Document:

<PAGE>

                                                                    Exhibit 10.4

                             EMPLOYMENT AGREEMENT
                             --------------------

          THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and effective as
of December 1, 1999, by and between KEYSTONE AUTOMOTIVE INDUSTRIES, INC., a
California corporation (the "Company") and John M. Palumbo (the "Employee"),
with respect to the following facts:

     A.  The Company desires to be assured of the continued association and
services of the Employee in order to take advantage of his experience, knowledge
and abilities in the Company's business, and is willing to employ the Employee,
and the Employee desires to be so employed, on the terms and conditions set
forth in this Agreement.

     B.  The Employee from time to time in the course of his employment may
learn trade secrets and other confidential information concerning the Company,
and the Company desires to safeguard such trade secrets and confidential
information against unauthorized use and disclosure.

          ACCORDINGLY, on the basis of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:

          1.  EMPLOYMENT
              ----------

               1.1  Employment.  The Company hereby employs the Employee as
                    ----------
aVice President and the Chief Financial Officer and the Employee hereby accepts
such employment, on the terms and conditions set forth below, to perform during
the terms of this Agreement such services as are required hereunder.

               1.2  Duties.  The Employee shall render such services to the
                    ------
Company, and shall perform such duties and acts, as reasonably may be required
by the Board of Directors and/or the Chief Executive Officer of the Company in
connection with any aspect of the Company's business.

               1.3  Service to Others.  The Employee shall devote his entire
                    -----------------
productive time, ability and attention to, and shall diligently and
conscientiously use his best efforts to further, the Company's business, and
shall not, without the prior written consent of the Company's Board of Directors
in each instance, perform services of any kind, whether or not for compensation,
for any person other than the Company, which services, in the sole opinion of
the Company's Board of Directors, might materially interfere with the
performance of his duties hereunder.

                                       1
<PAGE>

          2.  COMPENSATION
              ------------

               2.1  Compensation.  As the total consideration for the services
                    ------------
which the Employee renders hereunder, the Employee shall be entitled to the
following:

                    (a) an annual salary of $175,000 subject to such periodic
increases, if any, as the Company's Board of Directors may deem to be
appropriate in its sole discretion, less income tax and other applicable
withholdings, payable in weekly, bi-monthly or monthly installments as may be
agreed between the Employee and the Company;

                    (b) an annual bonus in such amount and upon the realization
of such performance criteria as may be established from time to time by the
Company's Board of Directors, less income tax and other applicable withholdings;

                    (c) participation in all benefit plans or programs sponsored
by the Company for executive officers in general, including, without limitation,
participation in any group health plan, medical reimbursement plan, dental plan,
disability insurance plan, life insurance plan and pension and profit sharing
plan;

                    (d) reimbursement of any and all reasonable and documented
expenses incurred by the Employee from time to time in the performance of his
duties hereunder;

                    (e) two weeks paid vacation per year, at such time or times
as the Company's Board of Directors may authorize, and all paid holidays
observed by the Company; provided, however, that such vacation shall be taken
                         --------
annually and shall not cumulate from year to year; and

                    (f) the use of an automobile substantially similar to that
currently provided by the Company to the Employee, together with reimbursement
of all expenses for insurance, fuel and maintenance.

               2.2  Illness.  Subject to the limitations contained in Section
                    -------
3.2(c) and 3.3(i) of the Agreement, if the Employee shall be unable to render
the services required hereunder on account of personal injuries or physical or
mental illness, he shall continue to receive all payments provided in this
Agreement; provided, however, that any such payments may, at the sole option of
           ---------
the Company, be reduced by any amount that the Employee receives for the period
covered by such payments as disability compensation under insurance policies, if
any, maintained by the Company or under government programs.

                                       2
<PAGE>

          3.  TERM OF EMPLOYMENT AND TERMINATION
              ----------------------------------

               3.1  Term.  Unless sooner terminated pursuant to Section 3.2 of
                    ----
this Agreement, the term of employment under this Agreement shall be for a
period commencing on December 1, 1999 and ending on the third anniversary date
thereof; provided, however, that such term of employment automatically shall be
         --------
renewed for successive two (2) year terms unless written notice of termination
is given by either the Company or the Employee not less than ninety (90) days
prior to the end of the initial term or any subsequent two (2) year term.

               3.2  Termination.  Employment under this Agreement shall
                    -----------
terminate prior to the expiration of its term upon the happening of any of the
following events:

                    (a) the mutual agreement of the Company and the Employee;

                    (b)  the death of the Employee;

                    (c) at the Company's option if, in the reasonable judgment
of the Company's Board of Directors, the Employee has become so physically or
mentally disabled as to be incapable of substantially performing his duties
hereunder for a period of six (6) consecutive months or an aggregate of 180 days
in any twelve (12) month period;

                    (d) at the Company's option, in the event of (i) a material
breach of this Agreement by reason of the Employee's continued and willful
failure or refusal to substantially perform his duties in accordance with this
Agreement or (ii) the conviction of the Employee of a felony or of a misdemeanor
involving financial impropriety or (iii) a material breach of the Employee's
fiduciary duty to the Company; provided, however, that no termination shall
                               --------
occur under clause (i) unless the Employee first shall have received written
notice specifying the acts or omissions alleged to constitute such breach and,
if such breach can be corrected, it continues after the Employee shall have had
reasonable opportunity to correct it;

                    (e) at the Employee's option, in the event of (i) a material
breach of this Agreement by the Company or (ii) the assignment to the Employee
of duties inconsistent with his status as a Vice President and the Chief
Financial Officer of the Company or (iii) a substantial alteration in the
Employee's reporting responsibility, title or office or (iv) a move of the
Company's principal executive offices outside the County of Los Angeles;
provided, however, that no termination shall occur under clause (i) unless the
--------
Company first shall have received written notice specifying the acts or
omissions alleged to constitute such breach and, if such breach can be
corrected, it continues after the Company shall have had a reasonable
opportunity to correct it; or

                    (f) at the Company's option by resolution of the Board of
Directors for any reason whatsoever without cause.

                                       3
<PAGE>

               3.3  Duties Upon Termination.  In the event that employment under
                    -----------------------
this Agreement is terminated, whether at the expiration of the initial term or
any subsequent two (2) year term or prior thereto pursuant to Section 3.2 of
this Agreement, neither the Company nor the Employee shall have any remaining
duties or obligations hereunder, except that (i) the Company shall pay to the
Employee, or his estate, such compensation as is due pursuant to Section 2.1,
prorated through the date of termination, (ii) the Employee shall continue to be
bound by Section 4 of this Agreement and (iii) in the event that such
termination shall occur pursuant to Section 3.2(a), (b), (c), (e) or (f) of this
Agreement or in the event that the Company terminates this Agreement under
Section 3.1 hereof effective at the end of the initial term or any renewal term,
except for any such termination for any reason described in Section 3.2(d)
hereof, the Company shall pay to the Employee, or his estate, such compensation
as would otherwise be due pursuant to Sections 2.1(a) and (c) during such
initial term or renewal term.

          4.  TRADE SECRETS
              --------------

               4.1  Trade Secrets.  The Employee shall not, without the prior
                    -------------
written consent of the Company's Board of Directors in each instance, disclose
or use in any way, during the term of his employment by the Company and for one
(1) year thereafter, except as required in the course of such employment, any
confidential business or technical information or trade secret of the Company
acquired in the course of such employment, whether or not patentable,
copyrightable or otherwise protected by law, and whether or not conceived of or
prepared by him (collectively, the "Trade Secrets") including, without
limitation, any information concerning designs, patterns, customer lists,
products, procedures, operations, information concerning designs, patterns,
customer lists, products, procedures, operations, investments, financing, costs,
employees, purchasing, accounting, marketing, merchandising, sales, salaries,
pricing, profits and plans for future development, the identity, requirements,
preferences, practices and methods of doing business of specific parties with
whom the Company transacts business, and all other information which is related
to any product, service or business of the Company, other than information which
is generally known in the industry in which the Company transacts business or is
acquired from public sources; all of which Trade Secrets are the exclusive and
valuable property of the Company.

               4.2  Tangible Items.  All files, accounts, records, documents,
                    --------------
books, forms, notes, reports, memoranda, studies, compilations of information,
correspondence and all copies, abstracts and summaries of the foregoing, and all
other physical items related to the Company, other than a merely personal item,
whether of a public nature or not, and whether prepared by the Employee or not,
are and shall remain the exclusive property of the Company and shall not be
removed from the premises of the Company, except as required in the course of
employment by the Company, without the prior written consent of the Company's
Board of Directors in each instance, and the same shall be promptly returned to
the Company by the Employee on the expiration or termination of his employment
by the Company or at any time prior thereto upon the request of the Company.

                                       4
<PAGE>

               4.3  Solicitation of Employees. During the term of his
                    -------------------------
employment by the Company and for one (1) year thereafter (such period not to
include any period of violation hereof by the Employee or period which is
required for litigation to enforce this paragraph and during which the Employee
is in violation hereof), the Employee shall not, directly or indirectly, either
for his own benefit or purposes or the benefit or purposes of any other person,
employ or offer to employ, call on, solicit, interfere with or attempt to divert
or entice away any employee of the Company in any capacity if that person
possesses or has knowledge of any Trade Secrets of the Company.

               4.4  Injunctive Relief.  The Employee hereby acknowledges and
                    -----------------
agrees that it would be difficult to fully compensate the Company for damages
resulting from the breach or threatened breach of this Section 4 and,
accordingly, that the Company shall be entitled to seek temporary and injunctive
relief, including temporary restraining orders, preliminary injunctions and
permanent injunctions, to enforce such provisions without the necessity of
proving actual damages and without the necessity of posting any bond or other
undertaking in connection therewith. This provision with respect to injunctive
relief shall not, however, diminish the Company's right to claim and recover
damages.

               4.5  "Company".  For the purposes of this Section 4 of this
                    ---------
Agreement only, the term "Company" shall mean collectively Keystone Automotive
Industries, Inc., a California corporation, and its successors, assigns and
nominees, and all individuals, corporations and other entities that directly, or
indirectly through one or more intermediaries, control or are controlled by or
are under common control with any of the foregoing.

          5.  MISCELLANEOUS
              -------------

               5.1  Severable Provisions.  The provisions of this Agreement are
                    --------------------
severable, and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.

               5.2  Successors and Assigns.  All of the terms, provisions and
                    ----------------------
obligations of this Agreement shall inure to the benefit of and shall be binding
upon the parties hereto and their respective heirs, representatives, successors
and assigns.  Notwithstanding the foregoing, neither this Agreement nor any
rights hereunder shall be assigned, pledged, hypothecated or otherwise
transferred by the Employee without the prior written consent of the Company in
each instance.

               5.3  Governing Law.  The validity, construction and
               -------------
interpretation of this Agreement shall be governed in all respects by the laws
of the State of California applicable to contracts made and to be performed
within that State.

                                       5
<PAGE>

               5.4  Arbitration.  At the demand of either party any dispute
                    -----------
arising out of this Agreement shall be resolved through binding arbitration.
Unless the parties agree on a different arbitration procedure, arbitration shall
take place under the Expedited Labor Arbitration Rules of the American
Arbitration Association of Los Angeles County, California. The decision of the
Arbitrator shall be final and binding on both parties.

               5.5  Headings.  Section and subsection headings are not to be
                    --------
considered part of this Agreement and are included solely for convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.

               5.6  Entire Agreement.  This Agreement constitutes the entire
                    ----------------
agreement between the parties hereto pertaining to the subject matter hereof,
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, relating to the subject matter of this
Agreement.  No supplement, modification, waiver or termination of this Agreement
shall be valid unless executed by the party to be bound thereby.  No waiver of
any of the provisions of this Agreement shall be deemed to or shall constitute a
waiver of any other provisions hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expresssly provided.

               5.7  Notice.  Any notice or other communication required or
                    ------
permitted hereunder shall be in writing and shall be deemed to have been given
(i) if personally delivered, when so delivered, (ii) if mailed, one (1) week
after having been placed in the United States mail, registered or certified,
postage prepaid, addressed to the party to whom it is directed at the address
set forth below or (iii) if given by telex or telecopier, when such notice or
other communication is transmitted to the telex or telecopier number specified
below and the appropriate answerback or telephonic confirmation is received.
Either party may change the address to which such notices are to be addressed by
giving the other party notice in the manner herein set forth.

               5.8  Attorneys' Fees.  In the event any party takes legal action
                    ---------------
to enforce any of the terms of this Agreement, the unsuccessful party to such
action shall pay the successful party's expenses, including attorneys' fees,
incurred in such action.

               5.9  Third Parties.  Nothing in this Agreement, expressed or
                    -------------
implied, is intended to confer upon any person other than the Company or the
Employee any rights or remedies under or by reason of this Agreement.

                                       6
<PAGE>

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date and year first set forth above.

                                   KEYSTONE AUTOMOTIVE INDUSTRIES, INC.

                                   By /s/Charles J. Hogarty
                                     ------------------------------------
                                        Charles J. Hogarty, President
                                        700 East Bonita Avenue
                                        Pomona, California 91767
                                        Facsimile: (909) 624-9136

                                      /s/John M. Palumbo
                                     ------------------------------------
                                        JOHN M. PALUMBO
                                        14049 Mar Vista
                                        Whittier, California  90602

                                       7<PAGE>

                                                                   Exhibit 10.26

                  KEY EMPLOYEE SALARY CONTINUATION AGREEMENT

     AGREEMENT, dated as of the 11/th/ day of April, 2000 between KEYSTONE
AUTOMOTIVE INDUSTRIES, INC., a California corporation (the "Company"), and James
C. Lockwood (the "Executive").

                              W I T N E S S E T H:
                              - - - - - - - - - -

     WHEREAS, the Company considers it essential to the best interests of the
Company and its stockholders that its management be encouraged to remain with
the Company and to continue to devote full attention to the Company's business
in the event an effort is made to obtain control of the Company through a tender
offer or otherwise;

     WHEREAS, in this connection, the Company recognized that the possibility
for a change in control and the uncertainty and questions which it may raise
among management may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders;

     WHEREAS, the Executive is a key employee of the Company;

     WHEREAS, the Company believes the Executive has made valuable contributions
to the productivity and profitability of the Company;
<PAGE>

     WHEREAS, should the Company receive any proposals from a third person
concerning a possible business combination with, or acquisition of equity
securities of, the Company, the Company believes it imperative that the Company
and the Board of Directors (the "Board") be able to rely upon the Executive to
continue in his position, and that the Company be able to receive and rely upon
his advice, if so requested, as to the best interests of the Company and its
stockholders without concern that he might be distracted by the personal
uncertainties and risks created by such a proposal; and

     WHEREAS, should the Company receive any such proposals, in addition to the
Executive's regular duties, he may be called upon to assist in the assessment of
such proposals, advise management and the Board as to whether such proposals
would be in the best interests of the Company and its stockholders, and to take
such other actions as the Board might determine to be appropriate;

     NOW, THEREFORE, to assure the Company that it will have the continued
undivided attention and services of the Executive and the availability of his
advice and counsel notwithstanding the possibility, threat or occurrence of a
bid to take over control of the Company, and to induce the Executive to remain
in the employ of the Company, and for other good and valuable consideration, the
Company and the Executive agree as follows:
<PAGE>

     1.  Services During Certain Events.
         -------------------------------

     In the event a third person begins a tender or exchange offer, circulates a
proxy to stockholders, or takes other steps seeking to effect a Change in
Control (as hereafter defined), the Executive agrees that he will not
voluntarily leave the employ of the Company, and will render the services
contemplated in the recitals to this Agreement, until the third person has
abandoned or terminated his or its efforts to effect a Change in Control or
until after such a Change in Control has been effected.  In the event that the
Executive breaks his obligations under this paragraph, he shall forfeit his
rights to the benefits conferred hereby (which forfeiture shall constitute the
sole remedy of the Company for such breach).  The Company shall promptly notify
the Executive if and when it receives knowledge that steps are being taken to
effect a Change in Control.

     2.  Change in Control.
         ------------------

     For the purposes of this Agreement, "Change in Control" shall have the
following meaning:   (i) a merger of equivalent combination involving the
Company after which forty-nine percent (49%) or more of the voting stock of the
surviving corporation is held by persons other than former shareholders of the
Company;  (ii) the acquisition of thirty percent (30%) or more of the
outstanding shares of Common Stock by any person (as defined by Section 3(a)(9)
of the 1934 Act) other than directly from the Company; (iii) the occurrence of
circumstance having the effect that thirty percent (30%) or more of the
directors elected by shareholders to the Board are
<PAGE>

persons who were not nominated by management in the then most recent proxy
statement of the Company; or (iv) a change in the Chief Executive Officer of the
Company.

     3.  Circumstances Triggering Receipt of Benefits.
         ---------------------------------------------

     The Company shall provide the Executive with the benefits set forth in
Section 5 immediately upon any "Involuntary Termination" of the Executive's
employment by the Company within one  year following a Change in Control.
"Involuntary Termination" shall mean the termination of the Executive's
employment with the Company during such period (a) by the Company unless the
termination is: (i) by reason of the Executive's death or (ii) by reason of the
Executive's inability by reason of illness or other physical and mental
disability to perform his duties for any consecutive 180 day period; (b) by such
Executive after any reduction in his base salary, any material reduction in his
fringe benefits, a requirement to be physically present at the Company's
executive offices more than two days per week, his relocation to a location
outside a 60 mile radius of his current residence without his consent, or a
material decrease in his responsibilities or authority or any other material
adverse change in the condition of his employment.

     4.  Notice of Termination.
         ----------------------

     Any termination of the Executive's employment with the Company by the
Company or by the Executive, in each case as contemplated by Section 3, shall be
communicated by written "Notice of Termination" to the other party hereto.
<PAGE>

     5.  Benefits.
         ---------

     Subject to the conditions set forth in Section 3, the following benefits
(subject to any applicable payroll or other taxes required to be withheld) shall
be paid to the Executive: (a) the Company shall continue paying such Executive's
then current annual base salary for a period of one year following such
termination, such amount to be in addition to any other coverage, fringe
benefits, payments and distributions to which such Executive is entitled; and
(b) all Stock Options granted to such Executive which the Executive shall not
then have been entitled to exercise shall be accelerated immediately prior to or
concurrently with the occurrence with the change in control and the optionee
shall have the right to exercise all such options.

     6.  Continuing Obligations.
         -----------------------

     In order to induce the Company to enter into this Agreement, the Executive
hereby agrees that all documents, records, techniques, business secrets and
other information which have come into his possession from time to time during
his employment hereunder, shall be deemed to be confidential and proprietary to
the Company and the Executive further agrees to retain in confidence any
confidential information known to him concerning the Company and its
subsidiaries and their respective businesses so long as such information is not
publicly disclosed.
<PAGE>

     7.  Successors.
         -----------

     (a) The Company will require any successor controlled by the Company's
Board of Directors (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.  Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to the benefits provided by Section 5 from the Company in the same amount and on
the same terms as the Executive would be entitled hereunder upon Involuntary
Termination within one year following a Change in Control as provided in Section
3, except that for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the date of the Involuntary
Termination.  As used in the Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
7 or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.

     (b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devises and legatees.  If the Executive should
die while any amounts are payable to him hereunder, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there be no such
designee, to his estate.
<PAGE>

     8.  Notices.
         --------

     For purposes of this Agreement, notices and all other communications
provided herein shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:

     If to the Executive:

          James C. Lockwood

          1817 Westridge Road

          Los Angeles, CA  90049

     If to the Company:

          Keystone Automotive Industries, Inc.

          700 E. Bonita Avenue

          Pomona, CA  91767

               Attention:  Chief Executive Officer

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

     9.  Governing Law.
         --------------

     The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California.
<PAGE>

     10.  Miscellaneous.
          --------------

     Except as provided in Section 13, no provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and the Company.  No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or any prior subsequent time.  This agreement supersedes
all prior agreements with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement.

     11.  Separability.
          -------------

     The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

     12.  Non-assignability.
          ------------------

     This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this agreement or
any rights or obligations hereunder, except as provided in Section 7.  Without
limiting the foregoing, the Executive's right to receive
<PAGE>

payments hereunder shall not be assignable or transferable, whether by pledge,
creation of security interest or otherwise, other than a transfer by his will or
by the laws of descent or distribution, and in the event of any attempted
assignment or transfer contrary to this paragraph the Company shall have no
liability to pay any amount so attempted to be assigned or transferred.

     13.  Termination; Modification.
          --------------------------

     The Company may terminate or modify this agreement at any time by three (3)
months written notice of such termination or modification given to the
Executive; except that no such termination or modification shall be made, and if
           ------ ----
made shall have no effect, (a) within one year after the Change in Control in
question, (b) following a termination of employment as contemplated by Section
3, or (c) during any period of time when the Company has knowledge that any
third person has taken steps reasonably calculated to effect a Change in Control
until, in the opinion of the Board, the third person has abandoned or terminated
his efforts to effect a Change in Control.  Any decision by the Board made in
good faith as to the nature of any steps taken by such third person or as to
whether the third person has abandoned or terminated his efforts to effect a
Change in Control shall be conclusive and binding on the Executive.
<PAGE>

     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above set forth.

                                       KEYSTONE AUTOMOTIVE INDUSTRIES, INC.

                                       By /s/ Charles J. Hogarty
                                          ------------------------------------
                                           President & Chief Executive Officer

                                       EXECUTIVE

                                       By /s/ James C. Lockwood
                                          -----------------------------------
                                              James C. Lockwood

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00011-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00011-of-00352.parquet"}]]