10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2007

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

For the transition period from             to            .

Commission file number: 333-112252

Keystone Automotive Operations, Inc.

(Exact name of registrant as specified in its charter)

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

44 Tunkhannock Avenue

Exeter, Pennsylvania 18643

(800) 233-8321

(Address, zip code, and telephone number, including

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ¨    No  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨                    Accelerated filer    ¨                    Non-accelerated filer    þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨  No  þ

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

As of August 13, 2007, Keystone Automotive Holdings, Inc. owns 100% of the registrant’s common stock.

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

QUARTERLY REPORT FOR THE PERIOD

ENDED JUNE 30, 2007

		Page
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets – as of December 30, 2006 and June 30, 2007	1
	Consolidated Statements of Operations and Comprehensive Income – Three months ended July 1, 2006 and June 30, 2007; Six months ended July 1, 2006 and June 30, 2007	2
	Consolidated Statements of Cash Flows – Six months ended July 1, 2006 and June 30, 2007	3
	Notes to Unaudited Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	23
Part II. Other Information
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
	Signatures	25

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	December 30, 2006			June 30, 2007
	(000’s)			(000’s)
ASSETS
Current assets:
Cash and cash equivalents	$	2,652		$	3,928
Trade accounts receivable, net of allowance for doubtful accounts of $2,370 and $2,159, respectively		53,805			60,716
Inventories		123,968			140,881
Deferred tax assets		7,139			9,239
Prepaid expenses and other current assets		6,982			4,579
Total current assets		194,546			219,343
Property, plant and equipment, net		52,363			51,254
Deferred financing costs, net		14,072			12,797
Goodwill		228,459			228,459
Capitalized software, net		479			426
Intangible assets		195,899			189,822
Other assets		2,665			3,023
Total assets	$	688,483		$	705,124
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities:
Trade accounts payable	$	39,954		$	63,179
Accrued interest		4,132			4,820
Accrued compensation		6,803			7,214
Accrued expenses		12,204			12,226
Current maturities of long-term debt		1,517			2,018
Total current liabilities		64,610			89,457
Long-term debt		372,876			372,036
Other long-term liabilities		2,138			4,535
Deferred tax liabilities		61,164			57,653
Total liabilities		500,788			523,681
Shareholder’s equity
Common stock, par value of $0.01 per share: Authorized/Issued 1,000 in 2003		—			—
Contributed capital		187,620			188,721
Accumulated deficit		(387	)		(8,039	)
Accumulated other comprehensive income		462			761
Total shareholder’s equity		187,695			181,443
Total liabilities and shareholder’s equity	$	688,483		$	705,124

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ending						Six Months Ending
	July 1, 2006			June 30, 2007			July 1, 2006			June 30, 2007
	(000’s)			(000’s)			(000’s)			(000’s)
Net sales	$	169,250		$	172,633		$	327,475		$	318,883
Cost of sales		(115,582	)		(119,993	)		(222,763	)		(221,353	)
Gross profit		53,668			52,640			104,712			97,530
Selling, general and administrative expenses		(40,837	)		(41,978	)		(82,673	)		(84,832	)
Income from operations		12,831			10,662			22,039			12,698
Other income (expense):
Interest income		62			56			133			100
Interest expense		(8,567	)		(9,541	)		(17,014	)		(19,235	)
Write-off of deferred financing costs		—			—			—			(6,130	)
Other income (expense), net		106			(198	)		99			(62	)
Income (loss) before income tax		4,432			979			5,257			(12,629	)
Income tax (expense) benefit		(1,731	)		(218	)		(2,076	)		4,894
Net income (loss)		2,701			761			3,181			(7,735	)
Other comprehensive income (loss):
Foreign currency translation		110			263			106			299
Comprehensive income (loss)	$	2,811		$	1,024		$	3,287		$	(7,436	)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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KEYSTONE AUTOMOTIVE OPERATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ending
	July 1, 2006			June 30, 2007
	(000’s)			(000’s)
Cash flows from operating activities:
Net income (loss)	$	3,181		$	(7,735	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,220			10,211
Amortization of deferred financing charges		1,527			1,476
Write-off of deferred finance cost		—			6,130
Net loss on sale of property, plant and equipment		92			113
Deferred income taxes		(1,728	)		(5,611	)
Non-cash stock-based compensation		891			1,092
Other non-cash charges		629			(26	)
Net change in operating assets and liabilities, net of acquisitions:
(Increase) in trade accounts receivable		(11,505	)		(6,700	)
(Increase) in inventory		(27,916	)		(17,063	)
Increase in accounts payable and accrued liabilities		27,328			26,716
Change in other assets/liabilities, net		1,287			2,369
Net cash provided by operating activities		4,006			10,972
Cash flows from investing activities:
Acquisition of businesses		786			—
Purchase of property, plant and equipment		(6,956	)		(2,828	)
Capitalized software costs		(150	)		(330	)
Proceeds from sale of property, plant and equipment		741			38
Net cash used in investing activities		(5,579	)		(3,120	)
Cash flows from financing activities:
Cash overdraft		120			26
Repayments under revolving line-of-credit		—			(24,300	)
Borrowings under long-term debt		—			200,000
Principal repayments on long-term debt		(5,123	)		(176,035	)
Repayment of capital leases		(514	)		—
Proceeds from stock options exercised		61			9
Payments for deferred financing costs		—			(6,331	)
Net cash used in financing activities		(5,456	)		(6,631	)
Net effects of exchange rates on cash		13			55
(Decrease)/increase in cash and cash equivalents		(7,016	)		1,276
Cash and cash equivalents, beginning of period		8,172			2,652
Cash and cash equivalents, end of period	$	1,156		$	3,928

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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KEYSTONE AUTOMOTIVE OPERATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited consolidated financial information herein has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and is in accordance with the Securities and Exchange Commission (“SEC”) regulations for interim financial reporting. In the opinion of management, the financial statements include all adjustments, consisting only of normal recurring adjustments, which are considered necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods. This financial information should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006.

1. Background and Basis of Presentation

Keystone Automotive Operations, Inc. and its wholly-owned subsidiaries (collectively “the Company”) are wholesale distributors and retailers of aftermarket automotive parts and accessories, operating in all regions of the United States and parts of Canada. The Company sells and distributes specialty automotive products, such as light truck/SUV accessories, car accessories and trim items, specialty wheels, tires and suspension parts, and high performance products to a fragmented base of approximately 23,500 customers. The Company’s wholesale operations include an electronic service strategy providing customers the ability to view inventory and place orders via its proprietary electronic catalog. The Company also operates 24 retail stores in Pennsylvania. The Company’s corporate headquarters is in Exeter, Pennsylvania.

2. Recent Accounting Pronouncements

In 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes and Related Implementation Issues.” FIN 48 is applicable to all uncertain positions for taxes accounted for under FASB Statement 109 (“SFAS 109”) “Accounting for Income Taxes.” It requires that a tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merit.

The Company adopted the provisions of FIN 48 at the beginning of its 2007 fiscal year. As a result of the adoption of FIN 48, the Company recognized a decrease in the liability related to unrecognized tax benefits and an increase in shareholder’s equity of $0.1 million. As of the beginning of the 2007 fiscal year, the amount of the liability for unrecognized tax benefits after adoption was approximately $2.4 million, of which $1.5 million would impact the effective tax rate if recognized.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). As of the beginning of the 2007 fiscal year, the Company had approximately $0.3 million accrued for the payment of interest (net of federal and state tax benefit) and penalties. During the three and six months ended June 30, 2007, subsequent to the adoption of FIN 48, the Company recorded an increase of $0.1 million and $0.2 million, respectively, related to the potential payment of unrecognized tax benefits, penalties and interest related to positions taken during the current year. This expense associated with the increase in the reserve was offset during the three months ended June 30, 2007, by a reduction of $0.2 million resulting from the lapse of statute of limitations for prior periods.

A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. We

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adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position would usually require the use of cash. Favorable resolution would be recognized as a reduction to our annual tax rate in the period of resolution.

Based upon the expiration of the state statute of limitations, we do not expect that a change in the unrecognized tax benefit will have a material impact on the results of operations or on the financial position of the Company. We do not expect that the total amounts of unrecognized tax benefits will change significantly within the next twelve months.

The Company files income tax returns in the U.S. for federal and various state jurisdictions and in Canada for federal and provincial jurisdictions. All federal income tax returns are closed through the short period ended October 30, 2003. The Company has not been notified of the commencement of any examination of the open years by the Internal Revenue Service. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The Company and its subsidiaries have a limited number of state income tax returns in the process of examination. Canadian federal and provincial income tax returns are closed through the year ended December 31, 1998. The Company has not been notified of the commencement of any examination of the open years by the Canada Revenue Agency.

In September of 2006, the FASB issued SFAS No. 157 (“SFAS 157”) “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the requirements of this standard and does not expect its provisions to have a material effect on its financial statements.

In February of 2007, the FASB issued SFAS No. 159 (“SFAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the requirements of this standard.

On December 15, 2006, the SEC adopted new measures to grant relief to non-accelerated filers, including the Company, by extending the date of required compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“the Act”). Under these new measures, the Company will be required to comply with the Act in two phases. The first phase will be effective for the Company’s fiscal year ending December 29, 2007 and will require the Company to furnish a management report on internal control over financial reporting. The second phase will require the Company to provide an auditor’s attestation report on internal control over financial reporting beginning with the Company’s fiscal year ending January 3, 2009.

3. Summary of Significant Accounting Policies

Principles of Consolidation and Fiscal Year

The consolidated financial statements include the accounts of Keystone Automotive Operations, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company operates on a 52/53-week year basis with the year ending on the Saturday nearest December 31. There are 13 weeks included in the three month periods ended June 30, 2007 and July 1, 2006, and 26 weeks in the six month periods ended June 30, 2007 and July 1, 2006.

For comparative purposes, certain prior period amounts have been reclassified to conform to the current year presentation. The impact of the changes was not material and did not impact net income (loss).

5

Stock-Based Compensation

On March 1, 2007, pursuant to a stock option grant agreement between the Company and Bryant P. Bynum, the Company’s former Chief Financial Officer, options to purchase 86,502 shares of Class L common stock and 778,518 shares of Class A common stock were issued. These new options are fully vested. This represented 65% of the options that were previously granted to Mr. Bynum, all of which were cancelled. In addition, other options to purchase 27,500 shares of Class L common stock and 247,500 shares of Class A common stock were issued on March 1, 2007. These options have a 5 year vesting period. The Company recorded $0.8 million of expense associated with the grant of the new options in the first quarter. In the first quarter of 2006, the Company recorded $0.9 million of expense for share-based payments.

In the second quarter of 2007, no new options were granted. The Company recorded $0.3 million of option expense for the quarter ended June 30, 2007 and an immaterial amount in the second quarter of 2006.

Our weighted average Black-Scholes fair value assumptions are set forth in the table below.

	Six Months Ended
	July 1, 2006		June 30, 2007
Dividend yield	0	%	0	%
Volatility	31.55	%	25.70	%
Risk free interest rate	4.36	%	4.56	%
Remaining estimated lives (years)	2.75		4.75

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Stock option awards as of June 30, 2007, and changes during the period were as follows:

	Class L Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life*
Outstanding, December 30, 2006	1,602,932
Granted	114,002
Exercised	—
Forfeited	(133,080	)
Outstanding, March 31, 2007	1,583,854		$	27.89	2.1 years
Exercisable, March 31, 2007	778,938		$	30.70	2.0 years
Outstanding, March 31, 2007	1,583,854
Granted	—
Exercised	(526	)
Forfeited	(185,233	)
Outstanding, June 30, 2007	1,398,095		$	27.34	1.9 years
Exercisable, June 30, 2007	678,983		$	30.32	1.75 years
	Class A Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life*
Outstanding, December 30, 2006	14,426,379
Granted	1,026,018
Exercised	—
Forfeited	(1,197,720	)
Outstanding, March 31, 2007	14,254,677		$	0.51	2.1 years
Exercisable, March 31, 2007	7,010,439		$	0.43	2.0 years
Outstanding, March 31, 2007	14,254,677
Granted	—
Exercised	(4,736	)
Forfeited	(1,667,095	)
Outstanding, June 30, 2007	12,582,846		$	0.52	1.9 years
Exercisable, June 30, 2007	6,110,841		$	0.44	1.75 years

* Weighted Average Remaining Contractual Life based on options that are accounted for under FAS 123 (R).

	Aggregate Intrinsic Value of Class A and Class L Options
	(in thousands)
Outstanding June 30, 2007	$	1,916
Exercisable June 30, 2007	$	1,331

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The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the calculated stock price as of December 30, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2007.

4. Segment Information

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

Distribution

The Distribution segment aggregates seven regions or operating segments that are economically similar, share a common class of customers and distribute the same products. One of the most important characteristics of this business segment is our hub-and-spoke distribution network. This segment distributes specialty automotive equipment for vehicles to specialty retailers/installers, and our distribution network is designed to meet the rapid delivery needs of our customers. This network is comprised of: (i) four inventory stocking warehouse distribution centers, which are located in Exeter, Pennsylvania; Kansas City, Kansas; Austell, Georgia; and Corona, California; (ii) 20 non-inventory stocking cross-docks located throughout the East Coast, Southeast, Midwest, West Coast and parts of Canada; and (iii) our fleet of approximately 370 trucks, as compared to over 380 trucks at December 30, 2006, that provide multi-day per week delivery and returns along over 270 routes which cover 42 states and parts of Canada. Our four warehouse distribution centers hold the vast majority of the Distribution segment’s inventory and distribute merchandise to cross-docks in their respective regions for next-day or second-day delivery to customers. The Distribution segment supplies the Retail Operations segment; these intercompany sales are included in the amounts reported as net sales for the Distribution segment in the table below, and are eliminated to arrive at net sales to third parties.

Retail

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

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Financial information for the two reportable segments is as follows:

(in thousands)

	Three Months Ending						Six Months Ending
	July 1, 2006			June 30, 2007			July 1, 2006			June 30, 2007
Net Sales
Distribution	$	167,463		$	171,105		$	324,555		$	316,194
Retail		6,816			6,712			12,950			12,228
Elimination		(5,029	)		(5,184	)		(10,030	)		(9,539	)
Total	$	169,250		$	172,633		$	327,475		$	318,883
Interest income
Distribution	$	62		$	56		$	133		$	100
Retail		—			—			—			—
Total	$	62		$	56		$	133		$	100
Interest expense
Distribution	$	8,567		$	9,541		$	17,014		$	19,235
Retail		—			—			—			—
Total	$	8,567		$	9,541		$	17,014		$	19,235
Depreciation & amortization
Distribution	$	4,989		$	5,012		$	10,084		$	10,109
Retail		67			51			136			102
Total	$	5,056		$	5,063		$	10,220		$	10,211
Income tax (expense) benefit
Distribution	$	(1,906	)	$	(309	)	$	(2,561	)	$	4,567
Retail		175			91			485			327
Total	$	(1,731	)	$	(218	)	$	(2,076	)	$	4,894
Net income (loss)
Distribution	$	2,968		$	938		$	3,908		$	(7,244	)
Retail		(267	)		(177	)		(727	)		(491	)
Total	$	2,701		$	761		$	3,181		$	(7,735	)

(in thousands)

	Three Months Ending				Six Months Ending
	July 1, 2006		June 30, 2007		July 1, 2006		June 30, 2007
Capital Expenditures
Distribution	$	4,785	$	723	$	6,956	$	2,784
Retail		—		13		—		44
Total	$	4,785	$	736	$	6,956	$	2,828

Net sales in the United States decreased as a percent of total sales in the three and six month periods ended June 30, 2007 to approximately 86.5% and 88.4% from 89.9% and 91.4% for the three and six month periods ended July 1, 2006, respectively. At June 30, 2007 and December 30, 2006, approximately 99.7% of long-lived assets are in the United States.

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No customer accounted for more than 2.0% of sales for the three and six month periods ended June 30, 2007 and July 1, 2006.

5. Goodwill and Other Intangibles - Net

Goodwill at June 30, 2007 for the Distribution and Retail segments is $214.9 million and $13.6 million, respectively. Intangible assets are comprised of:

	Gross Amount		Life	Accumulated Amortization			Balance at December 30, 2006
	(000’s)			(000’s)			(000’s)
Retail trade name—A&A	$	3,000	30	$	(317	)	$	2,683
eServices trade name—DriverFX.com		1,000	15		(211	)		789
Wholesale trade name—Keystone		50,000	30		(5,278	)		44,722
Vendor agreements		60,249	17		(11,200	)		49,049
Customer relationships—Reliable		17,000	20		(850	)		16,150
Customer relationships—Keystone		100,752	17		(18,246	)		82,506
Total intangibles, net	$	232,001		$	(36,102	)	$	195,899
(in thousands)
	Gross Amount		Life	Accumulated Amortization			Balance at June 30, 2007
	(000’s)			(000’s)			(000’s)
Retail trade name—A&A	$	3,000	30	$	(367	)	$	2,633
eServices trade name—DriverFX.com		1,000	15		(245	)		755
Wholesale trade name—Keystone		50,000	30		(6,111	)		43,889
Vendor agreements		60,249	17		(12,972	)		47,277
Customer relationships—Reliable		17,000	20		(1,275	)		15,725
Customer relationships—Keystone		100,752	17		(21,209	)		79,543
Total intangibles, net	$	232,001		$	(42,179	)	$	189,822

Amortization expense related to intangible assets for the six months ended June 30, 2007 and July 1, 2006 was $6.1 million for each period.

We completed our annual impairment testing of goodwill and indefinite-lived intangible assets for our reporting units as of December 30, 2006 and determined that there was no impairment as of that date.

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6. Related Party Transactions

On October 30, 2003, all of the outstanding stock of Keystone was acquired by Keystone Automotive Holdings, Inc. (“Holdings”), a newly formed company owned by (i) Bain Capital Partners, LLC (“Bain Capital”), (ii) its affiliates, (iii) co-investors and (iv) our management (the “Transaction”), our sole shareholder. In connection with the Transaction, the Company entered into advisory agreements with Bain Capital and Advent International Corporation (“Advent”). The Bain Capital agreement is for general executive and management services, merger, acquisition and divestiture assistance, analysis of financing alternatives and finance, marketing, human resource and other consulting services. In exchange for these advisory services, Bain Capital will receive a contingent annual advisory services fee of $1.5 million through 2006 and $3.0 million for 2007 through 2013, plus reasonable out-of-pocket fees and expenses, which is contingent on the Company achieving consolidated Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”), as defined in the Company’s credit agreement, of $52.7 million for a given year, including the impact of the Bain Capital advisory services fee. Adjusted EBITDA is defined as EBITDA adjusted for certain items including sale leaseback transactions, legal fees and litigation settlements, operating cost reductions, franchise taxes, losses and other charges. Pro-rata reductions, if any, on the annual advisory fees for years 2003 through 2007, based on the Adjusted EBITDA criteria, may be recaptured in periods subsequent to fiscal 2007, if Adjusted EBITDA is $158 million or more on a cumulative basis over any twelve consecutive fiscal quarters. Additionally, Bain Capital is entitled to transaction fees of 1.0% of the total value of the transaction, plus reasonable out-of-pocket fees and expenses, related to the completion of any financing or material acquisition or divestiture by Holdings. Bain Capital received a $4.7 million one-time fee for obtaining equity and debt financing for the Transaction, plus reasonable out-of-pocket fees and expenses related to the Transaction, which was included as part of the purchase price. The Bain Capital annual advisory services agreement has an initial term ending on December 31, 2013, subject to automatic one-year extensions unless the Company or Bain Capital provides written notice of termination; provided, however, that if the advisory agreement is terminated due to a change in control or an initial public offering of the Company or Holdings prior to the end of its term, then Bain Capital will be entitled to receive the present value of the advisory services fee that would otherwise have been payable through the end of the term. Bain Capital will receive customary indemnities under the advisory agreement. Selling, general and administrative expense for the six month period ended June 30, 2007 included $0.8 million of management fee expense to Bain Capital. There was no management fee expense to Bain Capital included in the results of operations for the three month period ended June 30, 2007. Included in accounts payable at June 30, 2007 and July 1, 2006 was $0.8 million and $2.3 million, respectively, payable to Bain Capital.

The Advent advisory agreement covers general executive and management services, assistance with acquisition and divestitures, assistance with financial alternatives and other services. The Advent annual advisory services fee is $0.1 million, subject to pro-rata reduction should the Bain Capital annual advisory services fee be reduced pursuant to the Adjusted EBITDA criteria outlined above. Selling, general and administrative expense for the three and six month periods ended June 30, 2007 and July 1, 2006 included less than $0.1 million of management fee expense, respectively, to Advent. Included in accounts payable at June 30, 2007 and July 1, 2006 was less than $0.1 million.

7. Commitments and Contingencies

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

8. Debt

On January 12, 2007, the Company entered into (i) a Term Credit Agreement (the “Term Loan”) by and between the Company, as borrower; Holdings; the Lenders party thereto, Bank of America, N.A. as Administrative Agent, Syndication Agent and Documentation Agent, and the other parties named therein, and (ii) a Revolving Credit Agreement (the “Revolver” and, together with the Term Loan, the “Credit Agreement”) by and between the

11

Company, as borrower, Holdings, the Lenders party thereto, Bank of America, N.A. as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, and the other parties named therein. The Credit Agreement effected a refinancing and replacement of the Company’s prior senior secured credit agreement dated October 30, 2003, in order to provide the Company with greater operational flexibility and liquidity to meet its growth and operational goals. Bain was entitled to receive a 1% transaction fee in exchange for its assistance with the refinancing of the debt but subsequently waived its rights to receive such fee.

In the first quarter of 2007, the Company wrote-off approximately $6.1 million of deferred financing costs associated with the extinguishment of the prior senior secured credit agreement.

The Term Loan is a secured $200.0 million facility (with an option to increase by an additional $25.0 million) guaranteed by Holdings and each domestic subsidiary of the Company, and matures on the fifth anniversary of the date of execution. The applicable margin on the Term Loan is 3.50% over LIBOR and 2.50% over the base rate. The Term Loan is secured by a first priority security interest in all machinery and equipment, real estate, intangibles and stock of the subsidiaries of the Company and Guarantors and a second priority security interest in the Company’s receivables and inventory.

The Revolver is an asset-based facility with a commitment amount of $125.0 million. The Revolver will mature on the fifth anniversary of the date of execution. The applicable margin on the Revolver is a grid ranging from 1.25% to 1.75% over LIBOR and 0.25% to 0.75% over the base rate, based on undrawn availability. The Company’s obligations under the Revolver are secured by a first priority security interest in all of the Company’s receivables and inventory and a second priority security interest in the stock of its subsidiaries and all other assets of the Company and Guarantors.

FORWARD-LOOKING STATEMENTS

Statements in this document that are not historical facts are hereby identified as “forward-looking statements” for the purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933 (the “Securities Act”). Keystone Automotive Operations, Inc. (“we”, “us” or the “Company”) cautions readers that such “forward-looking statements”, including without limitation, those relating to the Company’s future business prospects, results from acquisitions, revenue, working capital, liquidity, capital needs, leverage levels, interest costs and income, wherever they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the judgment of the Company’s senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the “forward-looking statements”. You can identify these statements by forward-looking words such as “expect,” “anticipate,” “plan,” “believe,” “seek,” “estimate,” “outlook,” “trends,” “future benefits,” “strategies,” “goals” and similar words. Such “forward-looking statements” should, therefore, be considered in light of the factors set forth in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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

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

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

The following Management’s Discussion and Analysis of our Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and notes thereto included as part of this

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Quarterly Report on Form 10-Q. This report contains forward-looking statements that are based upon current expectations. We sometimes identify forward-looking statements with such words as “may,” “will,” “expect,” “anticipate,” “estimate,” “seek,” “intend,” “believe” or similar words concerning future events. The forward-looking statements contained herein, include, without limitation, statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, research and development expenses, general and administrative expenses, capital resources, additional financings or borrowings and additional losses and are subject to risks and uncertainties including, but not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ materially from the results contemplated by these forward-looking statements. We also urge you to carefully review the section of this report entitled “Forward-Looking Statements” as well as the risk factors set forth in the Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

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

Overview

General Business Overview

We are a wholesale distributor and retailer of aftermarket automotive parts and accessories, operating throughout the United States and in parts of Canada. The Company sells and distributes specialty automotive products, such as light truck/SUV accessories, car accessories and trim items, specialty wheels, tires and suspension parts, and high performance products to a fragmented base of approximately 23,500 customers. Our wholesale operations include an electronic service strategy providing customers the ability to view inventory and place orders via its proprietary electronic catalog. The Company also operates 24 retail stores in Pennsylvania. Our corporate headquarters is in Exeter, Pennsylvania.

Our Distribution and Retail Operations constitute two business segments which are more fully described below.

Distribution

The Distribution segment aggregates seven regions or operating segments that are economically similar, share a common class of customers and distribute the same products. One of the most important characteristics of this business segment is our hub-and-spoke delivery network. This segment distributes specialty automotive equipment for vehicles to specialty retailers/installers and our distribution network is designed to meet the rapid delivery needs of our customers. This network is comprised of: (i) four inventory stocking warehouse distribution centers, which are located in Exeter, Pennsylvania; Kansas City, Kansas; Austell, Georgia; and Corona, California; (ii) 20 non-inventory stocking cross-docks spread throughout the East Coast, Southeast, Midwest, West Coast and parts of Canada; and (iii) our fleet of approximately 370 trucks, as compared to over 380 trucks at December 30, 2006, that provide multi-day per week delivery and returns along our over 270 routes which cover 42 states and parts of Canada. Our four warehouse distribution centers hold the vast majority of the Distribution segment’s inventory and distribute merchandise to cross-docks in their respective regions for next-day or second-day delivery to customers.

Retail

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

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Operations Overview

For the three and six month periods ended June 30, 2007, our net sales increased 2.0% and decreased 2.6%, respectively, versus the three and six month periods ending July 1, 2006. Our Distribution segment generated $165.9 million, or 96.1%, and $306.7 million, or 96.2%, of our net sales in the three and six month periods ended June 30, 2007, respectively, compared to $162.4 million and $314.5 million or 96.0%, of our net sales in the three and six month periods ended July 1, 2006, respectively. Our Retail segment generated $6.7 million, or 3.9%, and $12.2 million, or 3.8%, of our net sales in the three and six month periods ended June 30, 2007, respectively, compared to $6.8 million and $13.0 million, or 4.0%, of our net sales in the three and six month periods ended July 1, 2006, respectively.

Our net income decreased by $1.9 million and $10.9 million, respectively, for the three and six month periods ended June 30, 2007, to a net income of $0.8 million and a net loss of $7.7 million, respectively, compared to income of $2.7 million and $3.2 million for the three and six month periods ended July 1, 2006, respectively. The three and six month periods ended June 30, 2007 were each impacted by lower product selling margins, an increase in selling, general and administrative expense and higher interest expense. The six month period ending June 30, 2007 was also impacted by lower sales and the write-off of $6.1 million of deferred financing costs.

Items Affecting Comparability

Comparability between 2007 and 2006 periods

The Company operates on a 52/53-week year basis with the year ending on the Saturday nearest December 31. There are 13 and 26 weeks included in the three and six month periods ended June 30, 2007 and July 1, 2006, respectively.

Results of Operations

The tables and discussion presented below are based on the consolidated operations of the Company, except where otherwise noted. The table below summarizes our operating performance and sets forth a comparison of the three months ended June 30, 2007 to the three months ended July 1, 2006:

	Three Months Ended
(in thousands)	July 1, 2006			June 30, 2007			Dollar Change			Percent Change
Net sales	$	169,250		$	172,633		$	3,383		2.0	%
Cost of sales		(115,582	)		(119,993	)		(4,411	)	3.8
Gross profit		53,668			52,640			(1,028	)	(1.9	)
Selling, general and administrative expenses		(40,837	)		(41,978	)		(1,141	)	2.8
Income from operations		12,831			10,662			(2,169	)	(16.9	)
Other income (expense):
Interest income		62			56			(6	)	(9.7	)
Interest expense		(8,567	)		(9,541	)		(974	)	11.4
Other, net		106			(198	)		(304	)	(286.8	)
Income before income tax		4,432			979			(3,453	)	(77.9	)
Income tax (expense)		(1,731	)		(218	)		1,513		(87.4	)
Net income		2,701			761			(1,940	)	(71.8	)
Other comprehensive income:
Foreign currency translation		110			263			153		139.1
Comprehensive income	$	2,811		$	1,024		$	(1,787	)	(63.6	)

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The following table provides additional information setting forth the percentages of net sales that certain items of operating results constitute for the periods indicated:

	Three Months Ended
	July 1, 2006		June 30, 2007
Statement of operations data:
Net sales	100.0	%	100.0	%
Cost of sales	68.3		69.5
Gross profit	31.7		30.5
Selling, general and adminstrative expenses	24.1		24.3
Income from operations	7.6		6.2
Interest expense	5.1		5.5
Other income (expense), net	0.1		(0.1	)
Income before income tax	2.6		0.6
Income tax (expense)	(1.0	)	(0.2	)
Net income	1.6	%	0.4	%

Three Months Ended June 30, 2007 Compared to the Three Months Ended July 1, 2006

Net Sales. Net sales represent the sales of product and promotional items, fees, and all shipping and handling costs paid by customers, less any customer-related incentives and a reserve for future returns. The drivers of net sales were sales in existing locations and the addition of new truck routes and new customers in both existing and new regions.

Net sales for the quarter ended June 30, 2007 were $172.6 million, an increase of $3.4 million, or 2.0%, compared to $169.2 million for the same period in the prior year. The sales increase was driven by increased focus on customer service, greater inventory availability and an increase in vendor supported promotional activities. This was achieved in spite of conservative consumer spending on discretionary items driven by higher gasoline prices and general economic uncertainty. The net impact of vendor supported promotional activities increased sales by $1.9 million and $1.6 million for the three months ended June 30, 2007 and July 1, 2006, respectively. The Southeast and West Coast geographies delivered single digit growth in net sales versus the prior period while the Midwest and Canada geographies have achieved double digit growth versus the same period in the prior year. Sales from our Dropship fulfillment operations (shipping via third party delivery directly to the end-consumer on behalf of our customer) decreased by double digits, while our National Accounts (customers that participate in retail markets on a national or multi-region basis) experienced single digit decline in net sales growth and the company’s Northeast geography experienced a low single digit decline in net sales growth versus the same period in the prior year.

Gross Profit. Gross profit represents net sales less the cost of sales which includes third-party delivery costs. Gross profit decreased $1.0 million to $52.6 million for the three months ended June 30, 2007 compared to $53.6 million for the three months ended July 1, 2006. Gross margin as a percent of sales for the three months ended June 30, 2007 and July 1, 2006 was 30.5% and 31.7%, respectively. The decline was primarily attributable to lower product selling margins resulting from competitive pressures in the marketplace; however, this was partially offset by higher vendor supported promotional activities compared to the same period last year. Vendor supported promotional activities positively impacted sales and the cost of sales by $1.9 million and $1.2 million, respectively, for a net impact of $3.1 million, or 1.8% of net sales, for the three months ended June 30, 2007. This compares to $1.6 million and $0.3 million, respectively, for a net impact of $1.9 million, or 1.1% of net sales, for the three months ended July 1, 2006.

Selling, General and Administrative Expenses. Included are warehouse, marketing, delivery, selling and general and administrative expenses that are all non-product related operating expenses, including depreciation and amortization, occupancy, warehousing, delivery, marketing, selling, information technology, and general and administrative expenses

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less certain benefits received from promotional activities. Selling, general and administrative expenses increased by $1.1 million, or 2.8%, for the three months ended June 30, 2007. As a percentage of sales, selling, general and administrative expense for the three months ended June 30, 2007 was 24.3% compared to 24.1% for the three months ended July 1, 2006.

The following items are the primary drivers of the total increase in selling, general and administrative expenses. Warehouse expense for the three months ended June 30, 2007 increased by $1.1 million, to $8.5 million, from $7.4 million for the three months ended July 1, 2006. This increase was driven by costs associated with the Company’s distribution center in Austell, Georgia that became operational in June 2006. Selling, promotional and marketing expense for the three months ended June 30, 2007 increased by $0.4 million, to $8.3 million, from $7.9 million for the three months ended July 1, 2006, which was primarily due to increased marketing expense including an open house at our new West Coast Warehouse. General & administrative expense for the three months ended June 30, 2007 increased by $0.9 million, to $13.3 million, from $12.4 million for the three months ended July 1, 2006, which was related to increased professional fees and employee expense. These increases were partially offset by a decrease of approximately $1.1 million in selling, general and administrative expenses as a result of the elimination of expenses associated with the former operations of Reliable.

Interest Expense. Interest expense increased by $0.9 million, or 11.4%, to $9.5 million for the three months ended June 30, 2007 from $8.6 million for the three months ended July 1, 2006. The increase is related to our debt refinancing that was completed in January 2007, higher average indebtedness and changes in variable interest rates.

Income Tax Expense. Income tax expense decreased by $1.5 million to $0.2 million for the three months ended June 30, 2007 from $1.7 million for the three months ended July 1, 2006. Our effective tax rate was 22.3% for the three months ended June 30, 2007 compared to an effective tax rate of 39.1% for the three months ended July 1, 2006. The lower effective tax rate is primarily attributable to a reduction in the reserve for uncertain tax positions due to the lapse of prior year statute of limitations.

Net Income. Net income decreased by $1.9 million to $0.8 million for the three months ended June 30, 2007 compared to $2.7 million for the three months ended July 1, 2006. The decrease is primarily attributed to a $1.0 million decrease in gross profit, a $0.3 million decline in other net, and expense increases of $1.1 million in selling, general and administrative expense, and $0.9 million in interest expense for the three months ended June 30, 2007 compared to the three months ended July 1, 2006. These decreases to income before income tax were partially offset by a corresponding decrease in income tax expense of $1.5 million, from an expense of $1.7 million to $0.2 million.

Results by Reportable Segment. Consolidated net sales for the Distribution segment increased $3.5 million, or 2.1%, for the three months ended June 30, 2007 compared to the three months ended July 1, 2006. The sales increase was driven by increased focus on customer service, greater inventory availability and an increase in vendor supported promotional activities. Net income for the Distribution segment decreased by $2.0 million for the three months ended June 30, 2007 compared to the three months ended July 1, 2006. The decrease is due largely to the increase in sales being offset by lower gross margin, an increase in selling, general and administrative expense and an increase in interest expense.

The Retail segment’s sales decreased by $0.1 million, or 1.5%, for the three months ended June 30, 2007. The decrease is primarily due to a decrease in customer traffic in our stores. The Retail segment is not expected to contribute significantly to our growth as a result of management’s intent to not expand beyond our current 24 retail stores. The Retail segment’s net income increased by $0.1 million, or 33.7%, for the three months ended June 30, 2007.

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Six Months Ended June 30, 2007 Compared to the Six Months Ended July 1, 2006

The following table sets forth a comparison of the six months ended June 30, 2007 to the six months ended July 1, 2006.

	Six Months Ended
(in thousands)	July 1, 2006			June 30, 2007			Dollar Change			Percent Change
Net sales	$	327,475		$	318,883		$	(8,592	)	(2.6	) %
Cost of sales		(222,763	)		(221,353	)		1,410		(0.6	)
Gross profit		104,712			97,530			(7,182	)	(6.9	)
Selling, general and administrative expenses		(82,673	)		(84,832	)		(2,159	)	2.6
Income from operations		22,039			12,698			(9,341	)	(42.4	)
Other income (expense):
Interest income		133			100			(33	)	(24.8	)
Interest expense		(17,014	)		(19,235	)		(2,221	)	13.1
Write-off of deferred financing costs		—			(6,130	)		(6,130	)	*
Other, net		99			(62	)		(161	)	*
Income (loss) before income tax		5,257			(12,629	)		(17,886	)	*
Income tax (expense) benefit		(2,076	)		4,894			6,970		*
Net income (loss)		3,181			(7,735	)		(10,916	)	*
Other comprehensive income:
Foreign currency translation		106			299			193		*
Comprehensive income (loss)	$	3,287		$	(7,436	)	$	(10,723	)	*

* Percentage change intentionally left blank.

The following table provides additional information setting forth the percentages of net sales that certain items of operating results constitute for the periods indicated:

	Six Months Ended
	July 1, 2006		June 30, 2007
Statement of operations data:
Net sales	100.0	%	100.0	%
Cost of sales	68.0		69.4
Gross profit	32.0		30.6
Selling, general and adminstrative expenses	25.2		26.6
Income from operations	6.8		4.0
Interest expense	5.2		6.0
Other income (expense), net	—		—
Write-off of deferred financing costs	—		1.9
Income (loss) before income tax	1.6		(3.9	)
Income tax (expense) benefit	(0.6	)	1.5
Net income (loss)	1.0	%	(2.4	)%

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Net Sales. Net sales decreased by $8.6 million, or 2.6%, from $327.5 million to $318.9 million. The decrease was due to a combination of factors, including (i) a decrease in consumer spending on discretionary items driven by higher gasoline prices and general economic uncertainty, (ii) a year over year decline in truck and SUV sales, which directly impacts our business, (iii) a decrease in the net impact of vendor supported promotional activities and (iv) expected customer attrition related to the Reliable acquisition. Sales from our Dropship fulfillment operations (shipping via third party delivery directly to the end-consumer on behalf of our customer) have decreased by double digits while the Northeast, Southeast and National Accounts (customers that participate in retail markets on a national or multi-region basis) experienced single digit decline compared to the six months ended July 1, 2006. The net impact of vendor supported promotional activities impacted sales by $2.7 million compared to $3.6 million for the six months ended June 30, 2007 and July 1, 2006, respectively. Also, partially offsetting the decreases were increased sales in the West Coast geographies which maintained low single digit growth compared to the six months ended July 1, 2006 and the Midwest and Canada geographies which maintained double digit growth compared to the six months ended July 1, 2006.

Gross Profit. Gross profit decreased $7.2 million to $97.5 million for the six months ended June 30, 2007 compared to $104.7 million for the six months ended July 1, 2006. The decline was attributable to lower product selling margins resulting from competitive pressures in the marketplace and lower vendor supported promotional activities. Vendor supported promotional activities positively impacted sales and the cost of sales by $2.7 million and $4.1 million, respectively, for a net impact of $6.8 million, or 2.1% of net sales, for the six months ended June 30, 2007. This compares to $3.6 million and $3.4 million, respectively, for a net impact of $7.0 million, or 2.1% of net sales, for the six months ended July 1, 2006. Gross margin as a percent of sales for the six months ended June 30, 2007 and July 1, 2006 was 30.6% and 32.0%, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2.2 million, or 2.6%, for the six months ended June 30, 2007 compared to the six months ended July 1, 2006. As a percentage of sales, selling, general and administrative expense for the six months ended June 30, 2007 was 26.6% compared to 25.2% for the six months ended July 1, 2006.

The following items are the primary drivers of the total increase in selling, general and administrative expense. Warehouse expense for the six months ended June 30, 2007 increased by $3.1 million, to $16.4 million, from $13.3 million in the prior year. This increase was related to head count increases, inventory capitalization and rent expense primarily related to the addition of the new Austell, Georgia distribution center that became operational in June 2006. Delivery expense for the six months ended June 30, 2007 increased by $1.3 million, to $22.9 million, from $21.6 million for the six months ended July 1, 2006, which was due to the impact of an increase in fuel prices and the cost of operating new delivery routes. The general and administration expense for the six months ended June 30, 2007 increased by $2.4 million, to $27.4 million, from $25.0 million for the six months ended July 1, 2006, which was related to professional fees and employee expenses. These increases were partially offset by a decrease in selling, general and administrative expenses for the six months ended June 30, 2007 of approximately $4.7 million over the same period in the prior year as a result of the elimination of expenses associated with discontinued operations of Reliable.

Interest Expense. Interest expense increased by $2.2 million, or 13.1%, to $19.2 million for the six months ended June 30, 2007 from $17.0 million for the six months ended July 1, 2006. The increase is related to our debt refinancing that was completed in January 2007, higher average indebtedness and changes in variable interest rates.

Write-off of Deferred Finance Cost. As of January 2007 we have refinanced our term loans and line of credit portion of our debt. As a result, $6.1 million of unamortized deferred finance cost related to the prior senior secured credit agreement was written off.

Income Tax Expense. Income tax expense decreased by $7.0 million to a benefit of $4.9 million for the six months ended June 30, 2007 from an expense $2.1 million for the six months ended July 1, 2006. Our effective tax benefit rate was 38.8% for the six months ended June 30, 2007 compared to an effective tax rate of 39.5% for the six months ended July 1, 2006.

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Net Income. Net income decreased by $10.9 million to a loss of $7.7 million for the six months ended June 30, 2007 compared to $3.2 million of income for the six months ended July 1, 2006. The decrease is primarily attributed to the $6.1 million non-cash charge for the write-off of unamortized deferred finance cost discussed above, the decline in gross profit, and the increases in selling, general and administrative expenses and interest expense. These decreases to income (loss) before income tax were partially offset by the income tax benefit.

Results by Reportable Segment. Consolidated net sales for the Distribution segment decreased $7.9 million, or 2.5%, for the six months ended June 30, 2007 over the six months ended July 1, 2006. The decrease was due to a combination of factors, including (i) a decrease in consumer spending on discretionary items driven by higher gasoline prices and general economic uncertainty, (ii) a year over year decline in truck and SUV sales, which directly impacts our business, (iii) a decrease in the net impact of vendor supported promotional activities and (iv) expected customer attrition related to the Reliable acquisition. Net income for the Distribution segment decreased by $11.2 million for the six months ended June 30, 2007 compared to the six months ended July 1, 2006. The decrease is due largely to the decrease in sales, lower gross margin, an increase in selling, general and administrative expense, a non-cash write-off for deferred finance cost and an increase in interest expense.

The Retail segment’s sales decreased by $0.7 million, or 5.6%, for the six months ended June 30, 2007 compared to the six months ended July 1, 2006. The decrease is primarily due to a decrease in customer traffic in our stores. The Retail segment’s gross profit is higher and expenses are lower for the six months ended June 30, 2007. The Retail segment’s net income increased by $0.2 million, or 32.5% for the six months ended June 30, 2007 compared to the six months ended July 1, 2006.

Liquidity and Capital Resources

Operating Activities. Net cash provided by operating activities during the six months ended June 30, 2007 was $11.0 million compared with net cash provided by operating activities of $4.0 million for the six months ended July 1, 2006. The increase resulted from a $16.1 million decrease in net operating assets employed (accounts receivable, inventory and other assets offset by accounts payable, accrued liabilities and other liabilities). This increase was partially offset by the net of (i) decreased net income (loss) and (ii) increased non-cash adjustments. Our net loss of $7.7 million is a result of the $6.1 million write-off of unamortized deferred financing charges related to the prior senior secured credit agreement, the decline in gross profit, and the increases in selling, general and administrative expenses and interest expense. These decreases in net income were partially offset by the income tax benefit.

Investing Activities. Net cash used in investing activities was $3.1 million for the period ended June 30, 2007; a reduction of $2.5 million from the net cash used in investing activities of $5.6 million in the period ended July 1, 2006. The decrease in investing activities is related to higher prior year purchases of property, plant and equipment associated with the opening of the distribution center in Austell, Georgia.

Financing Activities. Net cash used in financing activities during the period ended June 30, 2007 was $6.6 million compared to net cash used in financing activities of $5.5 million during the period ended July 1, 2006. The period ended June 30, 2007 includes $6.3 million of new deferred finance charges related to the new Credit Agreement. The periods ended June 30, 2007 and July 1, 2006 included a term loan payment of $1.0 million and $5.1 million, respectively.

On January 12, 2007, we entered into a term credit agreement, or the Term Loan, with Holdings; the Lenders party thereto, Bank of America, N.A. and the other parties named therein, and a revolving credit agreement with Holdings, the Lenders party thereto, Bank of America, N.A., and the other parties named therein. We refer to the Term Loan and the Revolving Credit Agreement together as the “Credit Agreement.” The Credit Agreement refinances and replaces our prior senior secured credit agreement dated October 30, 2003, and provides us with greater operational flexibility and liquidity to meet our growth and operational goals.

Our principal sources of liquidity are cash flow from operations and borrowings under our Credit Agreement. We believe that these funds will provide us with sufficient liquidity and capital resources to meet our current and future

19

financial obligations, including our scheduled principal and interest payments, as well as provide funds for working capital, capital expenditures, and other needs for at least the next twelve months. Given our historical operating performance, including working capital needs, capital expenditures, and operating costs needed to support organic growth, we believe that our principal sources of liquidity will be sufficient to support our cash requirements through the maturity of our Credit Agreement. However, in the event that we consummate an acquisition during this period, our Credit Agreement contains certain restrictions that may not allow us to fund the total cost of an acquisition from our current sources of liquidity and may require additional borrowings. As of June 30, 2007, we had $102.0 million in available 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.

Debt Service. The Credit Agreement consists of a five year asset based revolving credit facility with a commitment amount of $125.0 million and a five-year term loan facility amortizing $200.0 million. As of June 30, 2007, under our Credit Agreement and our 9.75% Senior Subordinated Notes due 2013 “the Notes”, we had total indebtedness of $374.0 million and $98.1 million of borrowing availability as defined by our revolving credit agreement, subject to customary conditions.

Borrowings under the Credit Agreement generally bear interest based on a margin over, at our option, the base rate or the reserve-adjusted LIBOR. As of June 30, 2007 the applicable margin was 1.25% over LIBOR and 0.25% over the base rate for revolving credit loans and 3.50% over LIBOR and 2.50% over the base rate for the Term Loan. Our obligations under the revolving credit agreement are secured by a first priority security interest in all of our receivables and inventory and a second priority security interest in the stock of our subsidiaries and all other assets of us and the guarantors. The Term Loan is secured by a first priority security interest in all machinery and equipment, real estate, intangibles and stock of the subsidiaries of us and the guarantors under the Term Loan, and a second priority security interest in our receivables and inventory.

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 9.75% 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 guarantors are unsecured senior subordinated obligations and will be subordinated to all of our subsidiaries’ and guarantors’ existing and future senior debt. If we cannot make payments required by the Notes, the subsidiary guarantors are required to make the payments.

Capital Expenditures. We expect to spend approximately $8.0 million on capital expenditures in 2007. Through the six months ended June 30, 2007, $2.8 million was spent on capital expenditures. The Credit Agreement contains 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 Credit Agreement is 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 $129.9 million at June 30, 2007 and December 30, 2006. We maintain sizable inventory in order to help secure our position as a critical link in the industry between vendors and customers, and believe that we will continue to require working capital consistent with recent past experience. Our working capital needs are seasonal, and we build working capital in the winter months in anticipation of the peak spring and summer season, during which time our working capital tends to be reduced.

Acquisitions. As a part of our business strategy, we will continue to evaluate acquisition and business expansion opportunities in regions that are not well served by our existing distribution facilities or where we believe significant business synergies exist. 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 Credit Agreement 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.

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Off-Balance Sheet Arrangements

None.

Contractual and Commercial Commitments Summary

The following table presents our long-term contractual cash obligations as of June 30, 2007.

(in millions)

	Payments Due by Period
	2007		2008 - 2009		2010 - 2011		2012 and Thereafter		Total
Contractual Obligations (1)
Term loan	$	1.0	$	4.0	$	3.5	$	190.5	$	199.0
Senior subordinated notes		—		—		—		175.0		175.0
Revolving credit facility		—		—		—		—		—
Capital leases		—		0.1		—		—		0.1
Operating lease obligations		4.2		13.6		6.6		7.1		31.5
Interest on indebtedness (2)		22.1		68.8		68.1		31.9		190.9
Other long-term liabilities		—		1.0		0.6		1.2		2.8
Total contractual cash obligations	$	27.3	$	87.5	$	78.8	$	405.7	$	599.3

(1) The Company is contingently liable for certain advisory fees. See FN 6 of the Interim Financial Statements.

(2) Represents interest on the notes and interest on the senior credit facility assuming LIBOR of 8.8%. Each increase or decrease in LIBOR of 0.125% would result in an increase or decrease in annual interest on the senior credit facilities of $0.3 million assuming outstanding indebtedness of $199.0 million under our senior credit facilities.

The Company adopted the provisions of FIN 48 at the beginning of its 2007 fiscal year. As a result of the adoption of FIN 48, the Company recognized a decrease in the liability related to unrecognized tax benefits and an increase in shareholder’s equity of $0.1 million. As of the beginning of the 2007 fiscal year, the amount of the liability for unrecognized tax benefits after adoption was approximately $2.4 million. During the three and six months ended June 30, 2007, subsequent to the adoption of FIN 48, the Company recorded an increase of $0.1 million and $0.2 million, respectively, related to the potential payment of unrecognized tax benefits, penalties and interest related to positions taken during the current year. This expense associated with the increase in the reserve was offset during the three months ended June 30, 2007, by a reduction of $0.2 million resulting from the lapse of statute of limitations for prior periods. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved.

The Company files income tax returns in the U.S. for federal and various state jurisdictions and in Canada for federal and provincial jurisdictions. All federal income tax returns are closed through the short period ended October 30, 2003. The Company has not been notified of the commencement of any examination of the open years by the Internal Revenue Service. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The Company and its subsidiaries have a limited number of state income tax returns in the process of examination. Canadian federal and provincial income tax returns are closed through the year ended December 31, 1998. The Company has not been notified of the commencement of any examination of the open years by the Canada Revenue Agency.

In addition to unrecognized tax benefits, the Company has valuation allowances related to tax benefits in certain jurisdictions arising from net operating losses and related tax loss carryforwards. On an ongoing basis, the Company reassesses the need for such valuation allowances based on recent operating results, its assessment of the likelihood of future taxable income and developments in the relevant tax jurisdictions.

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Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”) “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the requirements of this standard and does not expect its provisions to have a material effect on its financial statements.

In February of 2007, the FASB issued SFAS No. 159 (“SFAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the requirements of this standard.

On December 15, 2006, the SEC adopted new measures to grant relief to non-accelerated filers, including the Company, by extending the date of compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Act”). Under these measures, the Company will be required to comply with the Act in two phases. The first phase will be effective for the Company’s fiscal year ending December 29, 2007 and will require the Company to furnish a management report on internal control over financial reporting. The second phase will require the Company to provide an auditor’s attestation report on internal control over financial reporting beginning with the Company’s fiscal year ending December 27, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our on-going business operations. Primary exposure includes changes in interest rates as borrowings under our senior credit facilities bear interest at floating rates based on LIBOR or the base rate, in each case plus an applicable borrowing margin. We 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.

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 general upward trend in the cost of fuel over the past several years has caused us to incur increased costs in operating our fleet, which has an adverse effect on our financial condition and results of operations.

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There have been no material changes in Quantitative and Qualitative disclosures in 2007 from the disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006. Reference is made to Item 7A included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2006 and the caption “Liquidity and Capital Resources” under Item 2 of this Quarterly Report on Form 10-Q.

Interest Rate Risk and Sensitivity Analysis

On January 12, 2007, the Company entered into the Credit Agreement to refinance our debt and replace the Company’s existing senior secured credit agreement. As of June 30, 2007, the Company has $374.1 million in debt, including $0.1 million in debt related to capital leases. The revolving credit facility was undrawn and the interest rate on the $175 million of our Senior Subordinated Notes is fixed at 9.75%. As of June 30, 2007, our exposure to changes in interest rates is related to our Term Loans of $199.0 million which provides for quarterly principal and interest payments at LIBOR plus 3.50% and matures in 2012. Based on the amount outstanding and affected by variable interest rates, a 100 basis point change would result in an approximately $2.0 million change to interest expense.

Item 4. Controls and Procedures

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

Changes in Internal Controls. No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not currently a party to any material legal proceedings. The Company is a party to various lawsuits arising in the normal course of business, and has 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, results of operations or cash flows.

Item 1A. Risk Factors

For a more detailed explanation of the factors affecting our business, please refer to the “Forward-Looking Statements Section” in this report and in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

There have been no material changes from Risk Factors previously disclosed in our Annual Report on Form10-K for the fiscal year ended December 30, 2006.

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

None.

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Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

31.1	Certification by Edward H. Orzetti pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Donald T. Grimes pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Edward H. Orzetti pursuant to 18 U.S.C. ss. 1350.
32.2	Certification by Donald T. Grimes pursuant to 18 U.S.C. ss. 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Exeter, Pennsylvania, on August 13, 2007.

KEYSTONE AUTOMOTIVE OPERATIONS, INC.

/s/ EDWARD H. ORZETTI

Edward H. Orzetti

Chief Executive Officer and President

/s/ DONALD T. GRIMES

Donald T. Grimes

Chief Financial Officer

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EX-31.1

Exhibit 31.1

Certifications

I, Edward H. Orzetti, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Keystone Automotive Operations, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2007
By:	/s/ EDWARD H. ORZETTI
	Edward H. Orzetti
	Chief Executive Officer and President

EX-31.2

Exhibit 31.2

Certifications

I, Donald T. Grimes, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Keystone Automotive Operations, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 13, 2007
By:	/s/ DONALD T.GRIMES
	Donald T. Grimes
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certifications

Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Keystone Automotive Operations, Inc. (the “Company”), hereby certifies that, to his knowledge, the Company’s Quarterly Report on Form 10-Q for the three month period ended June 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	August 13, 2007	By:	/s/ EDWARD H. ORZETTI
			Edward H. Orzetti
			Chief Executive Officer and President

The foregoing certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-32.2

Exhibit 32.2

Certifications

Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Keystone Automotive Operations, Inc. (the “Company”), hereby certifies that, to his knowledge, the Company’s Quarterly Report on Form 10-Q for the three month period ended June 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	August 13, 2007	By:	/s/ Donald T. Grimes
			Donald T. Grimes
			Executive Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. ss. 1350 and is not being filed as part of the Report or as a separate disclosure document.