Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended January 1, 2005.

For the transition period from                      to                     

Commission file number: 333-11252

Keystone Automotive Operations, Inc.

(Exact Name of Registrant as Specified in Its Charter)

44 Tunkhannock Avenue

Exeter, Pennsylvania 18643

(Address including zip code of registrant’s Principal Executive Offices)

(570) 655-4514

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No þ

None of the voting stock of the registrant is held by a non-affiliate of the registrant. There is no publicly traded market for any class of voting stock of the registrant.

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

Documents incorporated by reference: None.

Table of Contents

TABLE OF CONTENTS

-i-

Table of Contents

CAUTIONARY STATEMENTS

We have included in this Annual Report on Form 10-K, and from time to time our management may make, statements which may constitute “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You may find discussions containing such forward-looking statements in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as within this Annual Report generally. In addition, when used in this Annual Report, words such as “may,” “will,” “should,” “believes,” “anticipates,” “expects,” “estimates,” “plans,” “projects,” “intends” and similar expressions are intended to identify forward-looking statements. These forward-looking statements include statements other than historical information or statements of current condition, but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside of our control. It is possible that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in our specific forward-looking statements include, but are not limited to, those discussed under “Certain Factors That May Affect Our Business,” as well as:

Consequently, readers of this Annual Report should consider these forward-looking statements only as our current plans, estimates and beliefs. We do not undertake and specifically decline any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We undertake no obligation to update or revise any forward-looking statement in this Annual Report to reflect any new events or any change in conditions or circumstances. All of the forward-looking statements in this Annual Report are expressly qualified by these cautionary statements. Even if these plans, estimates or beliefs change because of future events or circumstances after the date of these statements, or because anticipated or unanticipated events occur, we disclaim any obligation to update these forward-looking statements

PART I

Company Overview

Unless the context requires otherwise, references in this Form 10-K to Keystone refer to Keystone Automotive Operations, Inc. and references such as “we”, “us” and “our” refer to Keystone Automotive Operations, Inc. together with its consolidated subsidiaries.

Table of Contents

History

In 1972, Keystone Automotive Warehouse was organized as a partnership and was sold in March of 1998, thereby dissolving the partnership. The new owners formed Keystone Automotive Operations, Inc., which was incorporated under the laws of the Commonwealth of Pennsylvania (the “Company”).

We are the leading distributor of specialty automotive equipment purchased by consumers to improve the performance, functionality, and appearance of their vehicles. We occupy a critical position in our industry by linking a highly fragmented base of approximately 650 vendors with an even more fragmented base of approximately 18,000 retail stores, who in turn sell to the consumer. In 2004, we believe we had net sales nearly four times higher than our largest competitor. The market in which we compete, as measured by manufacturers’ sales, is approximately $10.0 billion and grew at a compound annual growth rate of 8.9% in the period from 1994 to 2003. We have a differentiated business model and hard-to-replicate distribution network, which have enabled us to generate growth in excess of the market (a compound annual growth rate of 10.9%) in the period from 1985 to 2004. Our original concentration was in the Northeastern part of the United States. As we grew, we expanded and opened call centers and non-inventory stocking distribution centers (cross-docks) in Ohio, North Carolina and Massachusetts. In March of 1999, we purchased the assets of Automotive Performance Warehouse (“APW”), a distributor in Kansas City, Kansas, with warehouse locations in Kansas, Texas, Tennessee, Illinois, and Colorado. In 1999, we purchased the assets of a distributor in Toronto, Canada and purchased the stock of American Specialty Equipment Corp., a distributor in Long Island, New York that had serviced the East Coast. From 2000 to 2002, we opened new cross-docks in Pennsylvania, Maryland, Florida, Georgia, Indiana, Alabama, and Cornwall, Canada. In November of 2003, we opened our first call center and warehouse in Corona, California, allowing us to penetrate the West Coast market, and in November of 2004, we opened a cross-dock in Sacramento, California.

We offer the most comprehensive selection of specialty automotive equipment in our industry. We warehouse approximately 126,000 SKUs, which we are able to deliver to nearly all of our customers on a next or second-day basis. We have a hub-and-spoke distribution network, which we believe differentiates us from our competitors and allows us to provide rapid and dependable delivery of a broad selection of products. This network enables us to transport products from our three centralized warehouse distribution centers to our 17 non-inventory stocking cross-docks, which provide distribution points to key regional markets. Our fleet of over 295 trucks delivers our products directly to our customers along 285 routes in the East Coast, Midwest, Southeastern Canada, and California. We believe that this network meets the rapid delivery needs of specialty retailer/installers and ensures regular customer contact, allowing us to provide a superior level of service to our customers.

Our customers are principally small, independent retailers and installers of specialty automotive equipment with annual revenues of less than $1.0 million and annual purchases from us of less than $250,000. These businesses depend on us to provide a broad range of products, rapid delivery, marketing support, and technical assistance. Similarly, our vendors are typically small to mid-sized manufactures with annual revenues of less than $100.0 million, the majority of whom have revenues of less than $30.0 million. We provide a critical service to our vendors by stocking the full range of their products, managing the distribution of their products to our fragmented customer base, and providing marketing support to develop demand for their products. The valuable services we provide and the deep level of integration we have with the business operations of our customers and vendors have resulted in a strong and stable position within the industry.

We have experienced robust revenue and profit growth as a result of market growth, our ability to generate higher levels of sales from our existing customers, and by attracting new customers both in existing and in new regions. We believe that there is significant growth potential in the specialty automotive equipment market, which we expect will permit additional opportunities for revenue and profit growth in the future.

-2-

Table of Contents

Segment Information

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

Distribution

The distribution segment (“Distribution”) 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. The distribution segment generated $421.0 million or 93.8% of our net sales in 2004. This segment distributes specialty automotive equipment for vehicles to specialty retailers and 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) 17 non-inventory stocking cross-docks spread throughout the East Coast, Midwest, and parts of Canada; and (iii) our fleet of over 295 trucks that provide multi-day per week delivery and returns along over 285 routes which cover 42 states and parts of Canada. The Exeter, Kansas City, and Corona 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.

Our distribution operations are comprised of three primary steps:

Order Processing. Order requests are received primarily through any of our call centers or to a lesser extent, directly through the Internet, and then sent to the warehouse for processing. Items are individually picked from the warehouse shelves, consolidated into crates or on pallets for shipping, and loaded onto trucks depending on the location of the customer and the cross-dock. We have achieved a pick accuracy rate of greater than 99%.

Transportation to Cross-Docks. We transport shipments from our central distribution centers to the cross-docks via tractor trailers. Once these trucks arrive at a local cross-dock, the products are unloaded, sorted by delivery routes, and then reloaded into smaller 18-foot delivery trucks.

Transportation to Customers. Our fleet of delivery trucks delivers the products to customers and picks up goods to be returned to us. When delivery trucks return to the cross-dock, returned goods are unloaded, sorted and returned to the warehouse distribution centers via the tractor trailers, thereby reducing wasted miles on the fleet’s return trips to the warehouse distribution centers. At our discretion, returned goods are either sent back to the manufacturer for full credit or restocked into inventory. We provide delivery on company-owned and leased trucks within one to two days to customers representing nearly all of our sales on company-owned trucks throughout 42 states and parts of Canada. This ensures regular customer contact and meets the rapid delivery needs of specialty retailer/installers.

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

Retail Operations

The retail segment of our business (“Retail”) operates 24 retail stores in Pennsylvania under the A&A Auto Parts name (the “A&A Stores”). 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 $28.0 million, or 6.2% of our net sales, in 2004. 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. Due to the close proximity of many of the A&A Stores to the Exeter warehouse distribution center, the full range of SKUs carried at Exeter are delivered within 24 hours to any of our retail locations.

Competitive Strengths

We believe our key strengths are:

-3-

Table of Contents

We believe our leading market position enhances our ability to increase sales to existing customers attract new customers and enter into new markets.

-4-

Table of Contents

Business Strategy

We intend to continue to expand our business, enhance our market position, and increase our revenues and cash flow by focusing on the following:

We believe that large retail auto chains represent an additional source of growth for us. These chains are relatively minor players in the specialty automotive equipment market because their distribution infrastructure and business models are optimized to deliver and merchandise high-volume replacement parts. Lacking internal capability, they have traditionally relied upon a patchwork of local distributors and common carrier shipments to meet their specialty automotive

-5-

Table of Contents

equipment demand. As our geographic footprint has expanded, we have entered into preferred agreements with several of these retailers to supply their specialty automotive equipment needs.

Products

We believe we offer the most comprehensive product selection in the specialty automotive equipment industry, covering product lines from approximately 650 vendors with access to over 358,000 SKUs, of which we stock approximately 126,000 SKUs in our inventory. No particular SKU contributed more than 0.5% to our net sales in 2004. We have grown our product mix based on consumer demand for new technologies and products throughout many product growth periods, including speed and performance during the late 1960’s and 1970’s, trucks and SUVs in the 1980’s and 1990’s, and the recent growth of the market for sport compact vehicle specialty equipment and mobile electronics. These product growth periods have served to continuously expand and diversify our products across a mix of consumer demographics. Major consumer end-markets and representative products include:

Inventory Management

We have developed and implemented a variety of initiatives to manage a balanced level of inventory. These initiatives include implementing a customized computer program that assists our purchasing group in forecasting inventory needs and making purchasing decisions, consolidating all inventory at the Exeter, Kansas City, and Corona warehouse distribution centers, and examining on-hand inventory regularly to ensure that slow-moving inventory is returned to vendors. We also review our product mix on a regular basis to determine whether we have

-6-

Table of Contents

an appropriate inventory of product. Additionally, pursuant to standard industry practice, most manufacturers provide us with the opportunity to return unsold inventory at certain times during the year. The “stock adjustment” process allows us to maintain an inventory of active products, with minimal risk of accumulating slow-moving inventory or obsolete products, as products may be returned to the manufacturers if not sold or if returned to us by our customers. Stock adjustments encourage warehouse distributors to carry additional inventory, especially new products with no precedent sales data, as products that do not sell may generally be returned without penalty to distributors.

Management’s commitment to inventory management is reflected by a reduction of inventory as a percentage of net sales from 2000 to 2004. Ending inventory as a percentage of net sales for fiscal 2004 was 16.4%, compared to 21.7% for fiscal 2000.

Sales

Our employee sales force is comprised of approximately 315 inside sales personnel located within eight call centers and approximately 30 outside sales personnel who call directly on customers in the field.

Inside Sales Force. Our inside sales force is responsible for cultivating existing customer relationships. This sales force receives customer orders, responds to technical and other inquiries, and proactively places outbound sales calls to customers.

Outbound calling representatives are responsible for contacting approximately 5,000 customers per day, primarily to maintain an active dialogue with customers regarding new promotions, marketing initiatives, new products and our marketing events.

Inbound calling representatives are responsible for responding to the approximately 17,000 inbound calls per day in connection with customer requests, and order placement and fulfillment.

Outside Sales Force. The focus of our outside sales force is to identify and acquire new customers, and to further develop relationships with existing customers. Outside sales personnel are responsible for specific geographic regions across the United States, and they work with regional managers to penetrate and service new and existing markets. Outside sales personnel also sell value-added marketing services, such as merchandising support, eServices (discussed in “Online Initiatives”), and loyalty programs.

Marketing

Our strong performance has been achieved through efficient and effective use of sales resources and innovative marketing. At the core of our marketing strategy is our mission to deliver value-added services to both customers and vendors. From industry-leading catalogs and online initiatives to numerous advertising, sponsorship and promotional activities, we believe we are recognized as one of the most innovative marketers in the specialty automotive equipment industry.

Trade Shows and Events

We sponsor a series of vendor-supported special events and trade shows throughout the year to drive sales growth and showcase products, including a leading trade show, the “Big Show,” where we and approximately 250 vendors display specialty products to over 3,800 industry participants. Flyers and promotional materials are sold and distributed to our customers via call centers and truck drivers. In addition, we develop loyalty programs based on purchasing levels where customers earn rewards toward annual prizes and trips.

Catalogs

We produce the specialty automotive equipment industry’s leading online and print catalogs. Our catalogs are used throughout the industry to buy, sell and market products. We distribute catalogs to customers who circulate the catalogs to end consumers. In 2004, we distributed over 1.9 million catalogs, including our annual Keystone

-7-

Table of Contents

Specialty Catalog, which contains more than 1,150-pages showcasing over 50,000 products. The Keystone Specialty Catalog is distributed to over 16,000 retailers, sells approximately 350,000 copies per year, and we believe has become the industry standard in the specialty automotive equipment market. In addition to our primary Keystone Specialty Catalog, we publish other catalogs targeted to specific vehicle, market and product categories.

Online Initiatives

We launched our eServices initiatives in 1999 to provide customers with the added convenience of ordering online and to further extend consumer reach by enabling commercial customers to offer online shopping to end consumers. Our online initiatives include the following:

Customers

We have a fragmented base of approximately 18,000 customers. No customer comprised more than 1.1% of our net sales in 2004. Our customers are principally small, independent, owner-operated businesses with annual revenues of less than $1.0 million and annual purchases from us of less than $250,000. Our customers merchandise products directly to consumers and install purchased products in installation bays. These businesses rely upon us to provide a broad range of products, rapid delivery, marketing support and technical assistance. While we generally do not have long-term contracts with our customers, our high customer retention rates underscore the strength of our customer loyalty. Approximately 40% of our top 100 customers have been with us for more than ten years.

In addition to our traditional specialty retailers and installer customers, during the past few years, we have increased our sales to several large automotive parts retail chains. Large automotive retail chains typically stock 15,000 to 25,000 SKUs per retail location, and their distribution infrastructure and business models are optimized to deliver and merchandise high volume replacement parts and not the lower volume specialty and performance parts. While

-8-

Table of Contents

the automotive retail chains currently have a small presence in the lower volume market, some retailers have sought to augment their product offerings and sales with increasingly popular specialty and performance equipment. However, we believe these retailers face significant challenges in changing their business models to distribute specialty products, including: (i) purchasing from a different vendor base, (ii) maintaining a sizable inventory of slower-moving products, and (iii) setting up a delivery system to provide multi-day per week deliveries direct to stores. As a result, several large automotive parts retailers have established relationships with us to outsource their distribution of specialty and performance equipment. By purchasing products from us, these retailers avoid significant investments that would be required to develop the infrastructure necessary to achieve comparable product breadth and service. As our geographic footprint has expanded, our sales to automotive parts retail chains have grown rapidly, but still only represented approximately 3.0% of our net sales in 2004.

Vendors

Throughout the growth of our Company, we have built strong relationships with many of the industry’s leading manufacturers. We have a diversified vendor base of approximately 650 specialty manufacturers, with our largest vendor accounting for approximately 5% of net sales and our next largest vendor accounting for approximately 2% of net sales in 2004. In addition, the average length of our relationship with our top 100 vendors is approximately 11 years, demonstrating stable, efficient and mutually beneficial relationships.

We provide a critical services to our vendors by stocking the full range of their products, managing the distribution of their products to a fragmented customer base, and providing marketing support to develop demand for their products. We believe that we enhance our importance to vendors by carrying a complete offering of a vendor’s products, unlike competitors which may only carry selected SKUs. As we have grown and expanded our vendor relationships, we have created a self-reinforcing cycle of adding new vendors, increasing inventory breadth and depth, attracting new customers due to increased product selection, and again attracting new vendors as the customer base increases.

We provide vendors with manufacturing efficiencies, inventory and working capital management, as well as effective new product distribution. Our inventory management system allows manufacturers to coordinate manufacturing schedules with us, thereby increasing manufacturing efficiencies. We use our size and scale to purchase products in large quantities to meet our commitment to provide customers with a full range of products, while receiving volume discounts from our vendors. Vendors use us to generate demand, create innovative marketing support and distribute new products.

We believe that we represent a substantial share of the sales volume for many of our top vendors. Because of our broad access to customers, vendors also utilize our ongoing call center initiatives, customized marketing materials, customer event planning, and customer training programs. Vendors pay marketing fees to us to have their respective products and brands showcased in our catalogs, on our delivery vehicles, and on our invoices. In addition, our vendors financially support other marketing promotions, such as the “Big Show,” the Keystone Reward Program, and the Keystone Cruise, a vendor-supported annual cruise, and highly desired customer reward program.

Trademarks and Licensing

We own certain trade names, trademarks and patents used in our business. The loss of any such trade name, other than “Keystone”, “DriverFX”, or any trademark or patent would not have a material adverse effect on our consolidated financial condition or results of operations.

Competition

Specialty automotive equipment industry participants have a variety of supply choices. Vendors can deliver products to market via warehouse distributors and mail order catalogs, and/or directly to retailers and/or consumers. According to The Specialty Equipment Market Association, or SEMA, the industry is comprised of over 850 warehouse distributors and numerous catalog companies. We compete on the basis of product breadth and depth, rapid and dependable delivery, marketing initiatives, support services, and price.

-9-

Table of Contents

Employees

At January 1, 2005, we employed 1,527 full-time salaried staff and hourly workers. Management believes that we have a positive working relationship with our employees. We are not a party to any collective bargaining agreements with our employees.

Governmental Regulations and Environmental Matters

While we do not conduct manufacturing, our distribution and retail operations and our properties, including our maintenance of a fleet of vehicles, are nonetheless subject to federal, state, local and foreign environmental protection, and health and safety laws and regulations, including the Occupational Safety and Health Act (“OSHA”) and federal, state and local environmental laws, rules and regulations. We are not aware of any pending legislation that in our view, if enacted, is likely to affect significantly the operations of our business. We believe that our operations comply substantially with all existing government rules and regulations applicable to our business.

Environmental laws govern, among other things:

We are also required to obtain certain permits from governmental authorities for some of our operations. If we violate these laws, regulations or fail to obtain such permits, we could be fined or otherwise sanctioned by regulators. We could also become liable if employees or other third parties are improperly exposed to hazardous materials.

We have made and will continue to make expenditures relating to environmental compliance. We cannot assure you, however, that we will at all times be in complete compliance with such requirements. Although we presently do not expect to incur any capital or other expenditures relating to environmental controls or other environmental matters in amounts that would be material to us, we may be required to make such expenditures in the future. Environmental laws are complex, change frequently and have tended to become more stringent over time. Accordingly, we cannot assure you that environmental laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.

We operate distribution centers and retail locations and may be responsible under environmental laws for contamination resulting from our operations, such as the possible release of gasoline, motor oil, antifreeze, transmission fluid, CFCs from air conditioners or other hazardous materials. Contamination can migrate on-site or off-site which can increase the risk of, and the amount of, any potential liability for such contamination.

Many of our facilities are located on or near properties with a history of industrial use which may have involved hazardous substances. As a result, some of our properties could have contamination from historical operations. Some environmental laws hold the current operator of real property liable for the costs of cleaning up contamination, even if the operator did not know of and did not cause such contamination. Accordingly, we may be responsible under environmental laws for such historical contamination. These environmental laws also impose liability for cleanup costs and damages on persons who dispose of hazardous substances, regardless of whether the disposal site is owned or operated by such person. Third parties may also make claims against owners or operators of properties for personal injuries and property damage resulting from the release of hazardous substances.

While compliance with, or liabilities under, environmental laws have not had a material adverse effect on our financial position, results of operations or cash flows to date, we cannot guarantee that they will not materially adversely affect us in the future.

-10-

Table of Contents

Certain Factors That May Affect Our Business

Your should carefully consider the following factors, in addition to other information in this Report, in evaluating our company and our business.

Our substantial leverage may impair our financial condition and we may incur significant additional debt.

We have a substantial amount of debt. As of January 1, 2005, we had total indebtedness of $282.50 million. In addition, as of January 1, 2005 we were able to borrow up to an additional $47.2 million under our senior credit facilities, subject to customary borrowing conditions.

Our substantial debt could have important consequences to you, including:

These limitations and consequences may place us at a competitive disadvantage to other less-leveraged competitors.

Subject to specified limitations, the indenture governing our notes and the credit agreement governing our senior credit facilities will permit us and our subsidiaries to incur substantial additional debt. If new debt is added to our current debt levels, the risks described above could intensify.

We will require a significant amount of cash, and our ability to generate sufficient cash depends upon many factors, some of which are beyond our control.

Our ability to make payments on and refinance our debt and to fund working capital needs and planned capital expenditures depends on our ability to generate cash flow in the future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. For example, our need to stock substantial inventory could increase our working capital needs. We cannot assure you that our business will continue to generate cash flow from operations at current levels or that our cash needs will not increase. If we are unable to generate sufficient cash flow from operations in the future to service our debt and meet our other needs, we may have to refinance all or a portion of our existing debt or obtain additional financing or reduce expenditures that we deem necessary to our business. We cannot assure you that any refinancing of this kind would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on our financial condition.

Covenant restrictions under our indebtedness may limit our ability to operate our business and, in such an event, we may not have sufficient assets to pay amounts due to you on the notes.

The credit agreement governing our senior credit facilities, the indenture governing our outstanding notes and our future debt agreements will contain covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities. Our senior credit facilities and the indenture restrict, among other things, our ability and the ability of our restricted subsidiaries to:

-11-

Table of Contents

In addition, our senior credit facilities require us to maintain specified financial ratios and satisfy certain financial condition tests, including a minimum consolidated interest coverage ratio of 1.75:1.00, a maximum consolidated leverage ratio of 5.60:1.00, and a minimum consolidated fixed charge coverage ratio of 1.10:1.00. Each of these ratios will increase over time. For our fiscal year ended January 1, 2005 our consolidated interest coverage ratio was 2.41:1.00, our consolidated leverage ratio was 4.72:1.00, and our consolidated fixed charge ratio was 1.38:1.00. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests. We cannot assure you that we will meet those tests or that the lenders will waive any failure by us to meet those tests. A breach of any of these covenants would result in a default under our senior credit facilities and the indenture. If an event of default under our senior credit facilities occurs, the lenders could terminate all commitments to lend and elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, the lenders could proceed against the collateral pledged to them. We have pledged substantially all of our assets to the lenders. In such an event, we also cannot assure you that we would have sufficient assets to pay amounts due on the notes. As a result, you may receive less than the full amount you would be otherwise entitled to receive on the notes.

We depend on our relationships with our vendors and a disruption of these relationships or of our vendors’ operations could have an adverse effect on our business and results of operations.

Our business depends on developing and maintaining productive relationships with our vendors. Many factors outside of our control may harm these relationships. For example, financial difficulties that some of our vendors may face may increase the cost of the products that we purchase from them. Our vendors’ ability to supply products to us is also subject to a number of risks, including destruction of their facilities or work stoppages. In addition, our failure to promptly pay, or order sufficient quantities of inventory from our vendors may increase the cost of products we purchase or may lead to vendors refusing to sell products to us at all. We generally do not have long-term contracts with our vendors.

The automotive aftermarket equipment industry is subject to cycles in the general economy. A downturn in the economy could reduce consumer spending on specialty automotive equipment.

A downturn in the economy may delay or reduce consumer purchases of our products and services, which could adversely affect our revenues, cash flow and profits. Growth in our industry significantly slowed in 2001 and 2002 from the industry’s historic average growth rates due to the recession, and sales in our industry have declined on an annual basis in prior recessions. A continued slowdown in economic activity could adversely affect our results. Many factors affect the level of consumer spending on specialty automotive equipment, including, among others, general business conditions, interest rates, gasoline prices, the availability of consumer credit and consumer confidence in future economic conditions. While the number of automobiles registered in the United States has steadily increased, should a reduction in the number of automobiles driven by automobile owners or a reduction in new car purchases occur, it would adversely affect the demand for our products.

-12-

Table of Contents

Because all of our inventory is stored in our warehouse distribution centers, a disruption in our warehouse distribution centers could adversely affect the results of our operations by increasing our cost and distribution lead times.

We maintain our entire inventory in three warehouse distribution centers. A serious disruption to these distribution centers or to the flow of goods in or out of these centers due to inclement weather, fire, earthquake, act of terrorism or any other cause could damage a significant portion of our inventory and could materially impair our ability to distribute our products to customers in a timely manner or at a reasonable cost. We could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time that it takes for us to reopen or replace a distribution center, which would reduce our revenues and profits, and impair our relationships with our customers.

Our business could be adversely affected by consolidation among vendors and customer as it may reduce our importance as a holder of sizeable inventory thereby reducing our revenues and earnings.

Our success has been dependent, in part, on the fragmented vendor and customer base in our industry. Because of the small size of most vendors and customers, they cannot support substantial inventory positions and thus we fill an important role as our size permits us to maintain a large inventory. If a trend towards consolidation among vendors or customers developed in the future, it could reduce our importance and reduce our revenues, margins and earnings. We generally do not have long-term contracts with our customers and they can cease doing business with us at any time.

Our growth strategy of identifying and consummating acquisitions and expanding our services into new regions entails integration, financing and other risks, including expenditures associated with developing a distribution infrastructure with a new distribution center, cross-docks and routes.

We intend to continue to grow in part through acquisitions. This growth strategy entails risks inherent in identifying desirable acquisition candidates, in integrating the operations of acquired businesses into our existing operations and risks relating to potential unknown liabilities associated with acquired businesses. In addition, we may not be able to finance the acquisition of a desirable candidate or pay as much as our competitors because of our leveraged financial condition or general economic conditions.

In connection with future acquisitions, we may assume the liabilities of the companies we acquire. These liabilities could materially and adversely affect our business. Difficulties that we may encounter in integrating the operations of acquired businesses could also have a material adverse effect on our results of operations and financial condition. Moreover, we may not realize any of the anticipated benefits of an acquisition, and integration costs may exceed anticipated amounts. Our prior management team experienced difficulties in integrating certain acquisitions.

The launch of our distribution services into new regions will require expenditures to develop a distribution infrastructure, including new distribution centers, cross-docks and routes, and we generally do not expect to achieve profitability from new regions for a period of time. We may also face competition from existing distributors in those regions that could reduce the benefits we anticipate from such expansion.

We could be adversely affected by compliance with environmental regulations and could incur costs relating to environmental matters, particularly those relating to our distribution centers and retail locations.

We are subject to various federal, state, local and foreign environmental laws and regulations and health and safety laws and regulations governing, among other things:

-13-

Table of Contents

We are also required to obtain permits from governmental authorities for some of our operations. If we violate or fail to obtain or comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators. We could also become liable if employees or other third parties are improperly exposed to hazardous materials.

We operate distribution centers and retail locations, and under certain environmental laws, we could be held responsible for some or all of the costs relating to any contamination at, or migrating to or from, our current or past facilities or our predecessors’ past facilities and at sites where we disposed wastes. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances.

Environmental laws are complex, change frequently and have tended to become more stringent over time. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, financial position, results of operations or cash flows to date. See “Business—Environmental Matters.”

Our reliance on intellectual property and proprietary rights for certain of our electronic offerings that may not be adequately protected under current laws may harm our competitive position and materially and adversely affect our business and results of operations.

We rely on copyright, trademark and other intellectual property laws to establish and protect our proprietary rights in certain of our electronic offerings, which include internet-based and other technology-based services and products which are material to our business and are operated using proprietary software and other intellectual property. However, we cannot assure you that our proprietary rights in our software or other intellectual property used to provide certain material services and products to customers will not be challenged, invalidated or circumvented. If we are unable to adequately protect our intellectual property and proprietary rights, our competitive position may be harmed and our business and financial results could be materially and adversely affected.

If we experience problems with our fleet of trucks or are otherwise unable to make timely deliveries of product to our customers, our business and reputation could be harmed.

We use a fleet of trucks to deliver vehicle parts to our customers, most of which are owned by us and some of which are leased from third parties. We are therefore subject to the risks associated with providing trucking services, including inclement weather, disruptions in the transportation infrastructure, including disruptions in our lease arrangements, availability and price of fuel, and liabilities arising from accidents to the extent we are not covered by insurance. Our failure to deliver parts in a timely and accurate manner could harm our reputation and brand, which could have an adverse effect on our business.

Our business could adversely be affected by high prices of fuel.

Both the industry in which we operate and our distribution methods are affected by the availability and price of fuel. Because we use a fleet of trucks to deliver specialty automotive equipment parts to our customers, the high prices of fuel may cause us to incur higher costs in operating our fleet, which have an adverse effect on our business, financial condition and results of operations.

We could be subject to product liability, personal injury or other litigation claims which could have an adverse effect on our business, financial condition and results of operations.

Purchasers of our products, or their employees or customers, could be injured or suffer property damage from exposure to, or defects in, products we sell or distribute, or have sold or distributed in the past, and we could be subject to claims, including product liability or personal injury claims. These claims may not be covered by insurance, and vendors may be unwilling or unable to satisfy their indemnification obligations to us with respect to these claims. As a result, the defense, settlement or successful assertion of any future product liability, personal injury or other litigation claims could cause us to incur significant costs and could have an adverse effect on our business, financial condition, results of operations or cash flows.

-14-

Table of Contents

Loss of key personnel and/or failure to attract and retain highly qualified personnel could make it more difficult for us to generate cash flow from operations and service our debt.

We are dependent on the continued services of our senior management team, particularly Robert Vor Broker, President, Chairman and Chief Executive Officer; Bryant Bynum, Executive Vice President and Chief Financial Officer; and Richard Piontkowski, Senior Vice President of Sales. We believe the loss of such key personnel could adversely affect our financial performance. In addition, our ability to manage our anticipated growth will depend on our ability to identify, hire and retain qualified management personnel. We cannot assure you that we can attract and retain sufficient qualified personnel to meet our business needs. See “Management—Directors and Executive Officers.”

The interests of our controlling shareholder may be in conflict with the interests of note holders.

Bain Capital owns securities representing a substantial majority of the voting power of Holdings’ common stock on a fully diluted basis and has the ability to elect a majority of the board of directors and generally to control the affairs and policies of Keystone. Circumstances may occur in which the interests of Bain Capital, as our shareholder could be in conflict with the interests of the holders of the notes.

Available Information

We file periodic reports and other information with the Securities and Exchange Commission (“SEC”). We are, therefore, subject to the informational requirements of the Securities Exchange Act of 1934. Such reports may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy information statements and other information regarding issuers that file electronically.

Our filings under the Exchange Act (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports) are also available free of charge from Investor Relations by calling 1-570-603-2326 or emailing investorrelations@key-stone.com.

We are headquartered in Exeter, Pennsylvania, where our owned 165,000 square foot main office and 675,000 square foot warehouse distribution center are located. We also lease a 162,750 square foot warehouse distribution center in Kansas City, Kansas under a lease expiring in 2009, and a 73,320 square foot warehouse distribution center in Corona, California under a lease expiring in 2007. These distribution centers hold our entire inventory and regularly distribute inventory to 17 non-inventory stocking cross-dock locations strategically located throughout the United States and parts of Canada. We also have 24 A&A Auto Parts retail locations. Of these cross-docks and A&A Stores, 24 facilities are leased. The leases for our leased facilities are scheduled to expire between 2005 and 2019. We believe our current facilities are generally well maintained and provide adequate warehouse and distribution capacity for future operations. We will grant mortgages on our principal real property to secure our senior credit facilities.

We are party to various lawsuits, arising in the normal course of business. We are not currently a party to any material legal proceedings. We have certain contingent liabilities arising from various other pending claims and legal proceedings. While the amount of liability that may result from these matters cannot be determined, we believe the ultimate liability will not materially affect our financial position or results of operations.

No matters were submitted to a vote of security holders during our fiscal quarter ended January 1, 2005.

-15-

Table of Contents

PART II

There is no established public trading market for our equity securities . There is one holder of record of our equity, Keystone Automotive Holdings, Inc. (“Holdings”). As of January 1, 2005 Holdings consisted of 12 shareholders owning a total of 89,999,999 shares of Holdings’ Class A Common Stock and 9,999,999 shares of Holdings’ Class L Common Stock.

We have not paid cash dividends on our common stock and we do not anticipate paying any such dividends in the foreseeable future.

Each of our credit facility with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, UBS Securities LLC, as syndication agent and PNC Bank, National Association, as documentation agent, and a syndicate of lenders, and our indenture relating to our notes generally prohibit the payment of dividends by us on shares of our common stock (other than dividends payable solely in shares of our capital stock), with certain limited exceptions for dividend payments to Holdings.

The following tables present our selected historical consolidated financial data as of the dates and for the periods indicated. The financial data as of and for our fiscal years ended December 31, 2000, December 29, 2001, December 28, 2002, as of and for the periods from December 29, 2002 to October 30, 2003 and October 31, 2003 to January 3, 2004, as of and for our fiscal year ended January 1, 2005 has been derived from the historical consolidated financial statements.

The selected historical data presented below is shown on two basis of accounting: predecessor and successor. The successor basis reflects the push down of fair value adjustments recorded as a result of the acquisition of Keystone Automotive Operations, Inc. by Keystone Automotive Holdings, Inc. on October 31, 2003 (the “Transaction”, as further described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations). We changed our fiscal year effective January 1, 2001 and operate on a 52/53 week year basis with the year ending on the Saturday nearest December 31. Prior to 2001, our fiscal year ended on December 31. The years ended December 31, 2000, December 29, 2001, December 28, 2002 and January 1, 2005 include 52 weeks while the year ended January 3, 2004 included 53 weeks.

The selected information below should be read in conjunction with and the data is qualified by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and accompanying notes thereto of Keystone Automotive Operations, Inc. included below in this document.

-16-

Table of Contents

-17-

Table of Contents

The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and the accompanying notes included elsewhere in this document. This discussion contains forward-looking statements about our markets, the demand for our products, and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons including those discussed in the “Cautionary Statements” section of this document.

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

Items Affecting Comparability

Changes in Fiscal Year/2003 Period

We changed our fiscal year as of January 1, 2001 and since that time operated on a 52/53-week basis with the year ending on the Saturday nearest December 31. Prior to 2001, our fiscal year ended on December 31. The fiscal years ended January 1, 2005 and December 28, 2002 consisted of 52 weeks compared to January 3, 2004 which had 53 weeks.

As a result of the transaction, outlined below, we changed our basis of accounting as of October 30, 2003, as the fair value of the transaction was “pushed-down” to Keystone’s books and records. As a result of the change in basis of accounting on October 30, 2003, the consolidated statement of operations and comprehensive income, of cash flows and of stockholders’ equity have been prepared for both the period December 29, 2002 to October 30, 2003 and the period October 31, 2003 to January 3, 2004. Even though the consolidated financial statements are prepared separately for these two periods, the rules of the SEC permit the preparation of Management’s Discussion and Analysis on a full fiscal year basis.

-18-

Table of Contents

The Transaction

On October 30, 2003 in a series of transactions, with Keystone Automotive Holdings, Inc. (“Holdings”), a newly formed holding company owned by Bain Capital Partners, LLC (“Bain Capital”), its affiliates, co-investors and our management and Holdings thereby acquired all of our outstanding capital stock for a purchase price of $441.3 million (the “Transaction”). The aggregate cash costs, together with funds necessary to refinance certain of our existing indebtedness 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 Transaction 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 and we incurred sizable non-recurring expenses of $26.6 million for Transaction-related bonus payouts and $6.5 million related to transaction costs. The final purchase price allocation is as follows:

(in thousands)

The factors that contributed to the purchase price and resulting goodwill included our market positioning, distribution network and workforce. We do not expect any of the goodwill recognized as a result of the Transaction to be deducted for tax purposes.

In the third and fourth quarters of 2004, we determined that adjustments were required to the net deferred tax liabilities recorded as of the date of the Transaction. The third quarter adjustment related to the manner in which certain tax benefits, to be realized by the Company in future periods, was reflected in the balance sheet following a purchase business combination. The adjustments resulted in an increase in goodwill by $10,751 for the third and an increase in net deferred tax liabilities by corresponding amounts. The adjustments have been reflected in our balance sheets as of January 3, 2004 and January 1, 2005. These adjustments did not have an impact on our results of operations or cash flow and will not have an impact on future cash tax payments.

-19-

Table of Contents

Reclassifications

Net sales for the year ended December 28, 2002, period from December 29, 2002 to October 30, 2003, and period from October 31, 2003 to January 3, 2004 have been revised from the prior year presentation to include sales of catalogs and other promotional materials which were previously classified as reductions of selling, general and administrative expenses.

Executive Summary

Overview

We are the leading distributor of specialty automotive equipment purchased by consumers to improve the performance, functionality and appearance of their vehicles. We provide a critical link between a highly fragmented base of approximately 650 vendors and an even more fragmented base of approximately 18,000 customers. Our customers are principally small, independent installers and retailers of specialty automotive equipment with annual revenues of less than $1.0 million and annual purchases from us of less than $0.3 million. Due to their size, these businesses use us to provide a broad range of products, rapid delivery, marketing support, and technical assistance. Similarly, our vendors are typically small to mid-sized businesses with annual revenues of less than $100.0 million, the majority of whom have revenues of less than $30.0 million, and we typically represent a significant portion of their sales. We provide a critical service to our vendors by stocking the full range of their products, managing the distribution of their products to a fragmented customer base, and providing marketing support to develop demand for their products.

In 1999, we acquired the stock or assets of three companies: Automotive Performance Wholesalers, located in Kansas City, Kansas; Performance Improvements, located in Toronto, Canada; and American Specialty Equipment, located in Hauppauge, New York.

During 2001, we restructured the organizational composition of these acquired operations in order to eliminate duplicate costs, implement our sales and marketing techniques and introduce our distribution network. Net sales and net income in these markets have grown significantly since the time of acquisition. These acquisitions, together with the establishment of additional cross-dock locations, have also allowed us to extensively expand our geographic presence over the last four years.

In April 2002, we disposed of all five of American Specialty Equipment’s “ATV” retail stores (“ATV”) to existing customers. These customers continue to rely on us to provide inventory. As a result, we were able to eliminate the expense of operating these stores while we continue to generate net sales. Additionally, this on-going supply of the former ATV retail stores and continued servicing of the same customer base precluded recognition of the disposal as a discontinued operation.

-20-

Table of Contents

In November 2003, we opened our first warehouse distribution center on the West Coast in Corona, California. In November 2004, we opened our first West Coast cross-dock in Sacramento, California. This allows us to use our hub-and-spoke distribution network to expand and better serve our customers in this market.

In fiscal 2004, we increased net sales by 10.0%, from $408.1 million for the period ending January 3, 2004 to $449.0 million for the period ending January 1, 2005. The Distribution segment generated $421.0 million or 93.8% of net sales in fiscal 2004 compared to $381.3 million or 93.4% of net sales in fiscal 2003. The Retail segment generated $28.0 million or 6.2% of net sales in fiscal 2004 compared to $26.8 million or 6.6% of net sales in fiscal 2003. Northeast sales continued its single digit increase over 2003 as a result of new customers and higher sales to existing customers. In the Midwest, the increased breadth of on-hand inventory, and increased market penetration, enabled us to grow sales in this territory at a double digit growth rate as compared to 2003. Canada continued its four year trend of double digit growth. Our West Coast initiative continues to outperform management’s initial expectations both in terms of overall sales and new customer development.

Gross margin increased by 2.1% for the period ending January 1, 2005 to 33.1% compared to 31.0% for the period ending January 3, 2004. The period ending January 3, 2004 included $9.8 million of expense while the period ending January 1, 2005 included $3.5 million of expense for the fair market value adjustment on inventory related to the Transaction. Net operating income increased by $32.0 million for the period ending January 1, 2005 to $34.2 million compared to $2.2 million for the period ending January 3, 2004. The period ending January 3, 2004 was impacted by the Transaction cost of $9.8 million fair market adjustment on inventory, $26.6 management bonus, and $6.5 million other charges that occurred during that period.

Results of Operations

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

Period Ended January 1, 2005 Compared to the Period Ended January 3, 2004.

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 less any reserve for returns. Net sales increased by $40.9 million, or 10.0%, from $408.1 million for the period ended January 3, 2004 to $449.0 million for the period ended January 1, 2005. The primary drivers increasing net sales include the addition of new runs and new customers in both existing and new regions. New products introduced in 2004 as well as the West Coast warehouse opening in November 2003 in Corona and a cross-dock in November of 2004 in Sacramento, helped to

-21-

Table of Contents

drive the increase in sales in 2004. The period ended January 3, 2004 includes a 53^rd week, which contributed $4.8 million in net sales.

Gross Profit. Gross profit represents net sales less cost of goods sold, which includes third-party delivery costs. Gross profit increased $22.1 million, or 17.4%, from $126.6 million for the period ended January 3, 2004 to $148.7 million for the period ending January 1, 2005. The $126.6 million and $148.7 million includes a non-cash charge of $9.8 million and $3.5 million respectively, related to the recognition of a portion of fair market value adjustment on inventory recorded as part of the Transaction. The increase in gross profit was primarily the result of an increase in net sales. Gross margin for the period ended January 3, 2004 was 31.0% and for the period ended January 1, 2005 was 33.1%. The gross margin for the period ended January 3, 2004 and January 1, 2005 was impacted by $9.8 million and $3.5 million, or 2.4% and 0.8% of sales, respectively, of non cash charges described above. The gross margin for 2004 was favorably impacted by 1.1% due to excess vendor credits which were classified as a reduction of cost of sales for the year ended January 1st, 2005 in accordance with EITF 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”. Due to the timing of when promotional agreements were signed EITF 02-16 did not have a material impact on the company until year ended January 1, 2005.

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 decreased by $3.8 million, or 3.2%, from $118.3 million for the period ended January 3, 2004 to $114.4 million for the period ended January 1, 2005. Included in fiscal 2003’s selling, general and administrative expenses is $26.6 million resulting from the Transaction-related bonus payout. Included in fiscal 2004’s selling, general and administrative expense is a $11.0 million increase in amortization and depreciation related to the Transaction, $3.5 million related to an increase in delivery expense due to the impact of an additional cross-dock and delivery routes in 2004, $1.9 million in selling related expenses, $1.1 million in professional fees, and $1.5 million in consulting fees.

Reorganization and Other Charges. Reorganization and other charges decreased by $6.2 million from $6.2 million for the period ended January 3, 2004, to $0 for the period ended January 1, 2005. Reorganization and other charges for the period ended January 3, 2004 consisted of expenses related to the Transaction which were incurred on October 30, 2003 and a final adjustment related to the sale of ATV.

Interest Expense. Interest expense increased by $15.5 million, or 161.5%, from $9.6 million for the period ended January 3, 2004 to $25.1 million for the period ended January 1, 2005, from debt used to finance the Transaction.

Income Tax Expense. Income tax expense increased by $6.8 million from a benefit of $3.0 million for the period ended January 3, 2004, with an effective tax rate of 39.4%, to an expense of $3.8 million, for the period ended January 1, 2005, with an effective tax rate of 40.0%.

Net Income. Net income increased by $10.3 million from a loss of $4.6 million for the period ended January 3, 2004 to a net income of $5.7 million for the period ended January 1, 2005. The primary reasons for the increase in net income are a $40.9 million increase in sales, less the $3.5 million of inventory step-up for the period ended January 1, 2005 and the Transaction-related expenses incurred in the period ended January 3, 2004, including $26.6 million in Transaction-related bonus payouts, $9.8 million in inventory step-up amortization, and $6.5 million in Transaction-related charges.

Results by Reportable Segment. We operate in two reportable segments: distribution (“Distribution”) and retail (“Retail”). The Distribution reportable segment encompasses the Company’s hub-and-spoke distribution network that distributes specialty automotive equipment for vehicles to our customers. 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 13 to the Financial Statements for additional information. Of the Company’s $40.9 million increase in consolidated net sales for the year ended January 1, 2005 over the year ended January 3, 2004, $39.7 million is due to increases in the Distribution reportable segment. The increase in the Distribution reportable segment is due primarily to the addition of new runs, new customers in both existing and new regions, new products introduced, the warehouse opening in November 2003 in Corona, California, and a cross-dock in November 2004 in Sacramento, California.

-22-

Table of Contents

The remaining increase of $1.2 million is due to increases in the Retail reportable segment. The Retail distribution segment is not expected to contribute significantly to our growth, because of our decision not to expand the number of retail stores beyond 24.

Net income by reportable segment increased by $10.0 million in the Distribution reportable segment and increased by $0.2 million in the Retail reportable segment due largely to the increase in sales in the Distribution segment of 10.4% and the Retail segment of 0.4% over fiscal year 2003.

Period Ended January 3, 2004 Compared to the Period Ended December 28, 2002

Net Sales. Net sales increased by $33.0 million, or 8.8%, from $375.1 million for the period ended December 28, 2002 to $408.1 million for the period ended January 3, 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, and was partially offset by a reduction in net sales due to the impact of inclement weather in February 2003. The opening of the West Coast warehouse generated sales of 0.3% in new sales for 2003. Canada continued its double digit growth for the three year trend in 2003. New product lines including 12 Volt, Sport Compact, Icon Wheels, and Super Chips, and introduction of our private label products during 2003, contributed to a increase in sales of $7.2 million or 1.8%. The period ended January 3, 2004 includes a 53^rd week, which contributed $4.8 million to the increase in net sales. The remaining increase in sales in 2003 relates to the increase in sales to existing accounts and new accounts including national chains.

Gross Profit. Gross profit increased $0.7 million, or 0.6%, from $125.9 million for the period ended December 28, 2002 to $126.6 million for the period ending January 3, 2004. The $126.6 million includes a non-cash charge of $9.8 million related to recognition of a portion of fair market value adjustment on inventory recorded as part of the Transaction. The increase in gross profit was primarily the result of an increase in net sales. Gross margin for the period ended December 28, 2002 was 33.6% and for the period ended January 3, 2004 was 31.0%. The gross margin for the period ended January 3, 2004 was impacted by $9.8 million or 2.4% of sales, of the non-cash charge described above.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $31.8 million, or 36.8%, from $86.5 million for the period ended December 28, 2002 to $118.3 million for the period ended January 3, 2004. Included in selling, general and administrative expenses is $26.6 million resulting from the Transaction-related bonus payout, a $1.9 million increase in amortization and depreciation related to the Transaction, and $3.2 million related to an increase in delivery expense due to the impact of additional cross-docks and delivery routes in 2003. The increase in expenses related to the 53^rd week in 2003 was offset by management’s ability to control and lower selling, general and administrative expenses during the year.

Reorganization and Other Charges. Reorganization and other charges increased approximately $4.8 million from $1.4 million for the period ended December 28, 2002 to $6.2 million for the period ended January 3, 2004. Reorganization and other charges for the period ended December 28, 2002 consisted primarily of the gain on a sale of a building, which was partially offset by expenses related to the disposition of ATV. Reorganization and other charges for the period ended January 3, 2004 consisted primarily of expenses related to the Transaction which occurred on October 30, 2003 and a final adjustment related to the sale of ATV.

Interest Expense. Interest expense decreased by $0.3 million, or 3.2%, from $9.9 million for the period ended December 28, 2002 to $9.6 million for the period ended January 3, 2004, due primarily to lower interest expense from a reduction of outstanding indebtedness and lower interest rates.

Income Tax Expense. Income tax expense decreased by $14.6 million from an expense of $11.7 million for the period ended December 28, 2002 with an effective tax rate of 40.4% to a benefit of $3.0 million with an effective tax rate of 39.4% for the period ended January 3, 2004. This decrease is due to lower pretax income and from the tax treatment of certain Transaction-related charges.

Net Income. Net income decreased by $21.9 million from $17.3 million for the period ended December 28, 2002 to a loss of $4.6 million for the period ended January 3, 2004. The primary reason for the decrease is the Transaction-

-23-

Table of Contents

related items included in the period ended January 3, 2004, including $26.6 million in Transaction-related bonus payouts, $9.8 million in inventory step-up amortization, $6.5 million in Transaction-related charges and $1.8 million in amortization of intangible assets.

Results by Reportable Segment. Of the Company’s $33.0 million increase in consolidated net sales for the year ended January 3, 2004 over the year ended December 28, 2002, $32.3 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 $0.7 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 the number of retail stores beyond 24.

Net income by reportable segment decreased by $21.7 million in the Distribution reportable segment and decreased by $0.1 million in the Retail reportable segment due largely to the Transaction-related costs described above.

Liquidity and Capital Resources

Operating Activities. Net cash provided by operating activities during the period ended January 1, 2005 was $23.6 million compared with $8.6 million during the period ended January 3, 2004. The increase was primarily related to the $40.9 million increase in sales for 2004 and the result of the Transaction-related expenses in 2003. Net cash provided by operating activities was $8.6 million for 2003, compared with $24.0 million for 2002. The lower amount of net cash provided by operations for 2003 was primarily the result of the Transaction-related expenses offset by a $33.0 million increase in sales. Working capital increased by $7.5 million or 13.8% from $54.3 million for period ended January 3, 2004 to $61.8 million for period ended January 1, 2005.

Investing Activities. Net cash used in investing activities was $7.2 million for the period ended January 1, 2005, compared with $334.9 million for the period ended January 3, 2004. Net cash used in investing activities of $7.2 million included $5.5 million of capital expenditures for operating the business and $1.7 million in a working capital settlement related to the 2003 Transaction. Net cash used in investing activities of $334.9 million was the result of the Transaction, purchase of previously leased equipment and investment in property, plant and equipment to support the West Coast expansion. Net cash used in investing activities of $334.9 million for 2003, compared with $2.4 million for 2002. Net cash used in investing activities in 2002 was $3.5 million primarily for geographical expansion and replacement of delivery vehicles which was offset by $1.1 million in proceeds from the sale of a North Carolina building.

Financing Activities. Net cash used in financing activities during the period ended January 1, 2005 was $11.8 million, compared to net cash provided by $331.9 million during the period ended January 3, 2004. The use of cash in financing activities related to the period ended January 1, 2005 was due to a reduction in long-term debt of $7.5 million, repayment of capital contributions of $3.5 million, and $0.8 million incurred for deferred finance charges. Net cash provided by financing activities for the period ended January 3, 2004 was primarily the result of the impact of the Transaction. Net cash provided by financing activities during 2003 was $331.9 million, compared to a use of cash of $21.9 million for 2002. The 2003 financing activities were impacted by the Transaction and the 2002 use of cash was a result of debt repayments totaling $21.8 million and a $0.1 million purchase of treasury stock.

Post-Transactions. 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 12 months. As of January 1, 2005, we had $59.6 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, restrictive distributions to Holdings, and acquisitions.

-24-

Table of Contents

Debt Service. As of January 1, 2005, we had total indebtedness of $282.5 million outstanding 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 six months of the senior secured credit facilities, the applicable margin was 3.25% over LIBOR and 2.75% over the base rate for revolving credit loans and 2.75% over LIBOR and 1.75% over the base rate for term loans. Six months after closing, the applicable margin for revolving credit loans begin varying 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 9 ¾% per annum and is payable semi-annually in cash in arrears on May 1 and November 1, commencing on May 1, 2004. The notes and the guarantees are unsecured senior subordinated obligations and will be subordinated to all of our and guarantees’ existing and future senior debt. If we cannot make payments required by the notes, the subsidiary guarantors must make them.

Capital Expenditures. We anticipate that we will spend approximately $5.5 million on capital expenditures in 2005 and similar amounts thereafter. 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 $61.8 million at January 1, 2005. We maintain 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 working capital consistent with past experience. Our working capital needs are seasonal, and we build working capital in the winter months when sales are slower in anticipation of the peak summer driving season, during which time our working capital tends to be reduced.

Distributions to Holdings. Holdings has no assets other than our equity. We made distributions of previous Transaction-related capital contribution of $3.5 million to Holdings in the nine month period ended October 2, 2004 as a result of 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.

Acquisitions. As a part of our business strategy, we will continue to look for 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.

Our principal sources of funds are cash flows from operating activities and available borrowings under the senior 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 12 months.

-25-

Table of Contents

Contractual and Commercial Commitments Summary

The following tables present our long-term contractual cash obligations as of January 1, 2005.

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 consolidate the assets, liabilities and results of operations of the variable interest entity in the company’s consolidated financial statements. In December 2003, the FASB issued FIN 46R to address certain implementation issues encountered with FIN 46. Among other provisions, FIN 46R defers the effective date of application of FIN 46 for all entities, other than Special Purpose Entities (as defined), created before February 1, 2003 to the first interim period ending after March 15, 2004. FIN 46R also clarifies which types of entities, other than Special Purpose Entities, are within its scope and provides other computational guidance for applying the provisions of FIN 46. The Company has determined that it does not have any variable interests in Special Purpose Entities or other variable interests for which the provision of FIN 46R would require a change in the Company’s current accounting for such interests.

In November 2004, the FASB issued FAS 151, Inventory Costs an amendment of ARB 43, Chapter 4. FAS 151 amends the guidance in ARB 43, Chapter 4—Inventory Pricing to clarify the accounting for abnormal amounts of idle facility expense, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that such items be recognized as current period changes, regardless of whether they meet the criterion of “so abnormal” as stated in ARB 43. FAS 151 is effective for fiscal years beginning after June 15, 2005. Adoption of this standard is not expected to have a material effect on our financial statements.

In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payments (“FAS 123-R”). FAS 123-R replaces FAS 123, Accounting for Stock-Based Compensation, and supersedes APB 25, Accounting for Stock Issued to Employees. FAS 123-R requires all share-based payments to employees to be recognized in the financial statements based on a fair-value-based method. The pro forma disclosures previously permitted under FAS 123 no longer will be an alternative to financial statement recognition. Under FAS 123-R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. FAS 123-R permits companies to adopt the new standard using either a modified prospective transition method or a modified retrospective transition method. Using the modified prospective transition method, compensation expense would be recorded for all unvested awards at the beginning of the first quarter of FAS 123-R adoption. Using the modified retrospective method, companies are permitted to restate financial statements of previous periods based on proforma disclosures made in accordance with the original provisions of FAS 123. FAS 123-R is effective for interim or annual periods beginning after June 15, 2005. We are currently evaluating the requirements of this standard and, assuming a similar number of options with similar terms, expect that the effect on net income and earnings per share in the periods following adoption will be consistent with amounts reported in our pro forma disclosures under FAS 123

-26-

Table of Contents

(see Note 3). However, the actual effect on net income and earnings per share will vary depending on the number of options granted in 2005 and the terms of those options.

In December 2004, the FASB issued FAS 153, Exchanges of Nonmonetary Assets, an amendment of APB 29, Accounting for Nonmonetary Transactions. FAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of APB 29 and replaces it with an exception for exchanges that do not have commercial substance. FAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is effective for periods beginning after June 15, 2005. Adoption of this standard is not expected to have a material effect on our financial statement.

Critical Accounting Policies

Our significant accounting policies are described in Note 3 to our consolidated financial statements included in Item 15(a) of this document. While all significant accounting policies are important to our consolidated financial statements, some of these policies may be viewed as being critical. Such policies are those that are both most important to the portrayal of our financial condition and require our most difficult, subjective and complex estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. We believe our most critical accounting policies are as follows:

Revenue Recognition. Revenue is recognized when title and risk of loss is transferred to the customer, which occurs upon receipt by the customer when shipped on company vehicles and upon shipment of the product to the customer when shipped via common carrier. Revenue includes selling price of the product, promotional items and fees, and all shipping and handling costs paid by the customer. Revenue is reduced at the time of sale for estimated sales returns based on historical experience. We review sales returns and maintain a reserve for sales returns based on the historical trends. If returns were to increase, additional reserves could be required.

Accounts Receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which is included in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customer receivables, considering customers’ financial condition, credit history, and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories. We maintain a reserve for potential losses on the disposal of our obsolete and slow moving inventory based on our evaluation of levels of inventory that cannot be returned. We evaluate reserves based on judgments on our ability to restock inventory or return it to vendors. If our evaluation is incorrect, we could be required to record larger reserves. We value our inventories on a lower of cost or market basis using an average cost methodology. Average costs reflect actual costs for inventory purchases and an estimate of rebates due from vendors primarily related to volume. Accordingly, inventory values and cost of goods sold could vary if estimates of rebates differ from amounts actually received.

Income Taxes. We recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We believe that the current assumptions and other considerations used to estimate the current year effective and deferred tax positions are appropriate. However, if the actual outcome of future tax consequences differs from our estimates and assumptions, the resulting change to the provision for income taxes could have a material impact on our results of operations, financial position or cash flows.

In addition, we operate within multiple taxing jurisdictions and are subject to audit within these jurisdictions. We record accruals for the estimated outcomes of these audits. We adjust these accruals, if necessary, upon the completion of tax audits or changes in tax law. Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, we consider such estimates to be critical to the preparation of our financial statements.

-27-

Table of Contents

Impairment. We evaluate our long-lived assets, including intangible assets, for impairments whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. We consider the carrying value of a long-lived asset to have been impaired if the anticipated undiscounted cash flows from such an asset is less than its carrying value. If our operating performance declines significantly, we may need to test long-lived asset for impairment and record charges to reduce the carrying value of our long-lived assets.

We evaluate our goodwill for impairment, at least annually, as of the end of the fiscal year, in accordance with the requirements of Statement of Financial Accounting No. 142, Goodwill and Intangible Assets. We would consider the carrying value of goodwill to have been impaired if the anticipated discounted cash flows from our reporting units are less the carrying value of goodwill assigned to the reporting unit. The resulting impairment charge is determined by recalculating goodwill through a hypothetical purchase price allocation of the fair value and reducing the current carrying value to the extent it exceeds the recalculated goodwill. If our operating performance declines significantly, we may need to test goodwill for impairment and record charges to reduce the carrying value of goodwill more than annually.

Insurance-Related Liabilities. We carry a high deductible for workers’ compensation, automotive liability and general liability claims, up to a certain level. As a result, we are required to estimate the amount of reserves required for both reported claims and incurred, but not reported claims. The estimation of the amount of reserves required, performed in accordance with Statement of Financial Accounting Standard (SFAS) No. 5, Accounting for Contingencies, involves significant management judgment.

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.

Impact of Inflation

Our results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe that the effects of inflation, if any, on our results of operations and financial condition have been minor. However, there can be no assurance that during a period of significant inflation, our results of operations would not be adversely affected.

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, Term Loan Facility, and a Senior Subordinated Note. As of January 1, 2005, the Company has $282.5 million in debt. The Revolving Credit Facility was undrawn and the Senior Subordinated Note for $175 million is fixed at 9.75%. As of January 1, 2005, our exposure to changes in interest rates is related solely to our Term Loan of $107.5 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 charge would result in approximately $1.1 million change to interest expense.

-28-

Table of Contents

The financial statements are listed in Part IV Item 15 of this Form 10-K report.

Report of Management

None.

a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating 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 our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC. Such officers also confirm that there were no significant changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

b) Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended January 1, 2005 that have materially affected, or are likely to materially effect, our internal controls over financial reporting. However, in the fourth quarter of 2004, we began the implementation of the PeopleSoft financial package for accounts payable, general ledger, and financial reporting, and management’s plan for Sarbanes-Oxley Act Section 404 compliance.

None.

-29-

Table of Contents

PART III

Our directors, executive officers and other key employees as of December 2004 are as follows:

Robert Vor Broker joined us in 2001 as Chief Executive Officer, Chairman and President. Prior to joining us and since 1997, Mr. Vor Broker was employed by Reyes Holdings LLC, where he was Chief Executive Officer of Zema Foods LLC from 1997 to 2000, and most recently held the position of Senior Vice President of U.S. Operations for the Martin-Brower Company, the worldwide distributor for the McDonald’s Corporation. From 1979 to 1996, he held various positions at Edward Don and Company, first as Vice President of Marketing, then as Divisional President and finally as President and Chief Operating Officer. In May 2000, Zema Foods filed a voluntary petition for relief under Chapter 7 of the U.S. Bankruptcy Code.

Bryant Bynum joined us in 1999 as Executive Vice President and Chief Financial Officer. Before joining us and since 1989 he was employed at Foodbrands America, Inc., NYSE:FDB, in a variety of positions, including Treasurer and ultimately Senior Vice President of Finance. Prior to joining Foodbrands, Mr. Bynum was a management consultant for Coopers & Lybrand.

Patrick Judge joined us in 1973 and became Executive Vice President in 1998. He has held various positions with us including general manager of A&A Auto Parts. He began his career with us as a manager of an A&A Auto Parts store. Mr. Judge currently manages the A&A Auto Parts stores and company-wide human resources, administration, and real estate operations.

Richard Piontkowski joined us in 2001 as Senior Vice President, Sales. Prior to joining us and since 1998, he was Senior Vice President of Sales for AmeriServe Equipment, a subsidiary of AmeriServe. Prior to joining AmeriServe, Mr. Piontkowski held various positions with Edward Don and Company, including Regional Vice President of the Florida operation and regional manager. In January 2000, AmeriServe filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code.

Philip Avvisato has been with us since 1968. He currently holds the position of Vice President, Customer Development. He has held various positions with us including Vice President of Sales and sales manager. Mr. Avvisato was instrumental in growing our sales organization during the 1980’s and 1990’s and maintains strong industry relationships.

Anthony Fordiani joined us in 1973 and currently serves as Vice President, Logistics, where he is responsible for company-wide delivery logistics, including route planning and monitoring, truck acquisition and maintenance and driver management. Prior to holding this position, Mr. Fordiani managed our human resources and operational accounting.

-30-

Table of Contents

Richard Kovalick joined us in 1971 and became Vice President, Purchasing in 1998. Prior to that, he was our director for marketing and merchandising and director of purchasing. Mr. Kovalick began his career with us as a manager of an A&A Auto Parts Store.

Lawrence Montante joined us in 1982 and became Vice President, Marketing in 1998. From 1987 to 1998, he served as our purchasing agent and director of marketing. Mr. Montante also worked in various capacities at Keystone and A&A Auto Parts.

James Ruby joined us in 1970 and currently serves as Vice President, Operations and is responsible for all operations at the Company’s three warehouse distribution centers, including receiving, stocking, inventory control, picking, shipping, billing, and employee relations. He has held various positions with us including accounting manager.

Paul Edgerley became a director of our company upon consummation of the Transaction. Mr. Edgerley joined Bain Capital in 1988 and has been a Managing Director since 1990. Prior to joining Bain Capital, Mr. Edgerley spent five years at Bain & Company where he worked as a consultant and manager in the healthcare, information services, retail and automobile industries. Previously, Mr. Edgerley, a certified public accountant, worked at Peat Marwick, Mitchell & Company. Currently, Mr. Edgerley sits on the Board of Directors of Steel Dynamics Inc., Innophos Inc. and Walco International, Inc.

David Gross-Loh became a director of our company upon consummation of the Transaction. Mr. Gross-Loh has been an Principal at Bain Capital since 2000. Prior to joining Bain Capital, Mr. Gross-Loh was a consultant with Bain & Company.

Blair Hendrix became a director of our company in 2004. Mr. Hendrix is an Executive Vice President at Bain Capital. Prior to joining Bain Capital in 2000, Mr. Hendrix was an Executive Vice President and Chief Operating Officer of DigiTrace, Inc. and was a management consultant at Corporate Decisions, Inc. (now Mercer Management Consulting). Mr. Hendrix also serves on the Board of Directors of SMTC Corporation and Vivra Holdings, Inc.

Robert Taylor is currently a director of Keystone. Mr. Taylor is a Partner of Advent International Corporation which he joined in 1998. Mr. Taylor has 16 years of private equity experience covering a range of industries, including distribution, business services, healthcare services, and financial services. Mr. Taylor is also a director of American Radiology Services, Long Term Care Group, and National Bankruptcy Services.

Stephen Zide became a director of our company upon consummation of the Transaction. Mr. Zide has been a Managing Director of Bain Capital since 2001 and affiliated with the firm since 1997. From 1998 to 2000, Mr. Zide was a Managing Director of Pacific Equity Partners, a private equity firm in Sydney, Australia, which is affiliated with Bain Capital. Prior to joining Bain Capital, Mr. Zide was a partner of the law firm of Kirkland & Ellis LLP, where he was a founding member of the New York office and specialized in representing private equity and venture capital firms. Mr. Zide is also a director of Broder Bros., Co., DDi Corp. and Innophos Inc.

Our Board of Directors

Our Board of Directors currently has 6 members. Directors serve until the next annual meeting of shareholders or until his or her successor has been elected and qualified. Directors may be removed at any time, with or without cause, by vote of our shareholders. Our board of directors currently has two standing committees: an Audit Committee and a Compensation Committee.

Audit Committee and Audit Committee Financial Expert

The primary duties of the Audit Committee include assisting the Board of Directors in its oversight of (i) the integrity of our financial statements and financial reporting process; (ii) the integrity of our internal controls regarding finance, accounting and legal compliance; and (iii) the independence and performance of our independent auditors. The Committee also reviews our critical accounting policies, our annual and quarterly reports on Form 10- K

-31-

Table of Contents

and Form 10-Q, and our earnings releases before they are published. The Committee has sole authority to engage, evaluate and replace the independent auditor. The Committee also has the authority to retain special legal, accounting and other consultants it deems necessary in the performance of its duties. The Committee meets regularly with our management, independent auditors and internal auditors to discuss our internal controls and financial reporting process and also meets regularly with the independent auditors and internal auditors in private. The current members of the Audit Committee are Messrs. Hendrix and Gross-Loh.

Our Board of Directors has determined that one member of our Audit Committee, Mr. Gross-Loh, is qualified to be an “audit committee financial expert” within the meaning of SEC regulations. The Board reached its conclusion as to the qualifications of Mr. Gross-Loh based on his education and experience in analyzing financial statements of a variety of companies. Mr. Gross-Loh, as an Principal of Bain Capital, LLC, which through its affiliated investment funds holds over 78% of the outstanding common stock of Keystone Automotive Holdings, Inc., which controls the Company, does not meet the standards of independence adopted by the SEC.

Compensation Committee

The primary duty of the Compensation Committee is to discharge the responsibilities of the Board of Directors relating to compensation of our executive officers and other key employees, as the Committee may determine. The Committee also reviews and makes recommendations to the Board of Directors with respect to our employee benefits plans, compensation and equity based plans and compensation of directors. The current members of the Compensation Committee are Messrs. Zide, Hendrix, and Taylor.

Code of Ethics

A copy of our code of ethics (Keystone Automotive Operations, Inc. Code of Ethics) applicable to our principal executive officer, our principal financial officer, our controller and other senior officers is attached hereto as Exhibit 14.1.

The following summarizes, for the year indicated, the principal components of compensation for our Chief Executive Officer and the other four highest compensated executive officers (collectively, the “named executive officers”).

-32-

Table of Contents

-33-

Table of Contents

Option/SAR Grants During the Year Ended January 1, 2005

The following table summarizes the stock options granted to the named executive officers during the year ended January 1, 2005.