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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended October 2, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------



For the transition period from              to
             .



Commission File No. 333-112252



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Keystone Automotive Operations, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Pennsylvania                                                   |  | 23-2950980                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)



44 Tunkhannock
Avenue

Exeter, Pennsylvania 18643

(800) 233-8321

(Address, zip code, and telephone number, including

area code, of registrants principal executive office.)



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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 (or for such shorter periods 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



Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date.



Keystone Automotive Holdings, Inc. owns 100% of the registrants common stock.



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##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.



QUARTERLY REPORT FOR THE PERIOD

ENDED OCTOBER 2, 2004



|                              |  |                                                                                                                                          |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                          |  | Page
|Part 1.
Financial Information |  |                                                                                                                                         
|                              |  |                                                                                                                                         
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                         |  |     
|                              |  |                                                                                                                                         
|                              |  | Consolidated Balance Sheets  October 2, 2004 and January 3, 2004                                                                        |  | 1   
|                              |  |                                                                                                                                         
|                              |  | Consolidated Statements of Operations and Comprehensive Income  Three & Nine month periods ended October 2, 2004 and September 27, 2003 |  | 2   
|                              |  |                                                                                                                                         
|                              |  | Consolidated Statements of Cash Flows  Nine month periods ended October 2, 2004 and September 27, 2003                                  |  | 3   
|                              |  |                                                                                                                                         
|                              |  | Notes to Consolidated Financial Statements                                                                                               |  | 4   
|                              |  |                                                                                                                                         
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                    |  | 11  
|                              |  |                                                                                                                                         
|Item 3.                       |  | Quantitative and Qualitative Disclosures of Market Risk                                                                                  |  | 21  
|                              |  |                                                                                                                                         
|Item 4.                       |  | Controls and Procedures                                                                                                                  |  | 21  
|                              | 
|Part 2.
Other Information     |  |                                                                                                                                         
|                              |  |                                                                                                                                         
|Item 1.                       |  | Legal Proceedings                                                                                                                        |  | 22  
|                              |  |                                                                                                                                         
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                              |  | 22  
|                              |  |                                                                                                                                         
|Item 3.                       |  | Defaults upon Senior Securities                                                                                                          |  | 22  
|                              |  |                                                                                                                                         
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                      |  | 22  
|                              |  |                                                                                                                                         
|Item 5.                       |  | Other Information                                                                                                                        |  | 22  
|                              |  |                                                                                                                                         
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                         |  | 22  
|                              | 
|Signatures                    |  | 23                                                                                                                                      



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##### Table of Contents

PART 1. FINANCIAL INFORMATION



Item 1.Financial Statements



KEYSTONE AUTOMOTIVE OPERATIONS, INC.



CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                           |  |                 |         |   |                 |   |         |  
|------------------------------------------ |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                           |  | October 2, 2004 |         |   | January 3, 2004 |  
|                                           |  | (000s)         |         |   | (000s)         |  
|ASSETS                                     |  |                 |         |   |                 |   |         |  
|Current assets:                            |  |                 |         |   |                 |   |         |  
|Cash and cash equivalents                  |  | $               | 13,791  |   |                 | $ | 7,552   |  
|Trade accounts receivable, net             |  |                 | 33,512  |   |                 |   | 31,033  |  
|Inventories                                |  |                 | 76,106  |   |                 |   | 69,407  |  
|Deferred tax assets                        |  |                 | 2,323   |   |                 |   | 763     |  
|Prepaid expenses and other current assets  |  |                 | 4,494   |   |                 |   | 4,907   |  
|                                           |  |                 |         |   |                 |   |         |  
|Total current assets                       |  |                 | 130,226 |   |                 |   | 113,662 |  
|Property, plant and equipment, net         |  |                 | 50,002  |   |                 |   | 51,320  |  
|Deferred financing costs, net              |  |                 | 19,083  |   |                 |   | 20,431  |  
|Goodwill                                   |  |                 | 180,473 |   |                 |   | 178,780 |  
|Capitalized software, net                  |  |                 | 1,576   |   |                 |   | 2,750   |  
|Intangible assets                          |  |                 | 198,974 |   |                 |   | 207,175 |  
|Other assets                               |  |                 | 275     |   |                 |   | 327     |  
|                                           |  |                 |         |   |                 |   |         |  
|Total assets                               |  | $               | 580,609 |   |                 | $ | 574,445 |  
|                                           |  |                 |         |   |                 |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                 |         |   |                 |   |         |  
|Current liabilities:                       |  |                 |         |   |                 |   |         |  
|Current maturities of long-term debt       |  | $               | 9,500   |   |                 | $ | 10,000  |  
|Trade accounts payable                     |  |                 | 36,123  |   |                 |   | 35,674  |  
|Accrued Interest                           |  |                 | 7,630   |   |                 |   | 3,321   |  
|Accrued compensation                       |  |                 | 7,603   |   |                 |   | 6,920   |  
|Accrued expenses                           |  |                 | 5,737   |   |                 |   | 3,484   |  
|                                           |  |                 |         |   |                 |   |         |  
|Total current liabilities                  |  |                 | 66,593  |   |                 |   | 59,399  |  
|Long-term debt                             |  |                 | 275,000 |   |                 |   | 280,000 |  
|Long-term liabilities                      |  |                 | 1,603   |   |                 |   | 1,319   |  
|Deferred tax liabilities                   |  |                 | 63,556  |   |                 |   | 62,033  |  
|                                           |  |                 |         |   |                 |   |         |  
|Total liabilities                          |  |                 | 406,752 |   |                 |   | 402,751 |  
|                                           |  |                 |         |   |                 |   |         |  
|Commitments and contingencies              |  |                 |         |   |                 |   |         |  
|Shareholders Equity                       |  |                 |         |   |                 |   |         |  
|Common Stock par value of $0.01 per share: |  |                 |         |   |                 |   |         |  
|Authorized/Issued 1,000 in 2003 and 2004   |  |                 |        |   |                 |   |        |  
|Contributed capital                        |  |                 | 175,000 |   |                 |   | 178,500 |  
|Accumulated deficit                        |  |                 | (1,426  | ) |                 |   | (7,039  | )
|Accumulated other comprehensive income     |  |                 | 283     |   |                 |   | 233     |  
|                                           |  |                 |         |   |                 |   |         |  
|Total shareholders equity                 |  |                 | 173,857 |   |                 |   | 171,694 |  
|                                           |  |                 |         |   |                 |   |         |  
|Total liabilities and shareholders equity |  | $               | 580,609 |   |                 | $ | 574,445 |  
|                                           |  |                 |         |   |                 |   |         |  



See accompanying notes
to financial statements



1



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##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME



(UNAUDITED)



|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|------------------------------------------------- |  | ---------------------------- | ------- | - | --------------------------------- | - | ------- | ------------------------------- |  | - | ------------------------------------ | - |  | - | -------- | -
|                                                  |  | Three Months Ending          |         |   | Nine Months Ending                |  
|                                                  |  | Successor                    |         |   | Predecessor                       |   |         | Successor                       |  |   | Predecessor                          |  
|                                                  |  | July 4,2004 toOctober 2,2004 |         |   | June 29, 2003 toSeptember 27,2003 |   |         | January 4,2004 toOctober 2,2004 |  |   | December 29,2002 toSeptember 27,2003 |  
|                                                  |  | (000s)                      |         |   | (000s)                           |   |         | (000s)                         |  |   | (000s)                              |  
|Net sales                                         |  | $                            | 111,553 |   |                                   | $ | 104,728 |                                 |  | $ | 339,765                              |   |  | $ | 304,740  |  
|Cost of sales                                     |  |                              | (76,577 | ) |                                   |   | (70,562 | )                               |  |   | (234,455                             | ) |  |   | (205,213 | )
|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Gross profit                                      |  |                              | 34,976  |   |                                   |   | 34,166  |                                 |  |   | 105,310                              |   |  |   | 99,527   |  
|Selling, general and administrative expenses      |  |                              | (25,214 | ) |                                   |   | (20,971 | )                               |  |   | (77,751                              | ) |  |   | (60,478  | )
|Reorganization and other charges                  |  |                              |        |   |                                   |   | (578    | )                               |  |   |                                     |   |  |   | (1,065   | )
|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Income from operations                            |  |                              | 9,762   |   |                                   |   | 12,617  |                                 |  |   | 27,559                               |   |  |   | 37,984   |  
|Other income (expense):                           |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Interest income                                   |  |                              | 53      |   |                                   |   | 7       |                                 |  |   | 111                                  |   |  |   | 17       |  
|Interest expense                                  |  |                              | (6,315  | ) |                                   |   | (1,273  | )                               |  |   | (18,687                              | ) |  |   | (4,934   | )
|Other income (expense), net                       |  |                              | (19     | ) |                                   |   | (34     | )                               |  |   | 254                                  |   |  |   | (33      | )
|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Income before income tax                          |  |                              | 3,481   |   |                                   |   | 11,317  |                                 |  |   | 9,237                                |   |  |   | 33,034   |  
|Income tax expense                                |  |                              | (1,281  | ) |                                   |   | (4,405  | )                               |  |   | (3,624                               | ) |  |   | (12,065  | )
|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Net income                                        |  |                              | 2,200   |   |                                   |   | 6,912   |                                 |  |   | 5,613                                |   |  |   | 20,969   |  
|Other comprehensive income:                       |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Foreign currency translation, net of taxes        |  |                              | 148     |   |                                   |   | 82      |                                 |  |   | 50                                   |   |  |   | 366      |  
|Change in fair value of derivatives, net of taxes |  |                              |        |   |                                   |   | 19      |                                 |  |   |                                     |   |  |   | 993      |  
|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  
|Comprehensive income                              |  | $                            | 2,348   |   |                                   | $ | 7,013   |                                 |  | $ | 5,663                                |   |  | $ | 22,328   |  
|                                                  |  |                              |         |   |                                   |   |         |                                 |  |   |                                      |   |  |   |          |  



See accompanying notes
to financial statements.



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##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(UNAUDITED)



|                                                                                  |  |                                 |         |   |                                      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------------ | - | ------- | -
|                                                                                  |  | Successor                       |         |   | Predecessor                          |  
|                                                                                  |  | January 4,2004 toOctober 2,2004 |         |   | December 29,2002 toSeptember 27,2003 |  
|                                                                                  |  | (000s)                         |         |   | (000s)                              |  
|Cash flows from operating activities:                                             |  |                                 |         |   |                                      |   |         |  
|Net income                                                                        |  | $                               | 5,613   |   |                                      | $ | 20,969  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |         |   |                                      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 14,277  |   |                                      |   | 5,328   |  
|Deferred financing charges                                                        |  |                                 | 2,125   |   |                                      |   |        |  
|Deferred income taxes                                                             |  |                                 | (37     | ) |                                      |   | 4,329   |  
|Non-cash charges related to inventory fair value adjustment                       |  |                                 | 3,516   |   |                                      |   |        |  
|Other non-cash charges (gains)                                                    |  |                                 | 152     |   |                                      |   | (226    | )
|Net change in operating assets and liabilities:                                   |  |                                 |         |   |                                      |   |         |  
|(Increase) in trade accounts receivable                                           |  |                                 | (2,623  | ) |                                      |   | (2,957  | )
|(Increase) in inventory                                                           |  |                                 | (10,215 | ) |                                      |   | (8,373  | )
|Increase in accounts payable and accrued liabilities                              |  |                                 | 7,978   |   |                                      |   | 14,476  |  
|Decrease in other assets/liabilities                                              |  |                                 | 433     |   |                                      |   | 3,512   |  
|                                                                                  |  |                                 |         |   |                                      |   |         |  
|Net cash provided by operating activities                                         |  |                                 | 21,219  |   |                                      |   | 37,058  |  
|                                                                                  |  |                                
|Cash flows used in investing activities:                                          |  |                                 |         |   |                                      |   |         |  
|Purchase of property, plant and equipment                                         |  |                                 | (3,007  | ) |                                      |   | (4,586  | )
|Capitalized software costs                                                        |  |                                 | (553    | ) |                                      |   | (553    | )
|Transaction cost & working capital settlement                                     |  |                                 | (1,693  | ) |                                      |   |        |  
|Proceeds from sale of property, plant and equipment                               |  |                                 |        |   |                                      |   | 20      |  
|                                                                                  |  |                                 |         |   |                                      |   |         |  
|Net cash used in investing activities                                             |  |                                 | (5,253  | ) |                                      |   | (5,119  | )
|                                                                                  |  |                                
|Cash flows from financing activities:                                             |  |                                 |         |   |                                      |   |         |  
|Borrowings under revolving line-of-credit                                         |  |                                 |        |   |                                      |   | 69,350  |  
|Repayments under revolving line-of-credit                                         |  |                                 |        |   |                                      |   | (91,350 | )
|Principal repayments on long-term debt                                            |  |                                 | (5,500  | ) |                                      |   | (8,020  | )
|Payments for financing                                                            |  |                                 | (777    | ) |                                      |   |        |  
|Repayment of capital contributions                                                |  |                                 | (3,500  | ) |                                      |   |        |  
|                                                                                  |  |                                 |         |   |                                      |   |         |  
|Net cash used in financing activities                                             |  |                                 | (9,777  | ) |                                      |   | (30,020 | )
|                                                                                  |  |                                 |         |   |                                      |   |         |  
|Net effects of exchange rates on cash                                             |  |                                 | 50      |   |                                      |   | 1,359   |  
|                                                                                  |  |                                 |         |   |                                      |   |         |  
|Increase in cash and cash equivalents                                             |  |                                 | 6,239   |   |                                      |   | 3,278   |  
|Cash and cash equivalents, beginning of period                                    |  |                                 | 7,552   |   |                                      |   | 1,715   |  
|                                                                                  |  |                                 |         |   |                                      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 13,791  |   |                                      | $ | 4,993   |  
|                                                                                  |  |                                 |         |   |                                      |   |         |  



See accompanying notes
to financial statements.



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##### Table of Contents

KEYSTONE AUTOMOTIVE OPERATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The unaudited consolidated financial information herein has been prepared in accordance with generally accepted
accounting principles and is in accordance with the Securities and Exchange Commission (SEC) regulations for interim financial reporting. In the opinion of management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, which are considered necessary for a fair presentation of the Companys financial position, results of operations, and cash flows for the interim periods. This financial information should be read in conjunction
with the audited financial statements and notes thereto for the year ended January 3, 2004 of the Company, which are included in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 14, 2004.



|1. | Background and Basis of Presentation
|-- | ------------------------------------



Keystone Automotive Operations, Inc. and its wholly-owned subsidiaries (collectively the Company) are wholesale distributors and retailers of
aftermarket automotive parts and accessories, operating in the eastern, central, and western regions of the United States and parts of Canada. The Company sells and distributes over 650 lines of specialty automotive products, such as light truck/SUV
accessories, car accessories and trim items, specialty wheels, tires and suspension parts, and high performance products to a fragmented base of approximately 17,000 customers. The Companys wholesale operations include an electronic service
strategy allowing its customers access to its proprietary electronic catalog, as well as the ability to view product availability and place orders. The Company also operates 24 retail stores in Pennsylvania. The Companys corporate headquarters
are located in Exeter, Pennsylvania.



The accompanying
financial statements are presented under two different basis of accounting, as described below. Certain prior year amounts have been reclassified in order to conform to current year presentation.



Prior to October 30, 2003, approximately 73.2% of the outstanding common
stock was owned by Littlejohn & Co., LLC (Littlejohn), General Electric Capital Corporation (GECC) and Advent International Corporation and its affiliates (Advent). The accompanying statement of operations and
comprehensive income for the three month period ended September 27, 2003, and the statement of operations and comprehensive income and of cash flows for the nine month period ended September 27, 2003 are prepared using the historically owned
(Predecessor) basis of accounting.



On October 30,
2003 in a series of transactions, a newly formed holding company, Keystone Automotive Holdings, Inc. (Holdings), owned by Bain Capital Partners, LLC (Bain Capital), its affiliates, co-investors and management, acquired all of
the Companys outstanding capital stock for a purchase price of $441.3 million. The aggregate cash costs, together with funds necessary to refinance certain existing indebtedness of the Company and associated fees and expenses were financed by
equity contributions of $179 million from Holdings, new senior credit facilities in the amount of $115 million, and the issuance and sale of $175 million of 9.75% senior subordinated notes due 2013. The purchase of the Company by Holdings is
referred to hereinafter as the Transaction.



The
acquisition of our Company by Holdings was accounted for under the purchase method of accounting. Under purchase accounting, the purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based
on their respective fair values, with the remainder being allocated to goodwill. This is referred to as the (Successor) basis of accounting. The following table presents the final purchase price allocation that has been recorded on the
consolidated balance sheet:



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##### Table of Contents

(in thousands)



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Aggregate enterprise value                          |  | $ | 441,300
|Plus: Transaction costs                             |  |   | 4,518  
|Less: Repayment of existing debt                    |  |   | 123,611
|                                                    |  |   |        
|Excess purchase price                               |  | $ | 322,207
|                                                    |  |   |        
|Inventory fair value adjustment                     |  | $ | 13,313 
|                                                    | 
|Property, plant and equipment fair value adjustment |  |   | 26,593 
|                                                    | 
|Retail trade name  A&A                             |  |   | 3,000  
|eServices trade name  DriverFX.com                 |  |   | 1,000  
|Wholesale trade name  Keystone                     |  |   | 50,000 
|Vendor agreements                                   |  |   | 60,000 
|Customer relationships                              |  |   | 95,000 
|                                                    |  |   |        
|Total identifiable intangible assets                |  |   | 209,000
|                                                    | 
|Goodwill                                            |  |   | 180,473
|                                                    | 
|Less: Deferred taxes                                |  |   | 107,172
|                                                    |  |   |        
|Excess purchase price                               |  | $ | 322,207
|                                                    |  |   |        



The factors that
contributed to the purchase price and resulting goodwill included the Companys market positioning, distribution network, and workforce. As a result of these factors, the majority of the goodwill has been assigned to the Distribution segment.
The Company does not expect any of the goodwill recognized as a result of the Transaction to be deductible for income tax purposes.



The carrying value of inventory was increased by approximately $13.3 million as of October 30, 2003. The effect of this increase is to increase the cost
of sales and thereby reduce gross profit and gross margin in future periods when this inventory is sold. The Company sold that inventory during the eight months after closing of the Transaction. During the nine month period ended October 2, 2004
cost of sales was increased by approximately $3.5 million due to the recognition of the fair market value adjustment of the inventory, all of which was sold during the first six months of 2004.



In the third quarter of 2004, the Company determined that an adjustment was
required to the net deferred tax liabilities recorded as of the date of the Transaction. The adjustment relates to the manner in which certain tax benefits, to be realized by the Company in future periods, are to be reflected in the balance sheet
following a purchase business combination. The adjustment results in an increase in goodwill by $10,751 and an increase in net deferred tax liabilities by a corresponding amount. The adjustment has been reflected in the Companys balance sheet
as of October 2, 2004 and January 3, 2004. This adjustment did not have an impact on the Companys results of operations or cash flow and will not have an impact on future cash tax payments.



The accompanying balance sheets at October 2, 2004 and January 3, 2004 and
statements of operations and comprehensive income for the three month and nine month periods ended October 2, 2004, and of cash flows for the nine month period ended October 2, 2004 are prepared on the Successor basis of accounting for the
Transaction described above.



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##### Table of Contents

The unaudited, supplemental, pro forma financial information provided reflects the Transaction as if it
had occurred on December 28, 2002. The pro forma financial information includes adjustments that consider the fair values assigned to inventory; property, plant, and equipment, and intangibles; and the additional deferred financing amortization and
interest expense and related tax impacts related to the new debt. Additionally, the unaudited, supplemental, pro forma financial information includes the impact of the Transaction-related bonuses and one-time charges. The unaudited, supplemental pro
forma financial information is not necessarily indicative of the actual results that would have been achieved had the Transaction actually been consummated as of December 28, 2002, nor is it necessarily indicative of future results of operations.



|                          |  |                                     |  |                                    |  
|------------------------- |  | ----------------------------------- |  | ---------------------------------- | -
|(unaudited, in thousands) |  | Three MonthsEndingSeptember 27,2003 |  | Nine MonthsEndingSeptember 27,2003 |  
|Pro forma net sales       |  | 104,728                             |  | 304,740                            |  
|Pro forma net income      |  | 2,361                               |  | (17,780                            | )



On April 29, 2004,
Bain Capital, its affiliates and co-investors and Littlejohn, GECC, and Advent reached a settlement related to the working capital adjustment outlined in the Transaction Purchase Agreement. The settlement resulted in Bain Capital, its affiliates,
and co-investors paying an additional $1.3 million to Littlejohn, GECC, and Advent.



|2. | Recent Accounting Pronouncements
|-- | --------------------------------



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires that a company that has a controlling financial interest in a variable interest entity (VIE) consolidate the assets, liabilities and
results of operations of the VIE in a companys consolidated financial statements. In December 2003, the FASB issued a revision to FIN 46, FIN 46R. For the Company, which is a non-public as defined in FIN 46R, VIEs created after December 31,
2003, require immediate application of the provisions of FIN 46R. For all entities that qualify as VIEs created before December 31, 2003, application of FIN 46R is required by the beginning of its fiscal year 2005. The Company has not
identified any material VIEs or interests in VIEs for which the provisions of FIN 46R would require a change in the Companys current accounting for such interests.



|3. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Principles of Consolidation and Fiscal Year



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.



The Company operates
on a 52/53-week year basis with the year ending on the Saturday nearest December 31. There are 13 weeks included in the three month periods and 39 weeks in the nine month periods ended October 2, 2004 and September 27, 2003.



6



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##### Table of Contents

Inventory Valuation



Inventories consisting primarily of new purchased packaged auto parts and accessories, are valued at the lower of cost or
market, and are stated on the average cost method. The Companys reported inventory cost consists of the cost of product and certain costs incurred to bring inventory to its existing condition and location, including freight-in, purchasing,
receiving, inspection, and other material handling costs. Also included in inventory is the write-up of inventory as of the date of the Transaction to net realizable value as required by purchase accounting. The write-up included in inventory on
January 3, 2004 was $3.5 million, all of which was sold during the first six months of 2004.



Stock-Based Compensation



The Company accounts for stock-based compensation using the intrinsic value method described in Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees,and related interpretations.
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock Based Compensation, and in accordance with APB 25, compensation cost for stock options is recognized in income based on the
excess, if any, of the fair market value of the stock at the date of grant over the amount an employee must pay to acquire the stock. Additionally, the Company has adopted the disclosure provision of Statement of Financial Accounting Standards No.
148 (SFAS No. 148), Accounting for Stock Based CompensationTransition and Disclosure. On May 20, 2004, options to acquire approximately 11.2 million of Class L and 1.2 million of Class A shares of Holdings stock were issued
to certain of the Companys employees. As of October 2, 2004, no options were exercised. Had compensation costs for the Companys Option program been determined under SFAS No. 123, based on fair value at the grant date, the Companys
pro forma net income would have been as follows for the three month and nine month periods ended October 2, 2004:



|                                                  |  |                                |       |   |                                   |   |       |  
|------------------------------------------------- |  | ------------------------------ | ----- | - | --------------------------------- | - | ----- | -
|                                                  |  | Three Months Ending            |       |   | Nine Months Ending                |  
|                                                  |  | Successor                      |       |   | Successor                         |  
|                                                  |  | July 4, 2004 toOctober 2, 2004 |       |   | January 4, 2004 toOctober 2, 2004 |  
|(in thousands)                                    |  |                                |       |   |                                   |  
|Net income, as reported                           |  | $                              | 2,200 |   |                                   | $ | 5,613 |  
|Pro Forma SFAS No.123 expense, net of related tax |  |                                | (37   | ) |                                   |   | (85   | )
|                                                  |  |                                |       |   |                                   |   |       |  
|Pro Forma net income                              |  |                                | 2,163 |   |                                   |   | 5,528 |  
|                                                  |  |                                |       |   |                                   |   |       |  



In May 2004, the Board
of Directors approved the 2003 Executive Stock Option Plan (the Plan) which is designed to provide incentives to such present and future officers, directors, and employees of the Company (Participants). Each Participant is
issued options to purchase shares of Holdings Class A common stock (the Class A Common Options) and Holdings Class L Common Stock (the Class L Common Options and, together with the Class A Common Options, the
Options). The Board shall have the right and power to grant Participants, at any time prior to the termination of this Plan, Options in such quantity, at such price, on such terms and subject to such conditions that are consistent with
the Plan and established by the Board. The Options will vest ratably at a rate of 20% per year over five years. Participants must exercise Class A Common Options and Class L Common Options in tandem in the ratio of nine Class A Common Options to one
Class L Option exercised. The Options are not transferable by such Participant. If any Options expire unexercised or unpaid or are canceled, terminated or forfeited in any manner without the issuance of Holdings common stock or payment thereunder,
the shares with respect to such options that were granted shall again be available under the Plan.



The Black-Scholes option pricing model was used to estimate the fair value for each grant made under the Plan. The Company calculated this fair value
under the minimal value method using a risk-free rate of 3.74% and an expected life of 5 years.



For the three month period ended September 27, 2003, no new options were issued and an immaterial amount was exercised. All predecessor company stock
options were acquired as part of the Transaction. Had compensation cost for the Companys predecessor company stock option program been determined under SFAS No. 123, the Companys pro forma net income would have approximated reported net
income for the three and nine month periods ended September 27, 2003.



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Use of Estimates



The presentation of financial statements in accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and assets at the financial statement date, and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.



|4. | Segment Information
|-- | -------------------



Based on the nature of the Companys reportable operations, facilities and management structure, the Company considers its business to constitute two
segments for financial reporting purposes, Distribution and Retail, as described below:



Distribution



The
Distribution segment aggregates five regions or operating segments that are economically similar, share a common class of customers, and distribute the same products. This segment of our business is our hub-and-spoke distribution network. This
segment distributes specialty automotive equipment for vehicles to specialty retailers/installers and our network is designed to meet the availability and rapid delivery needs of our customers. This network is comprised of: (i) three inventory
stocking warehouse distribution centers, which are located in Exeter, Pennsylvania; Kansas City, Kansas; and Corona, California; (ii) 16 non-inventory stocking cross-docks located throughout the East Coast, Midwest, and parts of Canada; and (iii)
our fleet of over 270 trucks that provide multi-day per week delivery and returns along over 250 routes which cover 40 states and parts of Canada. The Exeter, Kansas City, and Corona warehouse distribution centers hold our entire inventory and
distribute merchandise to cross-docks in their respective regions for next-day or second-day delivery to customers. The Distribution segment supplies the Retail Operations segment; these inter-company sales are included in the amounts reported as
net sales for the Distribution Segment in the table below, and are eliminated to arrive at net sales to third parties.



Retail Operations



The Retail Operations segment of our business operates 24 retail stores in Pennsylvania under the A&A Auto Parts name. A&A stores sell replacement
parts, as well as specialty parts, to consumers and are primarily located in stand-alone facilities. A&A stores are visible from high traffic areas and provide customers ease of access and drive-up parking. While a small part of our business,
the Company believes that our retail operations allow us to stay close to end-consumer and product merchandising trends. A&A stores purchase their inventory from the Distribution segment.



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The financial information for these two segments is as follows:



|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|----------------------------- |  | ------------------- | ------- | - | ------------------ | - | ------- | --------------- |  | - | ------------------ | - |  | - | ------- | -
|                              |  | Three Months Ending |         |   | Nine Months Ending |  
|                              |  | Successor           |         |   | Predecessor        |   |         | Successor       |  |   | Predecessor        |  
|(in thousands)                |  | October 2, 2004     |         |   | September 27, 2003 |   |         | October 2, 2004 |  |   | September 27, 2003 |  
|Net sales                     |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Distribution                  |  | $                   | 109,102 |   |                    | $ | 102,410 |                 |  | $ | 333,259            |   |  | $ | 299,010 |  
|Retail                        |  |                     | 7,318   |   |                    |   | 7,110   |                 |  |   | 21,646             |   |  |   | 20,193  |  
|Elimination                   |  |                     | (4,867  | ) |                    |   | (4,792  | )               |  |   | (15,140            | ) |  |   | (14,463 | )
|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Total                         |  | $                   | 111,553 |   |                    | $ | 104,728 |                 |  | $ | 339,765            |   |  | $ | 304,740 |  
|Interest income               |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Distribution                  |  | $                   | (53     | ) |                    | $ | (7      | )               |  | $ | (111               | ) |  | $ | (17     | )
|Retail                        |  |                     |        |   |                    |   |        |                 |  |   |                   |   |  |   |        |  
|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Total                         |  | $                   | (53     | ) |                    | $ | (7      | )               |  | $ | (111               | ) |  | $ | (17     | )
|Interest expense              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Distribution                  |  | $                   | 6,315   |   |                    | $ | 1,273   |                 |  | $ | 18,687             |   |  | $ | 4,934   |  
|Retail                        |  |                     |        |   |                    |   |        |                 |  |   |                   |   |  |   |        |  
|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Total                         |  | $                   | 6,315   |   |                    | $ | 1,273   |                 |  | $ | 18,687             |   |  | $ | 4,934   |  
|Depreciation and Amortization |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Distribution                  |  | $                   | 4,491   |   |                    | $ | 1,867   |                 |  | $ | 14,041             |   |  | $ | 5,219   |  
|Retail                        |  |                     | 79      |   |                    |   | 37      |                 |  |   | 236                |   |  |   | 109     |  
|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Total                         |  | $                   | 4,570   |   |                    | $ | 1,904   |                 |  | $ | 14,277             |   |  | $ | 5,328   |  
|Income tax expense (benefit)  |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Distribution                  |  | $                   | 1,143   |   |                    | $ | 4,358   |                 |  | $ | 3,638              |   |  | $ | 12,061  |  
|Retail                        |  |                     | 138     |   |                    |   | 47      |                 |  |   | (14                | ) |  |   | 4       |  
|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Total                         |  | $                   | 1,281   |   |                    | $ | 4,405   |                 |  | $ | 3,624              |   |  | $ | 12,065  |  
|Net income (loss)             |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Distribution                  |  | $                   | 1,992   |   |                    | $ | 6,841   |                 |  | $ | 5,634              |   |  | $ | 20,963  |  
|Retail                        |  |                     | 208     |   |                    |   | 71      |                 |  |   | (21                | ) |  |   | 6       |  
|                              |  |                     |         |   |                    |   |         |                 |  |   |                    |   |  |   |         |  
|Total                         |  | $                   | 2,200   |   |                    | $ | 6,912   |                 |  | $ | 5,613              |   |  | $ | 20,969  |  



Net sales in the
United States slightly decreased as a percent of total sales due to stronger growth in the Canadian and other international markets in the three and nine month periods ended October 2, 2004 and September 27, 2003, to approximately 90.4% and 91.2%
and 89.9% and 91.4%, respectively. At October 2, 2004 and January 3, 2004, approximately 99.4% of long-lived assets are in the United States.



No customer accounted for more than 1.5% of sales for the three month and nine month periods ended October 2, 2004 and September 27, 2003.



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|5. | Related Party Transactions
|-- | --------------------------



Successor



In connection with the Transaction, the Company entered into advisory agreements with Bain Capital and Advent. The Bain Capital agreement is for general
executive and management services, merger, acquisition and divestiture assistance, analysis of financing alternatives and finance, marketing, human resource and other consulting services. In exchange for these advisory services, Bain Capital will
receive a contingent annual advisory services fee of $1.5 million through 2006 and $3.0 million for 2007 through 2013, plus reasonable out-of-pocket fees and expenses. This fee is contingent on the Company achieving consolidated Adjusted Earnings
before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA), as defined in the Companys credit agreement, of $52.7 million for a given year, including the impact of the Bain Capital advisory services fee. Adjusted
EBITDA is defined as EBITDA adjusted for certain items including sale leaseback transactions, legal fees and litigation settlements, operating cost reductions, franchise taxes, losses and other charges related to disposal of ATV business, racing
sponsorship fees and management relocation costs. Pro-rata reductions, if any, on the annual advisory fees for fiscal 2003 and 2004, based on the Adjusted EBITDA criteria, may be recaptured in periods subsequent to fiscal 2007, if Adjusted EBITDA is
$158 million or more on a cumulative basis over any twelve consecutive fiscal quarters. Additionally, Bain Capital is entitled to transaction fees of 1.0% of the total value of the transaction, plus reasonable out-of-pocket fees and expenses,
related to the completion of any financing or material acquisition or divestiture by Holdings. Bain Capital received a $4.7 million one-time fee for obtaining equity and debt financing for the Transaction, plus reasonable out-of-pocket fees and
expenses, related to the Transaction which is included as part of the purchase price. The Bain Capital annual advisory services agreement has an initial term ending on December 31, 2013, subject to automatic one-year extensions unless the Company or
Bain Capital provides written notice of termination; provided, however that if the advisory agreement is terminated due to a change in control or an initial public offering of the Company or Holdings prior to the end of its term, then Bain Capital
will be entitled to receive the present value of the advisory services fee that would otherwise have been payable through the end of the term. Bain Capital will receive customary indemnities under the advisory agreement. Selling, general and
administrative expense for the three month and nine month periods ended October 2, 2004 included $0.4 million and $1.1 million of management fee expense and accounts payable at October 2, 2004 included $1.4 million.



The Advent advisory agreement covers general executive and management
services, assistance with acquisition and divestitures, assistance with financial alternatives and other services. The Advent annual advisory services fee is $0.1 million, subject to pro-rata reduction, should the Bain Capital annual advisory
services fee be reduced pursuant to the Adjusted EBITDA criteria outlined above. Selling, general and administrative expense for the three month and nine month periods ended October 2, 2004 included less than $0.1 million of management fee expense
and accounts payable at October 2, 2004 included an immaterial amount.



Predecessor



In March 1998, the Company
entered into a Management Consulting Services Agreement with Littlejohn, Advent, and GECC, each of whom owned more than 5% of our outstanding capital stock prior to the consummation of the Transaction. Under this agreement, Littlejohn, Advent, and
GECC provided us and our subsidiaries with financial and management consulting services, for which the Company paid an annual fee of $0.3 million to Littlejohn and $0.1 million each to Advent, and GECC, plus each of their out-of-pocket expenses.
This agreement expired by its terms upon the consummation of the Transaction. The amount included in selling, general and administrative expense for the three month and nine month periods ended September 27, 2003 is $0.1 million and $0.4 million.



Prior to the Transaction, the Company had transactions in the
normal course of business with one of its principal stockholders and its affiliated companies. Selling, general and administrative expense for three month and nine month periods ended September 27, 2003 included less than $0.2 million and $0.5
million for both rental expense for the period under an operating lease agreement for transportation equipment, and for repairs and rentals of delivery trucks. For the three month and nine month periods ended October 2, 2004 there was less than $0.2
million and $0.4 million expense for these operating leases for transportation equipment, and repairs and rental of delivery trucks, respectively. Amounts included in accounts payable at October 2, 2004 and January 3, 2004 payable to these
affiliates were immaterial.



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The Company participates in a sponsorship program on behalf of Amato Racing, an organization whose sole
stockholder was a shareholder and Director of the Company through October 30, 2003. For the three month periods ended October 2, 2004 and September 27, 2003, the Company expensed $0.1 million and for the nine month periods ended the Company expensed
$0.3 million in connection with this program. At October 2, 2004 and January 3, 2004 accounts payable included an immaterial amount due to Amato Racing.



Return on Capital



Holdings contributed $3.5 million in capital as part of the Transaction related to certain tax benefits arising out of the Transaction. During the nine
month period ended October 2, 2004 the Company returned the $3.5 million in capital contributions to Holdings.



|6. | Commitments and Contingencies
|-- | -----------------------------



The Company is subject to various legal proceedings and claims which have arisen in the ordinary course of its business. Management does not expect the
outcome of such matters to have a material effect, if any, on the Companys consolidated financial position, results of operations, or cash flows.



FORWARD LOOKING STATEMENTS



Statements in this document that are not historical facts are hereby identified as forward looking statements for the purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) and Section 27A of the Securities Act of 1933 (the Securities Act). Keystone Automotive Operations, Inc. (the Company)
cautions readers that such forward looking statements, including without limitation, those relating to the Companys future business prospects, revenue, working capital, liquidity, capital needs, interest costs and income, wherever
they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Companys senior management and involve a number of risks and uncertainties that could cause actual results
to differ materially from those suggested by the forward looking statements. Such forward looking statements should, therefore, be considered in light of the factors set forth in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.



The forward looking statements contained in this report are made under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations. Moreover, the Company, through its senior
management, may from time to time make forward looking statements about matters described herein or other matters concerning the Company.



The Company disclaims any intent or obligation to update forward looking statements to reflect changed assumptions, the occurrence of
unanticipated events, or changes to future operating results over time.



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Terms used herein such as we, us, and our are references to Keystone Automotive Operations, Inc. and its affiliates
(collectively Keystone), as the context requires.



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Items Affecting Comparability



Comparability between 2004 and 2003 periods



The Company changed its fiscal year in 2001 and operates on a 52/53-week year basis with the year ending on the Saturday
nearest December 31. There are 13 weeks included in the three month periods and 39 weeks included in the nine month periods ended October 2, 2004 and September 27, 2003. As a result of the Transaction, outlined below, the Company had a change in its
basis of accounting as of October 30, 2003, as the fair value of the Transaction was pushed-down to the Companys books and records.



The Transaction



On October 30, 2003 in a series of transactions, Holdings, a newly formed holding company owned by Bain Capital, its affiliates, co-investors and
management, pursuant to which Holdings acquired all of the Companys outstanding capital stock for a purchase price of $440 million subject to adjustment based upon working as defined in the Purchase Agreement. The aggregate cash costs,
together with funds necessary to refinance certain existing indebtedness of the Company and associated fees and expenses were financed by equity contributions of $179 million, new senior credit facilities in the amount of $115 million, and the
issuance and sale of $175 million of unsecured 9.75% senior subordinated notes due 2013.



The acquisition of the Company by Holdings was accounted for under the purchase method of accounting. Under purchase accounting, the purchase price was allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their respective fair values, with the remainder being allocated to goodwill. The increase in the basis of these assets resulted in and will result in non-cash charges in future periods, principally related
to the amortization of the step-up in the value of inventory, depreciation of property, plant and equipment and amortization of intangible assets. Additionally, interest expense increased as a result of the acquisition. The final purchase price
allocation is as follows:



(in thousands)



|                                                    |  |   |        
|--------------------------------------------------- |  | - | -------
|Aggregate enterprise value                          |  | $ | 441,300
|Plus: Transaction costs                             |  |   | 4,518  
|Less: Repayment of existing debt                    |  |   | 123,611
|                                                    |  |   |        
|Excess purchase price                               |  | $ | 322,207
|                                                    |  |   |        
|Inventory fair value adjustment                     |  | $ | 13,313 
|                                                    | 
|Property, plant and equipment fair value adjustment |  |   | 26,593 
|                                                    | 
|Retail trade name  A&A                             |  |   | 3,000  
|eServices trade name  DriverFX.com                 |  |   | 1,000  
|Wholesale trade name  Keystone                     |  |   | 50,000 
|Vendor agreements                                   |  |   | 60,000 
|Customer relationships                              |  |   | 95,000 
|                                                    |  |   |        
|Total identifiable intangible assets                |  |   | 209,000
|                                                    | 
|Goodwill                                            |  |   | 180,473
|                                                    | 
|Less: Deferred taxes                                |  |   | 107,172
|                                                    |  |   |        
|Excess purchase price                               |  | $ | 322,207
|                                                    |  |   |        



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The factors that contributed to the purchase price and resulting goodwill included the Companys
market positioning, distribution network and workforce. The Company does not expect any of the goodwill recognized as a result of the Transaction to be deductible for tax purposes. On April 29, 2004, Bain Capital, its affiliates and co-investors and
Littlejohn, GECC, and Advent reached a settlement related to the working capital adjustment outline in the Transaction Purchase Agreement. The settlement resulted in Bain Capital, its affiliates, and co-investors paying an additional $1.3 million to
Littlejohn, GECC, and Advent.



In the third quarter of 2004,
the Company determined that an adjustment was required to the net deferred tax liabilities recorded as of the date of the Transaction. The adjustment relates to the manner in which certain tax benefits, to be realized by the Company in future
periods, are to be reflected in the balance sheet following a purchase business combination. The adjustment results in an increase in goodwill by $10,751 and an increase in net deferred tax liabilities by a corresponding amount. The adjustment has
been reflected in the Companys balance sheet as of October 2, 2004 and January 3, 2004. This adjustment did not have an impact on the Companys results of operations or cash flow and will not have an impact on future cash tax payments.



Executive Summary



Overview



For the three month and nine month periods ended October 2, 2004, sales grew 6.5% and 11.5% over the three month and nine
month periods ended September 27, 2003, respectively. The primary drivers increasing sales include the addition of new runs and new customers in both existing and new regions. New products including Private Label, Powersports, Diesel Products, and
Bed Liners also contributed to the growth in sales. However, although overall sales increased, the third quarter sales for the Northeast region to existing customers decreased as a result of slower store traffic and high market penetration.
Northeast sales were equal to the prior year three month sales primarily due to new customers in the region and continued its single digit increase over the nine month prior year sales as a result of new customers and higher sales to existing
customers. The increased breadth of on-hand inventory in the Midwest, and increased market penetration, grew sales in this territory to double digit growth over the three and nine month prior year periods. Canada continued its four year trend of
double digit growth. Management does not believe that changes in the value of the Canadian Dollar significantly impacted Canadian sales. Our new West Coast initiative continues to outperform managements initial expectations both in terms of
overall sales and new customer development. Additionally, the Sacramento cross dock opened on November 1, 2004 and is expected to contribute to the increase in sales in the West Coast for the fourth quarter 2004. eServices, driven by mail order /
internet fulfillment, also contributed to the strong growth in the periods. Management has approved the implementation of the PeopleSoft financial package which began in the fourth quarter of 2004.



Segment Information



We operate two business segments: Distribution and Retail as described below.



Distribution



The distribution segment of our business (Distribution) consists of our warehouse distribution operations
supported by our hub-and-spoke delivery network. The distribution segment generated $104.2 million or 93.4% of the net sales in the third quarter of 2004 and grew 6.8% over the same period in the prior year. During the first nine months of 2004,
distribution generated $318.1 million or 93.6% of the net sales and grew 11.8% over the same period in the prior year. This segment distributes specialty automotive equipment for vehicles to specialty retailer/installers and our network is designed
to meet the availability and rapid delivery needs of our customers. This network is comprised of: (i) three



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inventory stocking warehouse distribution centers, which are located in Exeter, Pennsylvania; Kansas City, Kansas; and
Corona, California; (ii) 16 non-inventory stocking cross-docks spread throughout the East Coast, Midwest, and parts of Canada; and (iii) our fleet of over 270 trucks that provide multi-day per week delivery and returns along our over 250 routes
which cover 40 states and parts of Canada. The Exeter, Kansas City, and California warehouse distribution centers hold all of our inventory and distribute merchandise to cross-docks in their respective regions for next-day or second-day delivery to
customers.



We believe that our hub-and-spoke distribution
network has enabled us to achieve significant competitive advantages in delivery service, customer service, and our ability to expand efficiently.



Retail Operations



This segment of our business operates 24 retail stores primarily in Eastern Pennsylvania under the A&A Auto Parts name. A&A stores sell
replacement parts, as well as specialty parts, to consumers and are primarily located in stand-alone facilities. A&A stores are visible from high traffic areas and provide customers ease of access and drive-up parking. These retail operations
generated $7.3 million or 6.6% of our net sales in the third quarter of 2004, an increase of 2.9% over the prior year. During the first nine months of 2004, the retail operations generated $21.6 million or 6.4% of the net sales and grew 7.2% over
the same period in the prior year. While a small part of our business, we believe that our retail operations allow us to stay close to end-consumer and product merchandising trends. A&A stores purchase their inventory from the Distribution
segment.



Related Party Transactions



Successor



In connection with the Transaction, the Company entered into advisory agreements with Bain Capital and Advent. The Bain
Capital agreement is for general executive and management services, merger, acquisition and divestiture assistance, analysis of financing alternatives and finance, marketing, human resource and other consulting services. In exchange for these
advisory services, Bain Capital will receive a contingent annual advisory services fee of $1.5 million through 2006 and $3.0 million for 2007 through 2013, plus reasonable out-of-pocket fees and expenses. This fee is contingent on the Company
achieving consolidated Adjusted EBITDA, as defined in the Companys credit agreement, of $52.7 million for a given year, including the impact of the Bain Capital advisory services fee. Adjusted EBITDA is defined as EBITDA adjusted for certain
items including sale leaseback transactions, legal fees and litigation settlements, operating cost reductions, franchise taxes, losses and other charges related to disposal of ATV business, racing sponsorship fees and management relocation costs.
Pro-rata reductions, if any, on the annual advisory fees for fiscal 2003 and 2004, based on the Adjusted EBITDA criteria, may be recaptured in periods subsequent to fiscal 2007, if Adjusted EBITDA is $158 million or more on a cumulative basis over
any twelve consecutive fiscal quarters. Additionally, Bain Capital is entitled to transaction fees of 1.0% of the total value of the transaction, plus reasonable out-of-pocket fees and expenses, related to the completion of any financing or material
acquisition or divestiture by Holdings. Bain Capital received a $4.7 million one-time fee for obtaining equity and debt financing for the Transaction, plus reasonable out-of-pocket fees and expenses, related to the Transaction which is included as
part of the purchase price. The Bain Capital annual advisory services agreement has an initial term ending on December 31, 2013, subject to automatic one-year extensions unless the Company or Bain Capital provides written notice of termination;
provided, however that if the advisory agreement is terminated due to a change in control or an initial public offering of the Company or Holdings prior to the end of its term, then Bain Capital will be entitled to receive the present value of the
advisory services fee that would otherwise have been payable through the end of the term. Bain Capital will receive customary indemnities under the advisory agreement. Selling, general and administrative expense for the three month and nine month
periods ended October 2, 2004 included $0.4 million and $1.1 million of management fee expense and accounts payable at October 2, 2004 included $1.4 million.



The Advent advisory agreement covers general executive and management services, assistance with acquisition and divestitures, assistance with financial
alternatives and other services. The Advent annual advisory services fee is $0.1 million, subject to pro-rata reduction, should the Bain Capital annual advisory services fee be reduced pursuant to the



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Adjusted EBITDA criteria outlined above. Selling, general and administrative expense for the three month and nine month
periods ended October 2, 2004 included less than $0.1 million of management fee expense and accounts payable at October 2, 2004 included an immaterial amount.



Predecessor



In March 1998, the Company entered into a Management Consulting Services Agreement with Littlejohn, Advent, and GECC, each of whom owned more than 5% of
our outstanding capital stock prior to the consummation of the Transaction. Under this agreement, Littlejohn, Advent, and GECC provided us and our subsidiaries with financial and management consulting services, for which the Company paid an annual
fee of $0.3 million to Littlejohn and $0.1 million each to Advent, and GECC, plus each of their out-of-pocket expenses. This agreement expired by its terms upon the consummation of the Transaction. The amount included in selling, general and
administrative expense for the three month and nine month periods ended September 27, 2003 is $0.1 million and $0.4 million.



Prior to the Transaction, the Company had transactions in the normal course of business with one of its principal stockholders and its affiliated
companies. Selling, general and administrative expense for three month and nine month periods ended September 27, 2003 included less than $0.2 million and $0.5 million for both rental expense for the period under an operating lease agreement for
transportation equipment, and for repairs and rentals of delivery trucks. For the three month and nine month periods ended October 2, 2004 there was less than $0.2 million and $0.4 million for these operating leases for transportation equipment, and
repairs and rental of delivery trucks, respectively. Amounts included in accounts payable at October 2, 2004 and January 3, 2004 payable to these affiliates were immaterial.



The Company participates in a sponsorship program on behalf of Amato Racing, an organization whose sole stockholder was a
shareholder and Director of the Company through October 30, 2003. For the three month periods ended October 2, 2004 and September 27, 2003 the Company expensed $0.1 million and for the nine month periods ended the Company expensed $0.3 million in
connection with this program. At October 2, 2004 and January 3, 2004 accounts payable included an immaterial amount due to Amato Racing.



Return on Capital



Keystone Holdings contributed $3.5 million in capital as part of the Transaction related to certain tax benefits arising out of the Transaction. During
the nine month period ended October 2, 2004 the Company returned the $3.5 million in capital contributions to Keystone Holdings.



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##### Table of Contents

Results of Operations



The following table sets forth the percentages of net sales that certain items of operating data constitute for the periods indicated:



|                                             |  |                    |   |  |                   |   |  |                |   |  |                   |  
|-------------------------------------------- |  | ------------------ | - |  | ----------------- | - |  | -------------- | - |  | ----------------- | -
|                                             |  | Three Months Ended |   |  | Nine Months Ended |  
|                                             |  | October 2,2004     |   |  | September 27,2003 |   |  | October 2,2004 |   |  | September 27,2003 |  
|Statement of operations data:                |  |                    |   |  |                   |   |  |                |   |  |                   |  
|Net sales                                    |  | 100.0              | % |  | 100.0             | % |  | 100.0          | % |  | 100.0             | %
|Cost of sales                                |  | 68.6               |   |  | 67.4              |   |  | 69.0           |   |  | 67.3              |  
|Gross profit                                 |  | 31.4               |   |  | 32.6              |   |  | 31.0           |   |  | 32.7              |  
|Selling, general and administrative expenses |  | 22.6               |   |  | 20.0              |   |  | 22.9           |   |  | 19.9              |  
|Reorganization and other charges             |  |                   |   |  | 0.6               |   |  |               |   |  | 0.3               |  
|Income from operations                       |  | 8.8                |   |  | 12.0              |   |  | 8.1            |   |  | 12.5              |  
|Interest expense                             |  | 5.7                |   |  | 1.2               |   |  | 5.5            |   |  | 1.7               |  
|Other (gain), net                            |  |                   |   |  |                  |   |  | (0.1           | ) |  |                  |  
|Income before income tax expense             |  | 3.1                |   |  | 10.8              |   |  | 2.7            |   |  | 10.8              |  
|Income tax expense                           |  | 1.1                |   |  | 4.2               |   |  | 1.0            |   |  | 4.0               |  
|Net income                                   |  | 2.0                |   |  | 6.6               |   |  | 1.7            |   |  | 6.8               |  



Three Months Ending October 2, 2004
Compared to the Three Months Ending September 27, 2003



Net Sales. Net sales represent the selling price of product and promotional items, fees, and all shipping and handling costs paid by customers, less any customer-related incentives and a reserve for future returns. Net sales
increased by $6.9 million, or 6.5%, from $104.7 million for the period ended September 27, 2003 to $111.6 million for the period ended October 2, 2004. The increase in net sales was primarily a result of an increase in the number of delivery runs
per week, the maturing of cross-docks opened in 2001 and 2002, opening of the West Coast warehouse, and the addition of new customer accounts. However, although over all sales increased, the third quarter sales for the Northeast region to existing
customers decreased as a result of slower store traffic and high market penetration. Additionally the opening of a new warehouse on the West Coast in November of 2003 increased overall sales for the three month period in 2004 by 2.4%. Of the 2.4%
increase, 2.2% was related to existing products and 0.2% was new products. New Products lines including Private Label, Powersports, Diesel Products, and Bed Liners were introduced during 2004 contributed to a $6.8 million or 6.5% increase in sales.
The marketing tools used to drive the increase in new and existing product lines were The Grillin and Chillin Promotion and The Car Starter Program during the three month period of 2004.



Gross Profit. The three month periods ended October 2, 2004 and
September 27, 2003 included depreciation expense in cost of goods sold that was less than $0.1 million. Gross profit represents net sales less cost of goods sold which includes third-party delivery costs. Gross profit increased $0.8 million, or
2.4%, from $34.2 million for the period ended September 27, 2003 to $35.0 million for the period ended October 2, 2004. The increase in gross profit was due to the increase in net sales. Gross margin for the periods ended October 2, 2004 was 31.4%
and for the period ended September 27, 2003 was 32.6%. The decrease in the gross margin was related to Grillin and Chillin sales promotion ran during August 2004.



Selling, General and Administrative Expenses. Selling, general and administrative expenses include all non-product
related operating expenses, including depreciation and amortization, occupancy, warehousing, delivery, marketing, selling, information technology, and general and administrative expenses less certain benefits received from promotional activities.
Selling, general and administrative expenses increased by $4.2 million, or 20.2%, from $21.0 million for the period ended September 27, 2003 to $25.2 million for the period ended October 2, 2004. The increase in selling, general and administrative
expenses includes a $3.0 million increase in amortization and depreciation related to the Transaction and a $0.5 million increase in delivery expense due to the impact of additional cross-docks, increase in fuel prices, delivery routes that began in
2003, and a $0.3 million increase in operating expense for the West Coast warehouse opened in November of 2003.



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Reorganization and Other Charges.Reorganization and other charges for the three months ended
September 27, 2003 consisted primarily of expenses related to the Transaction.



Interest Expense. Interest expense increased by $5.0 million, or 396.1%, from $1.3 million for the period ended September 27, 2003 to $6.3 million for the period ended October 2, 2004, due primarily to the
increase in debt related to the Transaction and the amortization of deferred financing costs.



Income Tax Expense. Income tax expense decreased by $3.1 million from an expense of $4.4 million for the period ended September 27, 2003 with an effective tax rate of 38.9% to $1.3 million with an effective tax
rate of 36.8% for the period ended October 2, 2004.



Net Income. Net income decreased by $4.7 million from $6.9 million for the period ended September 27, 2003 to $2.2 million for the period ended October 2, 2004. The primary reason for the decrease is the Transaction-related
items in the period ended October 2, 2004, including $3.0 million in amortization of intangible assets and a $5.0 million increase in interest expense related to the higher debt from the Transaction.



Results by Reportable Segment. The Company operates in two reportable
segments: Distribution and Retail. The distribution segment of our business consists of our warehouse distribution operations supported by our hub-and-spoke delivery network. The Retail reportable segment encompasses our 24 retail stores in
Pennsylvania under the A&A Auto Parts name. A&A stores sell replacement and specialty parts. See Note 4 to the Financial Statements for additional information. Of the Companys $6.8 million increase in consolidated net sales for the
period ended October 2, 2004 over the period ended September 27, 2003, $6.6 million is due to increases in the Distribution reportable segment. The increase in the Distribution reportable segment is due primarily to new customer growth, increased
customer penetration, and geographic expansion.



The remaining
increase of $0.2 million is due to increases in the Retail reportable segment. The Retail distribution segment is not expected to contribute significantly to the Companys growth, because of our decision not to expand beyond the current 24
retail stores.



Net income for the distribution segment
decreased by $4.8 million for the period ended October 2, 2004 compared to the period ended September 27, 2003. The decrease is due largely to the Transaction-related costs. The Retail reportable segment increased by $0.1 million for the period
ended October 2, 2004 compared to the period ended September 27, 2003. See Note 4 to the interim financial statements.



Nine Months Ending October 2, 2004 Compared to the Nine Months Ending September 27, 2003



Net Sales. Net sales represent the selling price of the products, promotional items, and fees, and all shipping and
handling costs paid by customers, less any customer-related incentives and a reserve for future returns. Net sales increased by $35.1 million, or 11.5%, from $304.7 million for the period ended September 27, 2003 to $339.8 million for the period
ended October 2, 2004. The increase in net sales was primarily a result of an increase in the number of delivery runs per week, the maturing of cross-docks opened in 2001 and 2002, increased sales to existing customers, and the addition of new
customer accounts. The continued development of customer relationships, along with the expansion of inventory in the Northeast and Midwest regions improved the breadth of product available and reduced stock shortages which increased service levels,
and thereby improved sales. Additionally the opening of a new warehouse on the West Coast in November of 2003 increased sales in 2004 by 2.4%. Of the 2.4% increase, 2.3% related to existing products and 0.1% was new products. New Products lines
including Private Label, Powersports, Diesel Products, and Bed Liners were introduced during 2004 contributing to a $12.9 million or 4.2% increase in sales. A variety of marketing programs were used during the year to help promote both new and
existing product line sales.



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Gross Profit. The nine month periods ended October 2, 2004 and September 27, 2003 included
depreciation expense in cost of goods sold that was less than $0.1 million. Gross profit represents net sales less cost of goods sold which includes third-party delivery costs. Gross profit increased $5.8 million, or 5.8%, from $99.5 million for the
periods ended September 27, 2003 to $105.3 million for the period ended October 2, 2004. The increase in gross profit was due to the increase in net sales. Gross margin for the period ended October 2, 2004 was 31.0% and for the period ended
September 27, 2003 was 32.7%. The gross margin for the period ended October 2, 2004 was impacted by $3.5 million or 1.0% sales, for the non-cash charge to recognize a portion of the fair market value adjusted in inventory. The additional decrease in
the gross margin was related to sales promotions.



Selling,
General and Administrative Expenses. Selling, general and administrative expenses include all non-product related operating expenses, including depreciation and amortization, occupancy, warehousing, delivery, marketing, selling, information
technology, and general and administrative expenses less certain benefits received from promotional activities. Selling, general and administrative expenses increased by $17.3 million, or 28.6%, from $60.5 million for the period ended September 27,
2003 to $77.8 million for the period ended October 2, 2004. The increase in selling, general and administrative expenses includes a $8.9 million increase in amortization and depreciation related to the Transaction and $2.0 million increase in
delivery expense due to the impact of additional cross-docks, increased fuel prices, and delivery routes that began in 2003, $1.1 million increase in operating expense for the West Coast warehouse which opened in November of 2003, and a $1.4 million
increase for strategic consulting services.



Reorganization
and Other Charges.Reorganization and other charges for the nine months ended September 27, 2003 consisted primarily of expenses related to the Transaction.



Interest Expense. Interest expense increased by $13.8 million, or 278.7%, from $4.9 million for the period ended September 27, 2003 to $18.7
million for the period ended October 2, 2004, due primarily to the increase in debt related to the Transaction and the amortization of deferred financing costs.



Income Tax Expense. Income tax expense decreased by $8.4 million from expense of $12.1 million for the period ended September 27, 2003 with an
effective tax rate of 36.5% to $3.6 million with an effective tax rate of 39.2% for the period ended October 2, 2004.



Net Income (loss). Net income decreased by $15.4 million from $21.0 million for the period ended September 27, 2003 to $5.6 million for the period
ended October 2, 2004. The primary reason for the decrease is the Transaction-related items in the period ended October 2, 2004, including $3.5 million in non-cash charges related to recognition of a portion of the fair market value adjustment in
inventory, $8.9 million in amortization of intangible assets, a $13.7 million increase in interest expense related to the higher debt from the Transaction, and $1.4 million in consulting fees for strategic consulting services. These increases in
expense are offset by the gross profit increase from the increase in sales.



Results by Reportable Segment.The Company operates in two reportable segments: Distribution and Retail. The distribution segment of our business is consists of our warehouse distribution operations supported
by our hub-and-spoke delivery network. The Retail reportable segment encompasses our 24 retail stores in Pennsylvania under the A&A Auto Parts name. A&A stores sell replacement and specialty parts. See Note 4 to the Financial Statements for
additional information. Of the Companys $35.1 million increase in consolidated net sales for the period ended October 2, 2004 over the period ended September 27, 2003, $33.7 million is due to increases in the Distribution reportable segment.
The increase in the Distribution reportable segment is due primarily to new customer growth, increased customer penetration, and geographic expansion.



The remaining increase of $1.4 million is due to increases in the Retail reportable segment. The Retail distribution segment is not expected to contribute
significantly to the Companys growth, because of our decision not to expand beyond the current 24 retail stores.



Net income (loss) for the distribution segment decreased by $15.3 million for the period ended October 2, 2004 compared to the period ended September 27,
2003. The decrease is due largely to the Transaction-related costs. The Retail reportable segment net loss decreased by less than $0.1 million for the period ended October 2, 2004 compared to the period ended September 27, 2003. See Note 4 to the
Interim Financial Statements.



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Liquidity and Capital Resources



Operating Activities. Net cash provided by operating activities during the period ended October 2, 2004 was $21.2
million compared with net cash provided by operating activities during the period ended September 27, 2003 of $37.1 million. The decrease in net cash provided by operating activities for the period ended October 2, 2004 was primarily due to a
decrease of $15.4 million in net income related to a $13.8 million increase in interest expense as a result of the Transaction and a $1.8 million increase in the change in inventory over last years change in inventory.



Investing Activities. Net cash used in investing activities was $5.2
million for the period ended October 2, 2004, an increase from the net cash used in investing activities of $5.1 million for the period ended September 27, 2003. The October 2004 and September 2003 periods included the purchases of fixed assets used
in the normal course of business. A $1.7 million charge relates to Transaction costs of $0.4 million and a $1.3 million final working capital settlement adjustment. The higher amount in property, plant, and equipment in the September 2003 period was
related to the buy out of leased equipment.



Financing
Activities. Net cash used in financing activities during the period ended October 2, 2004 was $9.8 million, compared to a use of $30.0 million during the period ended September 27, 2003. This decrease primarily resulted from no repayments under
the revolving line-of-credit and was partially offset by the payment of $3.5 million to Holdings as a return of capital contributions made in conjunction with the Transaction.



Our principal sources of liquidity are cash flow from operations and borrowings under our senior secured credit facilities.
We believe that these funds will provide us with sufficient liquidity and capital resources for us to meet our current and future financial obligations, including our scheduled principal and interest payments, as well as to provide funds for working
capital, capital expenditures, and other needs for at least the next twelve months. Given our historical operating performance, including working capital, capital expenditures, and operating costs necessary to support organic growth, we believe that
our principal sources of liquidity will be sufficient to support our cash requirements through the maturity of our senior secured credit facilities. In the event that we consummate an acquisition during this period, the total cost of the acquisition
may not be funded completely from our current sources of liquidity and may require additional borrowings. As of October 2, 2004, we had $63.8 million in cash and borrowing capacity under our revolving credit facility. Our principal uses of cash are
debt service requirements, capital expenditures, working capital requirements, dividends to Holdings, and acquisitions.



Debt Service. As of October 2, 2004, we had total indebtedness of $284.5 million and $47.2 million of borrowings available under our senior credit
facilities and senior subordinated notes, subject to customary conditions. We have $2.8 million of letters of credit that reduce availability under the senior credit facilities.



The senior secured credit facilities consist of a five-year $50.0 million revolving credit facility and a six-year
amortizing $115.0 million term loan facility. Borrowings under the senior credit facilities generally bear interest based on a margin over, at our option, the base rate or the reserve-adjusted LIBOR. For the first nine months, the applicable margin
is 3.25% over LIBOR and 2.25% over the base rate for revolving credit loans and 2.75% over LIBOR and 1.75% over the base rate for term loans. Beginning six months after closing, the applicable margin for revolving credit loans will vary based upon
our leverage ratio as defined in the senior credit facilities. The senior credit facilities are secured by first priority interests in, and mortgages on, substantially all of our tangible and intangible assets and first priority pledges of all the
equity interests owned by us in our existing and future domestic subsidiaries.



The notes mature in 2013 and are fully and unconditionally guaranteed by each of our existing domestic restricted subsidiaries, jointly and severally, on a senior subordinated basis. Interest on the notes accrues at
the rate of 93/4% per annum and is payable semi-annually in cash in arrears on May 1 and November 1, commencing
May 1, 2004. The notes



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and the guarantees are unsecured senior subordinated obligations and will be subordinated to all of our and the
guarantors existing and future senior debt. If we cannot make payments required by the notes, the subsidiary guarantors are required to make the payments. The guarantor subsidiaries are 100% owned by the Company, and have no independent assets
or operations.



Capital Expenditures. We will spend in
excess of $4.0 million on capital expenditures in 2004 as a result of normal capital expenditures, the implementation of the PeopleSoft financial package and the opening of the Sacramento cross-dock. Through the nine months ending October 2, 2004,
$3.6 million was spent on capital expenditures. The senior credit facilities contain restrictions on our ability to make capital expenditures. Based on current estimates, management believes that the amount of capital expenditures permitted to be
made under the senior credit facilities are adequate to grow our business according to our business strategy and to maintain the properties and business of our continuing operations.



Working Capital. Working capital totaled approximately $63.7 million at October 2, 2004. We increased purchases from
our vendors for certain steel related products to maintain a sizable inventory in order to help secure our position as a critical link in the industry between vendors and consumers, and believe that we will continue to require a higher working
capital than previously incurred. Inventory was increased to service our expected increase in sales, and to take advantage of lower prices prior to expected price increases.



Distributions to Holdings. Holdings has no assets other than our equity. We made distributions of previous
Transaction-related capital contributions of $3.5 million to Holdings in the nine month period ended October 2, 2004 related to Transaction-related state and federal tax refunds received. Our ability to make such distributions is limited by the
senior subordinated notes and the senior secured credit facilities.



Acquisitions. As a part of our business strategy, we will continue to evaluate acquisition opportunities in regions that are not well served by our existing distribution facilities. We cannot guarantee that any acquisitions will be
consummated. If we do consummate any acquisition, it could be material to our business and require us to incur additional debt under our senior secured credit facilities or otherwise. There can be no assurance that additional financing will be
available when required or, if available, that it will be on terms satisfactory to us.



Contractual and Commercial Commitments Summary



The following tables present our long-term contractual cash obligations as of October 2, 2004.



|                                   |  |                        |      |      |   |           |  |           |      |                    |   |       |  |   |       |  |   |       
|---------------------------------- |  | ---------------------- | ---- | ---- | - | --------- |  | --------- | ---- | ------------------ | - | ----- |  | - | ----- |  | - | ------
|                                   |  | Payments Due by Period
|Contractual Obligations(1)         |  | 2004                   |      | 2005 |   | 2006-2007 |  | 2008-2009 |      | 2010 andthereafter |   | Total
|                                   |  | (in millions)         
|Term loan facility                 |  | $                      | 4.5  |      | $ | 10.0      |  | $         | 25.0 |                    | $ | 70.0  |  | $ |      |  | $ | 109.5.
|Senior subordinated notes          |  |                        |     |      |   |          |  |           |     |                    |   |      |  |   | 175.0 |  |   | 175.0 
|Operating lease obligations        |  |                        | 1.0  |      |   | 2.6       |  |           | 3.8  |                    |   | 1.5   |  |   |      |  |   | 8.9   
|Interest on indebtedness (2)       |  |                        | 13.1 |      |   | 21.5      |  |           | 41.5 |                    |   | 30.1  |  |   | 65.5  |  |   | 171.7 
|                                   |  |                        |      |      |   |           |  |           |      |                    |   |       |  |   |       |  |   |       
|Total contractual cash obligations |  | $                      | 18.6 |      | $ | 34.1      |  | $         | 70.3 |                    | $ | 101.6 |  | $ | 240.5 |  | $ | 465.1 
|                                   |  |                        |      |      |   |           |  |           |      |                    |   |       |  |   |       |  |   |       

---

|(1) | The Company is contingently liable for certain advisory fees. See FN 5 of the Interim Financial Statements.
|--- | -----------------------------------------------------------------------------------------------------------

|(2) | Represents interest on the notes and interest on the senior credit facility assuming LIBOR of 1.92%. Each increase or decrease in LIBOR of 0.125% would result in an increase or
decrease in annual interest on the senior credit facilities of $0.1 million assuming outstanding indebtedness of $109.5 million under our senior credit facilities.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Recent Accounting Pronouncements



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, which clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 requires that a company that has a controlling financial interest in a variable interest entity (VIE) consolidate
the assets, liabilities and results of operations of the VIE in a companys consolidated financial statements. In December 2003, the FASB issued a revision to FIN 46, FIN 46R. For the Company, which will be a non-public as defined in FIN 46R,
VIEs created after December 31, 2003, require immediate application of the provisions of FIN 46R. For all entities that qualify as VIEs created before December 31, 2003, application of FIN 46R is required by the beginning of its fiscal year 2005.
The Company has not identified any material VIEs or interests in VIEs for which the provisions of FIN 46R would require a change in the Companys current accounting for such interests.



Item 3. Quantitative and Qualitative Disclosure About Market Risk



We are exposed to certain market risks as part of our on-going business operations. Primary exposure includes changes in interest rates as borrowings
under our senior credit facilities bear interest at floating rates based on LIBOR or the prime rate, in each case plus an applicable borrowing margin. We will manage our interest rate risk by balancing the amount of fixed-rate and floating-rate
debt. For fixed-rate debt, interest rate changes affect the fair market value but do not affect earnings or cash flows. Conversely, for floating-rate debt, interest rate changes generally do not affect the fair market value but do impact our
earnings and cash flows, assuming other factors are held constant.



We may use derivative financial instruments, where appropriate, to manage our interest rate risks. However, as a matter of policy we will not enter into derivative or other financial investments for trading or speculative purposes. We do
not have any speculative or leveraged derivative transactions. Most of our sales are denominated in U.S. dollars; thus our financial results are not subject to any material foreign currency exchange risks.



Interest Rate Risk and Sensitivity Analysis



In connection with the Transaction in October 2003, we entered into a Credit
Agreement that provides for a Revolving Credit Facility, and Term Loan Facility, and issued Senior Subordinated Notes. As of October 2, 2004, the Company has $284.5 million in debt. The Revolving Credit Facility was undrawn and the interest rate on
the $175 million of Senior Subordinated Notes is fixed at 9.75%. As of October 2, 2004, our exposure to changes in interest rates is related solely to our Term Loan of $109.5 million which provided for quarterly principal and interest payments and
is LIBOR plus 2.75 percent and matures in 2009, and our undrawn revolver. Based on the amount outstanding and affected by variable interest rates, a 100 basis point change would result in an approximately $1.1 million change to interest expense.



Item 4. Controls and Procedures



The Companys Chief Executive Officer and Chief Financial Officer, after evaluating (1) the design of procedure to ensure that material information relating to us is made known to our CEO and CFO by others and (2) the effectiveness of
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report, have concluded that the Companys
disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in rules and forms of the Securities and Exchange Commission.



Changes in Internal Controls. No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended
October 2, 2004 that has materially affected, or reasonably likely to materially affect, our internal controls over financial reporting. Management has approved the implementation of the PeopleSoft financial package. This implementation along with
Sarbanes-Oxley Section 404 began in the fourth quarter of 2004.



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PART 2. OTHER INFORMATION



Item 1.Legal Proceedings



Keystone is not currently involved in any material legal proceedings. The Company is subject to various legal proceedings and claims which have arisen in the ordinary course of its business. Management does not expect
the outcome of such matters to have a material effect, if any, on the Companys consolidated financial position, results of operations, or cash flows.



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds



None.



Item 3.Defaults upon Senior Securities



None.



Item 4.Submission of Matters to a Vote of Security Holders



None.



Item 5.Other Information



None.



Item 6.Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



| | 31.1 | Certification by Robert S. Vor Broker pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | -----------------------------------------------------------------------------------------------



| | 31.2 | Certification by Bryant P. Bynum pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | ------------------------------------------------------------------------------------------



| | 32.1 | Certification by Robert S. Vor Broker pursuant to 18 U.S.C. ss. 1350
| | ---- | --------------------------------------------------------------------



| | 32.2 | Certification by Bryant P. Bynum pursuant to 18 U.S.C. ss. 1350
| | ---- | ---------------------------------------------------------------



| | (b) | Reports of Form 8-K
| | --- | -------------------



None.



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Exeter, Pennsylvania, on
November 19, 2004.



KEYSTONE AUTOMOTIVE OPERATIONS, INC./S/ ROBERT S. VOR BROKERRobert S. Vor BrokerChief Executive Officer and President/s/ BRYANT P. BYNUMBryant P. BynumExecutive Vice President and Chief Financial Officer




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