by $0.6 million or 1.6% to $35.9 million during the three-month period ended June 30, 2004 from $36.5 million for the three-month period ended June 30, 2003. The decrease in operating expenses is due to a decrease in vehicle maintenance expense, which is partially the result of continued efforts in our fleet management to more aggressively recycle leased vehicles out of the fleet on an earlier basis in an attempt to significantly reduce repair expenditures related to those vehicles. The decrease in operating expense is also due to decreases in advertising and promotional, and shop maintenance expenses. These decreases were partially offset by an increase in operating expenses due to an increase in wages and wage related expenses primarily at the service center level, due to increased installation capacity, wage rate pressures and general wage increases. We experienced an increase in occupancy costs primarily due to normal rental rate increases and an increase in vehicle fuel costs due to rising prices. We also experienced an increase in vehicle lease expense due to the continued retirement of owned vehicles that are replaced with leased vehicles, and accelerated amortization of leased vehicle lives in order to more closely align our lease obligation upon termination of the lease with expected vehicle market values. Depreciation and amortization expense for the three-month period ended June 30, 2004 decreased by $0.1 million or 16.7% to $0.5 million from $0.6 million for the three-month period ended June 30, 2003. This was primarily due to decreases in depreciation expense for computer hardware, sales audit software, and POS software that became fully depreciated. Income From Operations. Income from operations for the three months ended June 30, 2004 decreased by $.1 million, or 2.1%, to $4.7 million from $4.8 million for the three months ended June 30, 2003. This decrease was primarily due to the decreased gross profit discussed above, which was partially offset by decreased operating expenses. Interest Expense. Interest expense for the three months ended June 30, 2004 increased $0.9 million, or 75.0%, to $2.1 million from $1.2 million for the three months ended June 30, 2003. The increase in interest expense is primarily due to the recording of a net gain of $1.1 million from the repurchase of senior notes during the three months ended June 30, 2003, thereby reducing interest expense for that period. There was no similar repurchase activity during the three months ended June 30, 2004. This increase was partially offset by decreased interest expense as a direct result of the repurchase of $13.2 million face amount of senior notes during 2003. Net Income. Net income for the three months ended June 30, 2004 decreased by $1.8 million to $0.4 million net income from $2.2 million of net income for the three months ended June 30, 2003. Net income as a percentage of sales decreased 2.9% for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. The decrease in net income and net income margin during the three months ended June 30, 2004 compared to the three months ended June 30, 2003 was primarily due to recording the net gain of $1.1 million from the repurchase of senior notes discussed above. 15 LIQUIDITY AND CAPITAL RESOURCES Diamond's need for liquidity will arise primarily from the interest payable on its 9-1/4% Senior Notes (the "Notes"), its Credit Facility and the funding of Diamond's capital expenditures and working capital requirements. There are no mandatory principal payments on the Notes prior to their maturity on April 1, 2008 and, except to the extent that the amount outstanding under the Credit Facility exceeds the borrowing base, no required payments of principal on the Credit Facility prior to its expiration on March 27, 2007. Diamond may from time to time repurchase Notes in the open market. Net Cash Provided by Operating Activities. Net cash provided by operating activities for the six months ended June 30, 2004 decreased by $1.0 million to $4.6 million from $5.6 million for the six months ended June 30, 2003. The decrease was primarily due to a decrease in Diamond's net income for the six-month period ended June 30, 2004 as compared to the six-month period ended June 30, 2003, as discussed above, which was partially offset by a decrease in inventory due to enhanced inventory management as a result of increased system functionality from our recently upgraded MIS platform. Net Cash Used in Investing Activities. Net cash used in investing activities for the six months ended June 30, 2004 decreased $0.3 million to $0.3 million from $0.6 million for the six months ended June 30, 2003. The decrease is primarily due to a decrease in capital expenditures. Net Cash Used in Financing Activities. Net cash used in financing activities for the six months ended June 30, 2004 was $2.5 million compared to $7.0 million used in financing activities for the six months ended June 30, 2003. The decrease is due to $9.5 million of payments for repurchase of senior notes during the six months ended June 30, 2003. There were no similar transactions during the six months ended June 30, 2004. This decrease was partially offset by a decrease in net borrowings during the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Capital Expenditures. Capital expenditures for the six months ended June 30, 2004 were $0.4 million, as compared to $0.7 million for the six months ended June 30, 2003. The decrease is due to a decrease in vehicle and software related expenditures, which were partially offset by increases in computer hardware and leasehold improvements. Liquidity. Management believes that Diamond will have adequate capital resources and liquidity to satisfy its debt service obligations, working capital needs and capital expenditure requirements for the foreseeable future. Diamond's capital resources and liquidity are expected to be provided by Diamond's net cash provided by operating activities and borrowings under the Credit Facility. See " -- Notes to Condensed Consolidated Financial Statements - Note 5 - Income Tax" for a discussion of the Internal Revenue Service's proposed adjustments with respect to Diamond's tax treatment of its Recapitalization Transaction (as defined in Diamond's 10-K for the year ended December 31, 2003). ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Diamond has a revolving Credit Facility that provides for revolving advances of up to $25.0 million, and matures in March 2007. Borrowings under the Credit Facility bear interest, at Diamond's discretion, at either the JP Morgan Chase Manhattan Bank Rate (as defined in the Credit Facility) or LIBOR, plus a margin of 0.50% for the JP Morgan Chase Manhattan Rate and 2.25% for the LIBOR Rate. In addition, a commitment fee of 0.25% is charged against any unused balance of the Credit Facility. Interest rates are subject to increases or reductions based upon Diamond meeting certain EBITDA levels. At June 30, 2004, Diamond had no outstanding borrowings under the Credit Facility. 16 FORWARD-LOOKING STATEMENTS Readers are cautioned that there are statements contained in this report which are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "expects," "anticipates," "intends," "plans," "believes," "will," "estimates," or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about Diamond, economic and market factors and the industries in which Diamond does business, among other things. These statements are not guarantees of future performance and Diamond has no specific intention to update these statements. These forward-looking statements, like any forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. The risks and uncertainties include the effect of overall economic and business conditions, the demand for Diamond's products and services, regulatory uncertainties, the impact of competitive products and pricing, changes in customers' ordering patterns and potential system interruptions. This list should not be construed as exhaustive. Diamond's annual report on Form 10-K in respect of the fiscal year ended December 31, 2003 discusses certain of these risks and uncertainties under the caption "Factors Affecting Future Performance." ITEM 4 CONTROLS AND PROCEDURES Diamond maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Diamond's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to Diamond's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), Diamond carried out an evaluation, under the supervision and with the participation of Diamond's management, including Diamond's Chief Executive Officer and Diamond's Chief Financial Officer, of the effectiveness of the design and operation of Diamond's disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, Diamond's Chief Executive Officer and Chief Financial Officer concluded that Diamond's disclosure controls and procedures were effective at the reasonable assurance level. There has been no change in Diamond's internal controls over financial reporting during Diamond's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, Diamond's internal controls over financial reporting. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 2, 2002, Diamond filed an amended Complaint with the United States District Court, Middle District of Pennsylvania against Safelite Glass Corporation (the "Defendant"). Diamond alleges, among other things, that the Defendant's conduct as (i) an operator of national telephone call centers which takes first notice of loss calls from insureds of several of the largest automobile insurers in the United States (the "Insurers"); (ii) a provider of various claims processing services to the Insurers as a third-party administrator and; (iii) an operator of a network of retail repair and replacement facilities who perform work for the Insurers as Safelite affiliates, violated certain federal and state laws and gave rise to other legal and equitable claims against the Defendant. Diamond alleges that the Defendant engaged in various practices designed to divert customers away from Diamond to the Defendant, and that Diamond has suffered damages as a result of this conduct in an amount to be determined at trial. On November 1, 2002, the Defendant filed a counter claim against Diamond, alleging, among other things, that Diamond has engaged and continues to engage in publishing certain false and defamatory statements about the Defendant to automobile insurance companies that are the Defendant's clients. Defendant alleges that this alleged conduct has injured the Defendant's goodwill and business reputation with its insurance clients and in the auto glass repair and replacement industry. Among other things, the Defendant is seeking damages in an amount to be determined at trial. On February 3, 2003, Delbert Rice and Kenneth E. Springfield, Jr., on behalf of themselves and all others similarly situated (the "Plaintiffs"), filed a class action Complaint in the Court of Common Pleas of Luzerne County, Pennsylvania against Diamond. Plaintiffs allege, among other things, Diamond violated certain sections of the Pennsylvania Unfair Trade Practices and Consumer Protection Law and common law. Plaintiffs allege that this alleged conduct has caused monetary damages to Plaintiffs. Among other things, Plaintiffs are seeking damages in an amount to be determined at trial. Diamond believes Plaintiffs' allegations are without merit and plans to vigorously contest this complaint. Diamond is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Diamond's financial condition, results of operations or liquidity. No amounts have been recorded in the consolidated financial statements for any of these legal actions. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS

(B) REPORTS ON FORM 8-K Form 8-K filed on May 17, 2004, reporting that Diamond Triumph Auto Glass, Inc. issued a press release announcing its operating and financial results for the quarter ended March 31, 2004. 19 SIGNATURE PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. DIAMOND TRIUMPH AUTO GLASS, INC. Date: August 16, 2004 By: /s/ Michael A. Sumsky ---------------------------------------- Name: Michael A. Sumsky Title: President, Chief Financial Officer and General Counsel (Principal Financial and Chief Accounting Officer) 20

DIAMOND TRIUMPH AUTO GLASS INC 10-Q