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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

	OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2004.

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

	OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-13927

CSK AUTO CORPORATION

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

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     o

      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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      As of August 4, 2003, the aggregate market value of our voting and non-voting common stock held by non-affiliates was approximately $521.5 million. For purposes of the above statement only, all directors and executive officers of the registrant are assumed to be affiliates. As of April 12, 2004, there were 46,516,840 shares of our common stock outstanding.

Documents Incorporated by Reference

•	Portions of our definitive Proxy Statement on Schedule 14A, with respect to our 2004 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Form 10-K.

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Note Concerning Forward-Looking Information

      Some of the information in this Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may”, “will”, “expect”, “anticipate”, “believe”, “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future results of operations or of our financial condition; or (3) state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control, the occurrence of which could have a material adverse effect on our business, operating results and financial condition. These events may include changes in laws and regulations, changes in economic and market conditions and potential competition, among other things. Factors that might cause actual results to differ materially from those in such forward-looking statements include, but are not limited to, those discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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PART I

General

      We are the largest specialty retailer of automotive parts and accessories in the Western United States and one of the largest such retailers in the United States, based on store count. We have the number one market position in 25 of the 28 geographic markets in which we operate, based on store count. As of February 1, 2004, we operated 1,114 stores in 19 states under one fully integrated operating format and three brand names:

	•	Checker Auto Parts, founded in 1969, with 411 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;
	•	Schucks Auto Supply, founded in 1917, with 226 stores in the Pacific Northwest and Alaska; and
	•	Kragen Auto Parts, founded in 1947, with 477 stores primarily in California.

      We offer a broad selection of national brand name, private-label and generic automotive products for domestic and imported cars and light trucks. Our products include new and remanufactured automotive replacement parts, maintenance items and accessories. Our stores average approximately 7,300 square feet in size and typically offer a store specific mix averaging approximately 18,000 stock-keeping units, or SKUs. We also operate a highly efficient network of strategically located depots to provide approximately 75% of our stores an additional 65,000 SKUs on a same-day delivery basis. Through our extensive on-line vendor network, we make available up to an additional 250,000 SKUs on a same-day delivery basis to approximately 75% of our stores and up to 1,000,000 additional SKUs on a next-day delivery basis to substantially all of our stores.

      We serve both the do-it-yourself (“DIY”) and the commercial installer, or do-it-for-me (“DIFM”), markets. The DIY market, which is comprised of consumers who typically repair and maintain vehicles themselves, is the foundation of our business. Sales to the DIY market represented approximately 83% of our net sales for fiscal 2003. The DIFM market is comprised of auto repair professionals, fleet owners, governments and municipalities and accounted for over 75% of the annual sales in the U.S. automotive aftermarket industry in 2002, according to statistics published by Lang Marketing Resources, Inc. Sales to the DIFM market represented approximately 17% of our net sales for fiscal 2003. In 1994, we began targeting the DIFM market to leverage our existing store base, fixed costs, inventory and in-store personnel. We believe we are well positioned to effectively and profitably further penetrate the highly fragmented DIFM market because of our sales force dedicated to DIFM customers, experienced in-store sales associates, level of customer service, conveniently located stores, efficient depot delivery network, attractive pricing, and ability to provide timely availability of a broad selection of national brand name products.

      Through our subsidiary, Automotive Information Systems, Inc. (“AIS”), we provide diagnostic vehicle repair information to automotive technicians, automotive replacement parts manufacturers, automotive test equipment manufacturers, and to DIY consumers. This allows us to provide high quality diagnostic information to our DIY, DIFM, and Internet customers in order to assist them with correctly identifying problems and efficiently obtaining the parts they need. We are currently considering alternatives that will allow us to maximize the potential value of AIS without significantly increasing our capital commitment. Possibilities include joint ventures or a sale in a manner that would allow us to retain certain of the attributes of AIS we deem most valuable to our business.

      As used herein, the terms “CSK”, “CSK Auto”, “the Company”, “Auto”, “we”, “us”, and “our” refer to CSK Auto Corporation and its subsidiaries, including CSK Auto, Inc. and its subsidiaries.

      You may obtain, free of charge, copies of this Annual Report on Form 10-K as well as our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K (and amendments to those reports) filed with or furnished to the SEC as soon as reasonably practicable after such reports have been filed or furnished by accessing our website at www.cskauto.com, clicking on “Company,” then “Investor Relations.” Information contained on our website is not part of this Report.

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Industry Overview

      We compete in the U.S. automotive aftermarket industry, which has annual sales in excess of $110 billion. This industry includes replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks. The industry is comprised of the DIY market and the DIFM market. We believe that the U.S. automotive aftermarket industry is characterized by stable demand and is growing because of increases in:

	•	the size and age of automotives in use;
	•	the number of miles driven annually per vehicle;
	•	the number of licensed drivers;
	•	the percentage of the total light vehicle fleet represented by light trucks (including SUVs), which generate higher average aftermarket product purchases versus such purchases generated per car; and
	•	the number of light vehicles coming off warranty, particularly leased vehicles, which we believe are often under-maintained and, therefore, may require higher than average maintenance and repair expenditures in the post-warranty period.

      Despite significant consolidation of automotive aftermarket retailers in recent years, the industry remains highly fragmented. Our primary competitors include national and regional automotive parts chains, wholesalers, jobber stores, independent operators, automobile dealers, and discount stores and mass merchandisers that carry automotive products.

Competitive Strengths

      We believe that our competitive strengths include the following:

      Leading Market Position in the Western United States. We are the largest specialty retailer of automotive parts and accessories in the Western United States and have the number one market position in 25 of the 28 geographic markets in which we operate, based on store count. Research conducted by a third party market research company indicates that, on an aggregate basis for our key markets, we have better brand name recognition than our major competitors. We believe that this is due to the long operating history of our stores, our advertising and marketing programs, the breadth of our product selection and our reputation for superior customer service.

      As the largest specialty retailer of automotive parts and accessories in the Western United States, we believe we have certain competitive advantages over smaller retail chains and independent operators. These advantages include: (1) our brand name recognition as a trusted source of automotive parts and accessories, (2) our ability to make available a broad selection of products on a timely basis, (3) marketing and distribution efficiencies due to economies of scale, and (4) our advanced store level information and distribution systems, which are the result of our significant investments in recent years. We also believe that we enjoy a competitive advantage over mass merchandisers due to our focus on automotive parts and accessories and our knowledgeable sales associates.

      Focus on Customer Service. Our promise of “G.R.E.A.T.” service, our internally developed customer service initiative, has been well received. Recruiting, training and retaining high quality sales associates is a major component of our focus on customer service. Our training programs and incentives encourage our sales associates to develop technical expertise, which enables them to effectively advise customers on product selection and use. We have an average of two Automotive Society of Engineers, or ASE, certified mechanics per store. Research conducted by a third party market research company indicates that, on an aggregate basis for our key markets, consumers rate our sales associates as “the most knowledgeable and helpful” more frequently than those of our major competitors. To further satisfy our customers’ needs, we also offer free testing of certain parts, “no hassle” return policies, electronically maintained warranties and a customer service call center.

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      Timely Availability of a Broad Selection of Brand Name Products. Our stores typically offer a store specific mix of approximately 18,000 SKUs. We also operate a highly efficient network of strategically located depots to provide approximately 75% of our stores an additional 65,000 SKUs on a same-day delivery basis. Through our extensive on-line vendor network, we make available up to an additional 250,000 SKUs on a same-day delivery basis to approximately 75% of our stores and up to 1,000,000 additional SKUs on a next-day delivery basis to substantially all of our stores. While our stores also stock high quality generic products that appeal to our value conscious customers, we feature a broad selection of national brand name products that help generate customer traffic and have strong consumer appeal, particularly in the DIFM market.

      Sophisticated Store-Level Information and Distribution Systems. In recent years, we have made significant investments in sophisticated store-level information systems and warehouse and distribution systems in order to more effectively manage our inventory and increase the availability of products to our customers. Our sophisticated inventory management systems provide inventory movement forecasting based on history, trends and seasonality. Our systems have enhanced our ability to predict the size and timing of product requirements by closely monitoring service level goals, vendor lead times and cost of inventory assumptions. Our store level replenishment system generates orders based upon store on-hand and store model stock quantities. Store model stock quantities are determined by an automatic model stock adjustment system that utilizes historical sales patterns, seasonality and store presentation requirements. We also maintain a store specific precision pricing program that seeks to optimize margins while maintaining price competitiveness. Our fully integrated warehouse and distribution network and our strategically located depots, which operate using state-of-the-art technology, have allowed us to significantly improve distribution efficiency. In addition, these investments have allowed us to both improve our in-stock inventory levels and reduce delivery costs and times for products.

      Profitable Commercial Sales Program. We are well positioned to effectively service our DIFM customers, who typically require convenient locations, a higher level of customer service and timely availability of brand name products. Beginning in 1996, we significantly increased our marketing efforts to the DIFM market, added sales personnel dedicated to our DIFM customers, increased the breadth and depth of our product selection and improved and expanded our distribution systems. This has enabled us to add significant sales volume to each of our stores with minimal incremental cost. We currently operate DIFM sales centers in approximately half of our stores and DIFM sales have grown from $89.6 million, or approximately 11%, of net sales in fiscal 1996 to $260.8 million, or approximately 17%, of net sales in fiscal 2003. Our commercial sales program growth has increased the sales base for participating stores, created improved efficiencies and allowed us to enhance the product selection for our DIY customers.

      Highly Experienced and Proven Management Team. We are led by an innovative management team with a wealth of automotive aftermarket and retail industry experience. Maynard Jenkins, our Chairman and Chief Executive Officer, has served in his current position since January 1997 and has 38 years of retail management experience, including 17 years as a Chief Executive Officer. Martin Fraser, our President and Chief Operating Officer, has been with us for 26 years, serving in a number of key positions prior to his current role, including Executive Vice President — Merchandising, Distribution and Commercial and Sr. Vice President — Merchandising, Transportation, Replenishment and Marketing. Our senior management team averages over 28 years of retail industry experience. We believe the strength and experience of our management team has enabled us to deliver exceptional operating and financial results and to emerge as a leader in our highly competitive industry.

Store Operations

      Our stores are divided into nine geographic regions: Southwest, Rocky Mountain, Northwest, Northern Plains, Southern California, Coastal California, Los Angeles, Bay Area and Northern California. A regional manager, each of whom oversees seven to eleven district managers, administers each region. Each of our district managers has responsibility for between 8 and 19 stores.

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      The table below sets forth, as of February 1, 2004, the geographic distribution of our stores and the trade names under which they operated.

      Our stores are generally open seven days a week, with hours from 8:00 a.m. to 9:00 p.m. (9:00 a.m. to 6:00 p.m. on Sundays). The average store employs approximately 10 to 20 employees, including a store manager, two assistant store managers and a staff of full-time and part-time employees.

Store Formats

      Approximately 63% of our stores are freestanding, with the balance principally located within strip shopping centers. The stores, which range in size from 2,600 to 24,000 square feet, average approximately 7,300 square feet in size and offer a store specific mix of between 13,000 and 18,000 SKUs.

      We have three prototype store designs, which are 6,000, 7,000 and 8,000 square feet in size. The store size for a given new location is selected generally based upon sales volume expectations determined through demographics and the detailed market analysis that we prepare as part of our site selection process. The following table categorizes our stores by size, as of February 1, 2004:

      Approximately 85% to 90% of the square footage in each store is selling space, of which approximately 40% to 50% is dedicated to automotive replacement parts inventory. The replacement parts inventory area is

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Real Estate Strategy

      Our real estate strategy is focused on our existing or contiguous markets and includes:

	•	opening new stores;
	•	relocating under-performing stores with expiring leases to better locations; and
	•	expanding selected stores.

      Our market strategy group, which is a part of our real estate department, utilizes a sophisticated, market-based approach that identifies and analyzes potential store locations based on detailed demographic and competitive studies. These demographic and competitive studies include analysis of population density, growth patterns, age, per capita income, vehicle traffic counts and the number and type of existing automotive-related facilities, such as automotive parts stores and other competitors within a pre-determined radius of the potential new location. These potential locations are compared to our existing locations to determine opportunities for opening new stores and relocating or expanding existing stores.

      The following table sets forth our store development activities during the periods indicated:

      We expect to open, relocate or expand approximately 45 stores in fiscal 2004.

Store Merchandising

      Our store merchandising program, which classifies our product mix into 120 separate categories, is designed to determine the optimal inventory mix at each individual store based on that store’s historical sales. We believe that we can improve store sales, gross profit margin and inventory turnover by tailoring individual store inventory mix based on historical sales patterns for each of the 120 product categories. As part of our Profitability Enhancement Program (“PEP”) in fiscal 2001, we completed a comprehensive review of slower-selling items that met neither current return criteria nor our objective for inventory turns. This review resulted in the elimination of certain merchandise, and the transfer of certain goods to stores that turn the merchandise satisfactorily.

Purchasing

      Merchandise is selected from over 300 suppliers and purchased for all stores by personnel at our corporate headquarters in Phoenix, Arizona. No one class of product and no single supplier accounted for as much as 10% of our purchases in fiscal 2003.

      Our inventory management systems include the E-3 Trim Buying System, which provides inventory movement forecasting based upon history, trend and seasonality. Combined with service level goals, vendor

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      Our stores offer products with nationally recognized, well-advertised brand names, such as Armor All, Autolite, Castrol, Dayco, Fel Pro, Fram, Havoline, Mobil, Monroe, Pennzoil, Prestone, Quaker State, RayBestos, Stant, Sylvania, Turtle Wax and Valvoline. In addition to brand name products, our stores carry a wide variety of high quality generic products. Because nationally recognized manufacturers that produce similar brand name products that enjoy a high degree of consumer acceptance produce most of our generic products, we believe that our generic products are of a quality that is comparable to such brand name products.

Commercial Sales Program

      In addition to our primary focus on serving the DIY consumer, we have significantly increased our marketing directed at the commercial or DIFM customer in the automotive replacement parts market. The commercial or DIFM market constitutes in excess of 75% of the annual sales in the automotive aftermarket and is currently growing at a faster rate than the do-it-yourself market. Our commercial sales program, which is intended to facilitate penetration of this market, is targeted toward professional mechanics, auto repair shops, auto dealers, fleet owners, mass and general merchandisers with auto repair facilities and other commercial repair outlets located near our stores.

      We have made a significant commitment to this portion of our business and upgraded the information systems capabilities available to the commercial sales group. In addition, we employ one district sales manager for approximately every five stores with a commercial sales center. This district sales manager is responsible for servicing existing commercial accounts and developing new commercial accounts. In addition, at a minimum, each commercial sales center has a dedicated in-store salesperson, driver and delivery vehicle.

      We believe we are well positioned to effectively and profitably service commercial customers, who typically require a higher level of customer service and broad product availability. The commercial market has traditionally been serviced primarily by jobbers. Recently, however, automotive specialty retailing chains, such as us, have entered the commercial market. The chains typically have multiple locations in given market areas and maintain a broad inventory selection. We believe we have significant competitive advantages in servicing the commercial market because of our experienced sales associates, conveniently located stores, attractive pricing and ability to consistently deliver a broad product offering with an emphasis on national brand names.

      As of February 1, 2004, we operated commercial service centers in approximately half of our stores. Our sales to commercial accounts (including sales by stores without commercial service centers) decreased 0.7% to $260.8 million in fiscal 2003 from $262.8 million in fiscal 2002. On a comparable store basis, commercial sales increased 4.8% in fiscal 2003 over fiscal 2002.

Advertising

      We support our marketing and merchandising strategy primarily through print advertising, in-store promotional displays and radio and television advertising. The print advertising consists of color circulars that are produced by our in-house advertising department. We also advertise on radio, television and billboards primarily to reinforce our image and name recognition. Television advertising is primarily targeted to sports programming and radio advertising is primarily aired during commuting hours. Advertising efforts include Spanish language television and radio as well as bilingual store signage. In-store signs and displays are used to promote products, identify departments, and to announce store specials. We also sponsor two National Hot

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	•	http://www.cskauto.com;
	•	http://www.checkerauto.com;
	•	http://www.schucks.com;
	•	http://www.kragen.com;
	•	http://www.identifix.com; and
	•	http://www.autoshop-online.com.

Associates

      As of February 1, 2004, we employed approximately 8,600 full-time associates and approximately 4,970 part-time associates. Approximately 86% of our personnel are employed in store level operations, 8% in distribution and 6% in our corporate headquarters, including our call center and priority parts operation.

      We have never experienced any material labor disruption and believe that our labor relations are good. Except for a limited number of associates located at certain stores in the Northern California market, who have been represented by a union for many years, none of our personnel are represented by a labor union.

      CSK Tech, our sales associate development program, is dedicated to the continuous education of store associates through structured on-the-job training and formal classroom instruction. The curriculum focuses on four areas of the associates’ development:

	•	customer service skills;
	•	basic automotive systems;
	•	advanced automotive systems; and
	•	management development.

      Much of the training is delivered through formal classes in training centers that are fully equipped with the same systems as are in our stores. We believe that our training programs enable sales associates to provide a high level of service to a wide variety of customers ranging from less knowledgeable do-it-yourself consumers to more sophisticated purchasers requiring diagnostic advice. We also provide continuing training programs for store managers and district managers designed to assist them in increasing store-level efficiency and improving their potential for promotion. In addition, we require periodic meetings of district and store managers to facilitate and enhance communications within our organization. Many of our current associates have passed the ASE-P2 test, a nationally recognized certification for auto parts technicians.

Competition

      We compete in both the DIY and DIFM markets of the automotive aftermarket industry, which is highly fragmented and generally very competitive. We compete primarily with national and regional retail automotive parts chains (such as AutoZone, Inc. and The Pep Boys — Manny, Moe and Jack, Inc.), wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations, such as NAPA), automobile dealers, and discount stores and mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc.). As the largest specialty retailer of automotive parts and accessories in the Western United States, we believe we have certain competitive advantages over smaller retail chains and independent operators. These advantages include: (1) our brand name recognition as a trusted source of automotive parts and accessories, (2) our ability to make available a broad selection of products on a timely basis, (3) marketing and distribution efficiencies achieved from economies of scale, and (4) our advanced store level information and distribution systems, which are the result of our significant investments in recent years. We also believe that we enjoy a competitive advantage

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      The principal competitive factors that affect our business are store location, customer service, product selection, availability, quality and price. While we believe that we compete effectively in our various markets, certain competitors are larger in terms of number of stores and sales volume, have greater financial and management resources and have been operating longer in certain geographic areas.

Trade Names, Service Marks and Trademarks

      We have the right to exclusively use the trade name Checker nationwide in connection with the automotive parts retailing business pursuant to a settlement and use agreement with the owner of the federal registration for such trademark. We own and have registered the service mark Schucks with the United States Patent and Trademark Office for use in connection with the automotive parts retailing business. We expect to file a renewal for this mark prior to June 30, 2005, based on its current expiration date. We have common law rights to use the trade name Kragen in connection with the automotive parts retailing business. In addition, we own and have registered numerous trademarks with respect to many of our private label products and advertising and marketing strategies. We believe that our various trade names, service marks and trademarks are important to our merchandising strategy, but that our business is not otherwise dependent on any particular service mark, trade name or trademark. There are no infringing uses known by us that materially affect the use of such marks.

Warehouse and Distribution

      Our warehouse and distribution system utilizes bar coding, radio frequency scanners and sophisticated conveyor and put-to-light systems. We instituted engineered labor standards and incentive programs in each of our distribution centers, which have contributed to improved labor productivity. Each store is currently serviced by one of our three main distribution centers, with the regional distribution centers handling bulk materials, such as oil. All of our merchandise is shipped by vendors to our distribution centers, with the exception of batteries, which are shipped directly to stores by the vendor. We have sufficient warehouse and distribution capacity to meet the requirements of our expected growth plans for the foreseeable future.

Seasonality

      Our business is somewhat seasonal in nature, with the highest sales occurring in the months of June through October (overlapping our second and third fiscal quarters). In addition, our business is affected by weather conditions. While unusually severe or inclement weather tends to reduce sales, as our customers are more likely to defer elective maintenance during such periods, extremely hot and cold temperatures tend to enhance sales by causing auto parts to fail and sales of seasonal products to increase.

Environmental Matters

      We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants, and the ownership and operation of real property. For example, under environmental laws, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous substances in soil or groundwater. Such laws often impose joint and several liability and liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. We have recorded no liabilities to provide for the cost of environmental remediation activities, as we do not believe that we have incurred any such liabilities.

      At some of our locations acquired in prior years, automobiles are serviced in automotive service facilities that we sublease to third parties. As a result of investigations undertaken in connection with such acquisitions, we are aware that soil or groundwater may be contaminated at some of these properties. Although there can be no assurance, based on current information and, in some cases, indemnities we obtained from the former

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      As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous materials onto our property in connection with, for example, our oil recycling program. We currently provide a recycling program for batteries and for the collection of used lubricants at certain of our stores as a service to our customers pursuant to agreements with third-party vendors. The batteries and used lubricants are collected by our associates, deposited into vendor-supplied containers/ pallets and then disposed of by the third-party vendors. In general, our agreements with such vendors contain provisions that are designed to limit our potential liability under applicable environmental regulations for any damage or contamination that may be caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused by the vendor.

      We do not believe that compliance with environmental laws and regulations has had a material impact on our operations to date, but there can be no assurance that future compliance with such laws and regulations will not have a material adverse effect on our financial position, results of operations or cash flows.

      The following table sets forth certain information concerning our principal leased facilities as of February 1, 2004:

(1)	This facility is owned by an entity that until November 2002 was an affiliate of ours. See Note 4 to the Consolidated Financial Statements for a further explanation.
(2)	Subject to time period and other restrictions, we have the ability to expand the Phoenix distribution center by approximately 80,000 square feet and the Dixon distribution center by 160,000 square feet should the need arise.

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      As of February 1, 2004, all but one of our operating stores was leased. The expiration dates (including renewal options) of the store leases are summarized as follows:

      Additional information regarding our facilities appears in Item 1. Business under the captions Store Operations, Store Formats and Warehouse and Distribution.

      During the third quarter of fiscal 2003, we received notification from the State of California Board of Equalization (the “Board”) of an assessment for approximately $1.2 million for sales tax and approximately $0.6 million for related interest based on the Board’s audit findings for the tax periods of October 1997 through September 2000. During this time period, we refunded the sales tax associated with battery cores to customers who returned a battery core to our stores. The Board believes that the sales tax associated with the battery cores should have been remitted to the taxing authority rather than refunded to the customers. Based on the Board’s position, we could be responsible for the sales tax and related interest associated with this matter for the audited periods of October 1997 through September 2000, plus the additional unaudited time period through December 2002, when we changed our business practices in this area.

      We believe that we have a strong basis under California law for disputing the payment of this assessment and have filed a Petition for Redetermination with the Board. Our practices through December 2002 relative to the handling of taxes on battery cores had been consistent for over a decade, and it is our position that our consistent treatment of battery core charges, together with prior tax audits and tax auditors’ written commentary concerning our handling of such charges, permits us to rely upon precedent set in prior audits. Reliance on prior audits is a position that is supportable under California law. We also have other defenses, and intend to vigorously defend our position with regard to this matter. A liability for the potential sales tax and related interest payments has not been recorded in our consolidated financial statements.

      We currently and from time to time are involved in other litigation incidental to the conduct of our business, including asbestos and similar product liability claims, slip and fall and other general liability claims, discrimination and employment claims, vendor disputes, and miscellaneous environmental and real estate claims. The damages claimed in some of this litigation are substantial. Based on internal review, we accrue reserves using our best estimate of probable and reasonably estimable contingent liabilities. We do not currently believe that any of the legal claims, individually or in the aggregate, will result in liabilities material to our consolidated financial position, results of operations or cash flows.

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      No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2003.

PART II

      Our common stock has been listed on the New York Stock Exchange under the symbol CAO since March 12, 1998. As of April 12, 2004, there were 46,516,840 shares of our common stock outstanding and there were approximately 75 record holders of our common stock.

      The following table sets forth, for the periods indicated, the high and low bid prices for our common stock as reported by the New York Stock Exchange.

      We have not paid any dividends on our common stock during the last two fiscal years. We currently do not intend to pay any dividends on our common stock.

      We are a holding company with no business operations of our own. We therefore depend upon payments, dividends and distributions from CSK Auto, Inc., our wholly owned subsidiary, for funds to pay dividends to our stockholders. CSK Auto, Inc. currently intends to retain its earnings to fund its working capital, debt repayment and capital expenditure needs and for other general corporate purposes. CSK Auto, Inc. has no current intention of paying dividends or making other distributions to us in excess of amounts necessary to pay our operating expenses and taxes. CSK Auto, Inc.’s senior credit facility and the indentures governing its senior notes contain restrictions on its ability to pay dividends or make payments or other distributions to us. See Note 8 to the Consolidated Financial Statements.

      The required table and information relating to equity compensation plans is incorporated by reference from the information contained under the caption “Report of the Compensation Committee on Executive Compensation” in our definitive proxy statement in connection with the solicitation of proxies for our 2004 Annual Meeting of Stockholders to be held on June 16, 2004 (the “Proxy Statement”).

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      The following table sets forth our selected consolidated financial and operating data. The selected statement of operations, balance sheet and cash flow data are derived from our consolidated financial statements. PricewaterhouseCoopers LLP, independent accountants, have audited our consolidated financial statements for each of the five years ended February 1, 2004. You should read the data presented below together with our consolidated financial statements and related notes, the other financial information contained herein, and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

See accompanying notes on pages 14 and 15

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Notes to Selected Consolidated Financial Data

      (1) Our fiscal year consists of 52 or 53 weeks, ends on the Sunday nearest to January 31 and is named for the calendar year just ended. All fiscal years presented had 52 weeks except for fiscal 2000, which had 53 weeks.

      (2) In March 2003, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached consensus on certain matters discussed in EITF 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor”. EITF 02-16 states that allowances provided by our vendors are presumed to be a reduction in the costs of purchasing inventories (to be recognized in inventory and cost of sales), except for that portion that is a reimbursement for costs incurred by us to sell the vendors’ products. In order to qualify as a reimbursement, the costs must be specific, identifiable and incremental, to be recognized as a reduction to operating and administrative expenses. Under previous accounting guidance, we accounted for all non-performance based vendor allowances as a reduction of inventory cost and allocated performance based vendor allowances as a reduction of advertising expense or cost of goods sold, as appropriate, in the period the expense was incurred. During the first quarter of fiscal 2003, we adopted the provisions of EITF 02-16 and implemented a policy of considering all cooperative advertising arrangements and other vendor allowances to be a reduction of product costs, unless we are specifically required to substantiate costs incurred to the vendor and do so in the normal course of business. For fiscal 2002, 2001, 2000 and 1999, vendor allowances totaling approximately $19.2 million, $20.0 million, $17.9 million and $17.4 million, respectively, were classified as a reduction to advertising expense (in operating and administrative expense) rather than as a reduction to cost of sales as currently required by EITF 02-16.

      (3) During fiscal 2001, 2000 and 1999, we incurred transition and integration costs associated with certain store acquisitions of $0.2 million, $23.8 million and $30.2 million, respectively. These costs have been included in operating and administrative expenses.

      (4) Amounts relate to costs incurred in connection with the closure of existing stores. See discussions under Store Closures in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

      (5) During fiscal 2001 and 2000, we incurred charges associated with certain legal settlements of $2.0 million and $8.8 million, respectively. The $8.8 million in fiscal 2000 was settlement of a California class action lawsuit related to overtime pay for store and assistant store managers.

      (6) Consistent with our adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” we no longer incur any goodwill amortization for fiscal years subsequent to fiscal 2001.

      (7) Effective February 3, 2003, we adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. In accordance with SFAS No. 145, extraordinary losses as a result of the write-off of deferred debt issuance costs and other costs incurred in connection with the early extinguishments of debt that were previously classified as extraordinary have been reclassified to loss on debt retirement. In fiscal 2003 we recorded a loss on debt retirement of $49.5 million as a separate line in our consolidated statement of operations as a component of income before income taxes. In fiscal 2002 and 2001, we incurred pre-tax extraordinary losses of $6.0 million and $5.1 million, respectively, which we have reclassified as required by SFAS No. 145.

      (8) On March 1, 2000, we participated in the formation of a new joint venture, PartsAmerica.com, Inc. PartsAmerica.com engaged in the sale of automotive parts and accessories via e-commerce. During fiscal 2000, we invested approximately $3.2 million in this joint venture. During fiscal 2000, we wrote-off our investment in PartsAmerica.com.

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      (9) Represents sales to commercial accounts, including sales from stores without commercial sales centers.

      (10) Comparable store net sales data is calculated based on the change in net sales commencing after the time a new store has been open twelve months. Therefore, sales for the first twelve months a new store is open are not included in the comparable store calculation. Relocations are included in comparable store net sales from the date of opening.

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General

      Our fiscal year ends on the Sunday nearest to January 31 and is named for the calendar year just ended. Occasionally this results in a fiscal year that is 53 weeks long. When we refer to a particular fiscal year we mean the following:

	•	Fiscal 2003 means the 52 weeks ended February 1, 2004;
	•	Fiscal 2002 means the 52 weeks ended February 2, 2003; and
	•	Fiscal 2001 means the 52 weeks ended February 3, 2002.

      CSK Auto Corporation is the largest specialty retailer of automotive parts and accessories in the Western United States and one of the largest retailers of these products in the United States based, in each case, on our number of stores. As of February 1, 2004, we operated 1,114 stores under one fully integrated operating format and three brand names:

	•	Checker Auto Parts, founded in 1969, with 411 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;
	•	Schucks Auto Supply, founded in 1917, with 226 stores in the Pacific Northwest and Alaska; and
	•	Kragen Auto Parts, founded in 1947, with 477 stores primarily in California.

Executive Summary

      In fiscal 2003, we increased our comparable store sales by 6% while maintaining our gross margins, allowing us to increase our operating profit 14% over fiscal 2002. Our fiscal 2003 operating profit of $116.6 million included $12.7 million of store closing costs. Additionally, in the fourth quarter of 2003, we completed a refinancing which will significantly reduce our future annual interest costs. However, expenses related to refinancing activities in fiscal 2003 reduced our pre-tax income by $49.5 million. Our improvement in operating results reflects the following key business strategies:

      Drive Customer Traffic and Increase Sales Base. Our marketing and merchandising strategy is designed to drive customer traffic and build market share. Our strategy is to make available to our customers one of the broadest selections of quality brand name products on a timely basis in order to maximize customer satisfaction and generate loyal repeat customers. We also strive to be the industry leader in introducing new and innovative product offerings, supported by our 52-week promotional print advertising programs. We offer our products at competitive prices, in conveniently located and attractively designed stores. Our advertising programs are specifically tailored to target our various customer constituencies for maximum appeal and effectiveness.

      Targeted Pricing Philosophy. Our pricing philosophy is that we should not lose a customer because of price. Our pricing strategy is to offer everyday low prices at each of our stores. As a result, we closely monitor our competitors’ pricing levels through our precision pricing program, which analyzes prices at the store level rather than at the market or chain level. This initiative enables us to establish pricing levels at each store based upon that store’s local market competition. Our entry-level products offer excellent value by meeting standard quality requirements at low prices. In addition, our sales associates are encouraged to offer alternative products at slightly higher price points. These products typically provide extra features, improved performance, an enhanced warranty, or are nationally branded items.

      Focus on Customer Service. We aim to provide the highest level of customer service in our industry in order to generate repeat business by, among other things, staffing our stores with well trained associates, including an average of two ASE certified technicians per store, which allows us to provide high quality diagnostic support. Another integral part of our focus on customer satisfaction includes utilizing our sophisticated product distribution and store-level systems to provide our customers with a broad selection of parts and accessories on a timely basis.

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      Accelerate Growth of Hispanic Customer Base. Long-term upward trends in the Hispanic population, particularly in key markets in the Southwest and California, present an opportunity for increased sales and market share. We have implemented a Hispanic marketing initiative using Spanish language media and marketing messages to focus on this growing market segment. Seventeen of our key markets are currently included in the program.

      Continue to Improve Profitability and Cash Flow. We continually review our operations in order to ensure that we are optimally allocating our resources and have an appropriate cost structure that will enable us to grow our net sales, profitability and cash flow. In recent years we have generated increased cash flows and lowered outstanding debt balances. This was due largely to our improved operating results, which were fueled by strong comparable store sales, and by improving our gross margins and successfully leveraging our operating and administrative costs.

      Results of operations and outlook:

      We are very pleased with our operating results for fiscal 2003. Our merchandising department continues to improve our category management. This improvement has allowed us to achieve 6% annual comparable store sales increases, while at the same time control our inventory levels, which increased by only 2.4% during fiscal 2003 relative to fiscal 2002. Comparable sales were strong in all regions. Balanced growth across all regions demonstrates the strength of our merchandise and operational model. Superior customer service has resulted in higher dollar average transactions, fewer returns, and improved customer satisfaction. We believe our new items give our customers quality automotive related products at exceptional values. These new items have also enhanced the customer experience inside the store, giving our customers additional reasons to shop our stores.

      Our marketing program continues to drive sales. Weekly print advertising featuring exceptional values and new products has been very well received by our customers. Our promotional activities also played an important part in achieving our sales objectives for comparable store sales. Our Spanish language marketing campaign that we started in the spring of 2002 continues to be effective in communicating with our Spanish speaking customers.

      During fiscal 2003, we rolled out our Free Automotive Systems Test (called F.A.S.T.) diagnostic program to approximately half of our stores. This program allows customers to put a security deposit down to use diagnostic equipment that reads their vehicle’s onboard computer and retrieves diagnostic information. The information is then uploaded into our stores’ computers and the customer receives a print-out of the results. By assisting DIY customers with this information, we can get them the right parts the first time, improving customer service and lowering returns. Customer use of this program continues to increase and we remain committed to improving this new customer service.

      For fiscal 2004, we will continue our focus on top-line growth by increasing sales of existing product offerings and offering new products to attract new customers into our stores. We expect our sales to continue to grow, and we will use that growth to take advantage of lower product costs and the increased dollar average of sales, which should increase our operating margin dollars. At the same time, we expect to continue to improve our financial position.

      For fiscal 2004, we are forecasting same store sales increases in the low to mid single digit range. We expect our gross profit percentage for fiscal 2004 to approximate the levels of fiscal 2003. In January 2004, we completed a refinancing of our debt and expect pre-tax annual savings during fiscal 2004 of approximately $11.0 million to $13.0 million in interest expense, assuming no significant changes in variable interest rates.

Overview

      The discussion that follows includes several references to charges and effects relating to the following significant events that occurred during the periods covered:

	•	In June 2003, we refinanced our senior credit facility, increasing the availability and reducing the interest rate. In January 2004, we redeemed approximately 94% of our 12% senior notes, issued 7% senior subordinated notes, and amended our credit facility, increasing the availability and reducing the interest rate. We refer to these transactions as our 2003 Refinancing.

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	•	In July 2002, we sold approximately 6.9 million shares of common stock in an underwritten public offering at $12 per share. In addition, a selling stockholder sold approximately 2.6 million shares in this offering and, together with other affiliated stockholders, this stockholder group sold their remaining approximately 3.0 million shares on November 20, 2002. These transactions are referred to collectively as the secondary offerings.
	•	In August 2001, we initiated a refinancing of our capital structure that included the issuance of a convertible note and convertible debentures and a refinancing of our credit facility. We refer to these transactions as our 2001 Refinancing.
	•	In July 2001, we implemented a Profitability Enhancement Program to reduce costs, improve operating efficiencies and close under-performing stores. We refer to this as our PEP.

Results of Operations

      The following table sets forth our statement of operations data expressed as a percentage of net sales for the periods indicated:

     Net Sales

      Net sales and sales data for the prior three years were as follows (sales $ in thousands):

      Retail sales represent sales to the do-it-yourself customer. Commercial sales represent sales to commercial accounts, including sales from stores without commercial sales centers. We evaluate comparable (or same-store) sales based on the change in net sales commencing after the time a new or acquired store has been open for twelve months. Therefore, sales for the first twelve months a new or acquired store is open are

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      Retail sales and comparable store sales increased in fiscal 2003 compared to fiscal 2002 as a result of an increase in average sale per customer and the attraction of new customers to our stores through our new product offerings (including performance products, garage maintenance items and specialty auto related items). Commercial sales decreased slightly, while comparable stores commercial sales increased 4.8% in fiscal 2003 compared to fiscal 2002. The increase in comparable commercial sales reflects sales increases in our ongoing commercial centers, while the overall reduction in commercial sales reflects our consolidation of certain commercial sales centers in an effort to improve overall profitability.

      Net sales for all stores and comparable stores increased in fiscal 2002 compared to fiscal 2001 primarily due to: (1) our improved liquidity which allowed us to replenish our store inventories to more normal levels of product availability; (2) the commencement of a new merchandising program that features garage maintenance and organizational products; and (3) an increased emphasis on promotional activities and promotional pricing to stimulate customer awareness and improve customer counts in our stores. Total commercial sales increased 1.4% in fiscal 2002 compared to fiscal 2001.

     Gross Profit

      Gross profit consists primarily of net sales less the cost of sales and warehouse and distribution expenses. Gross profit as a percentage of net sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs.

      Gross profit for fiscal 2003 was $748.2 million, or 47.4% of net sales, compared to $700.2 million, or 46.5% of net sales for fiscal 2002. Adjusting fiscal 2002 for the effects of EITF 02-16 would have increased fiscal 2002 gross profit by $19.2 million and gross profit as a percent of net sales to 47.7%, which, as a percent of net sales, is relatively consistent with fiscal 2003. During fiscal 2003, we began selling several new product offerings, which resulted in higher average dollar transactions and higher gross profit dollars, but carry slightly lower gross profit rates. Sales of these new products allows us to further leverage our fixed store level selling and operational costs. The lower margins on new products are partially offset by our continued emphasis on lowering acquisition costs of inventory in our existing product categories.

      Gross profit for fiscal 2002 was $700.2 million, or 46.5% of net sales, compared to $648.0 million, or 45.0% of net sales for fiscal 2001. Gross profit increased in fiscal 2002 over fiscal 2001 due to increased cash discounts and vendor allowances as a result of our improved sales volume and liquidity. Gross profit was negatively impacted in fiscal 2001 primarily as a result of our PEP, in which $23.1 million of charges were incurred relating to reduction in inventory values and costs associated with inventory review and disposal. Although we had anticipated higher gross profit levels for 2001, we did not achieve this result because of lower than expected vendor volume purchase allowances and cash discounts during the year due principally to lower than typical in-stock inventory levels in the 2001 period. We have historically utilized prompt payment and other cash discount programs offered by vendors. Because of the need to pay for a class action lawsuit settlement and term loan amortization payments, we made efforts to retain cash during most of fiscal 2001 and did not take full advantage of the contractual vendor allowances. In addition, our change of advertising strategy to emphasize promotional discounts through newspaper advertising to increase retail customer count resulted in a reduction to the realized gross profit margin during the period.

     Operating and Administrative Expenses

      Operating expenses consist of operating and administrative expenses and also include the costs of store closing and restructuring costs (including the PEP), legal settlements, secondary offering costs and goodwill amortization (in fiscal years prior to 2002). Operating and administrative expenses are comprised of store payroll, store occupancy, advertising expenses, other store expenses and general and administrative expenses, including salaries and related benefits of corporate employees, administrative office occupancy expenses, data processing, professional expenses and other related expenses.

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      Operating expenses increased by approximately $33.9 million to $631.5 million, or 40.0% of net sales, in fiscal 2003 from $597.7 million, or 39.7% of net sales, in fiscal 2002. The following items impacted the comparability of operating expenses for the fiscal years indicated:

	•	Net advertising expense in fiscal 2002 included $19.2 million of vendor allowances, which reduced operating expenses and, as a result of EITF 02-16, similar allowances were classified in cost of sales during fiscal 2003.
	•	Store closing and other restructuring costs were $7.6 million higher during fiscal 2003 than in fiscal 2002, primarily as a result of charges associated with our change in closed store strategy during the fourth quarter of fiscal 2003 (see Note 13 to the Consolidated Financial Statements).
	•	During fiscal 2002, we incurred a charge for workers’ compensation of approximately $4.9 million reflecting increased loss reserves for claims incurred during plan years 1999 through 2001 and claims relating to the acquired PACCAR stores, in response to increasing medical and claims costs, primarily in California.
	•	Operating expenses as a percent of sales continue to be favorably impacted by our ability to leverage our fixed operating costs over our increasing sales and our continued focus on expense controls.

      Operating expenses decreased by approximately $11.6 million to $597.7 million, or 39.7% of net sales, in fiscal 2002 from $609.3 million, or 42.3% of net sales, in fiscal 2001. Operating expenses in fiscal 2001 were impacted by the following:

	•	Store closing and other restructuring charges of $21.5 million associated with our PEP.
	•	Charges of $4.8 million for amortization of goodwill, which in subsequent fiscal years, is no longer amortized.
	•	The settlement of a lawsuit for $2.0 million.

     Interest Expense

      Interest expense for fiscal 2003 decreased to $51.0 million from $62.3 million for fiscal 2002. This decrease primarily reflects a $7.0 million reduction in interest expense due to lower average outstanding debt levels throughout the year and a $3.1 million reduction in interest expense as a result of lower average interest rates due, in part, to our 2003 Refinancing.

      Interest expense for fiscal 2002 increased to $62.3 million from $61.6 million for the comparable period of fiscal 2001. Higher average interest rates, primarily on our fixed rated debt, and increased amortization of deferred financing fees as a result of our 2001 Refinancing, increased interest expense. These increases were partially offset by reduced interest expense associated with lower average outstanding debt balances and less vendor interest on accounts payables because of our improved liquidity in fiscal 2002. In addition, during February 2002, we entered into an interest rate swap agreement, which reduced our interest expense by $2.4 million during fiscal 2002.

      In January 2004, we completed a refinancing of our debt that included the redemption of approximately 94% of our outstanding $280.0 million 12% senior notes, the issuance of $225.0 million 7% senior subordinated notes and the amendment of our senior credit facility. In conjunction with these transactions, we incurred a loss on debt retirement of $45.2 million that included early redemption premiums, the write-off of certain deferred financing fees and other direct costs partially offset by a prorata adjustment representing the unamortized gain on a terminated interest rate swap. In June 2003, we refinanced our senior credit facility and redeemed the remaining balance of our outstanding 11% senior subordinated notes. In conjunction with these transactions, we incurred a loss on debt retirement of approximately $4.3 million that included early redemption premiums, the write-off of certain financing fees and other direct costs. As a result of all of these transactions, we recorded a total of $49.5 million in loss on debt retirement during fiscal 2003.

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      During fiscal 2002, we redeemed $71.7 million of our 11% senior subordinated notes. In conjunction with this transaction, we incurred a loss on debt retirement of $6.0 million that included early redemption premiums, the write-off of certain financing fees and other direct costs.

      During fiscal 2001, we used the proceeds from a note offering together with borrowings under a $300.0 million credit facility and the gross proceeds of a $50.0 million private placement of 7% convertible subordinated debentures to refinance our prior credit facility. In conjunction with these transactions, we incurred a loss on debt retirement of approximately $5.1 million for the write-off of certain financing fees.

      Income tax expense for fiscal 2003 was $5.3 million or 33.0% of income before income taxes, compared to $12.4 million or 36.3% for fiscal 2002. The effective tax rate in fiscal 2003 is lower than the effective tax rate in fiscal 2002 primarily due to an adjustment of tax reserves in 2003 relating to a matter for which the statute of limitations expired.

      Income tax expense for fiscal 2002 was $12.4 million or 36.3%, compared to an income tax benefit of $10.9 million or 38.7% for fiscal 2001. The effective tax rate in fiscal 2002 is lower than the effective tax rate benefit in fiscal 2001 primarily as a result of 2002 state tax credits.

Profitability Enhancement Program (PEP)

      During the second quarter of fiscal 2001, we implemented our PEP to reduce costs, improve operating efficiencies and close under-performing stores. As a result of the PEP, we recorded total restructuring and other charges of $44.6 million, which are detailed in the following paragraphs. The table below summarizes the charges relating to the PEP:

      Under the PEP, we increased the store closing reserve by approximately $13.7 million. Approximately $6.8 million of the charge related to the planned closure of 36 stores based on several factors including market saturation, store profitability, and store size and format. Of these planned closures, 34 were closed as of February 2, 2003 and charges relating to two of the stores were subsequently eliminated from the reserve upon the sale of these stores and the transfer of the lease commitments to the new owner. In addition, we recorded an increase to the reserve for prior years plans of approximately $6.9 million relating to existing closed stores that had longer than anticipated vacancy periods as a result of the continued economic slowdown. The PEP charge also includes a $6.6 million write-down for impairment of leasehold improvements and other store-related property and equipment, which has been recorded as a direct reduction of net property and equipment balances. See Store Closures in a subsequent section of this Management’s Discussion and Analysis of

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      As a result of the consolidation of certain regional operations and general and administrative functions under our PEP, we terminated 36 employees and eliminated 84 open positions. The terminated employees worked primarily in human resources, information technology and real estate. As a result of these actions, the restructuring charges included a provision for severance and benefits of approximately $0.4 million.

      We have also accrued other costs and charges incidental to the restructuring. These costs include early termination fees for operating lease commitments and other asset impairments aggregating approximately $0.7 million.

      As a part of the PEP, we completed an inventory review to: (1) increase inventory turnover; (2) provide an optimal inventory level at each store location; (3) liquidate inventory not meeting our new asset return levels; and (4) write down the carrying value of inventory relating to the 36 stores planned for closure. As a result of the analysis, we elected to establish a reserve for excess inventories resulting from the decision to eliminate certain product lines and to liquidate inventory from closed stores. In conjunction with this decision, a provision of $17.3 million was recorded to reduce inventory values. In addition, we incurred actual costs of approximately $5.8 million related to labor, warehouse and distribution, freight and other operating costs associated with the inventory review and disposal. These costs are reflected as cost of sales in the accompanying statement of operations for fiscal 2001.

      Based on the initiatives described above, the PEP reduced fiscal 2003 and 2002 operating expenses by approximately $3.5 million, which related to the reduction of certain personnel, communications and transportation costs. We anticipate that these cost savings will be applicable to future years as well. In addition, the stores closed as a result of the PEP incurred operating losses of $0.1 million and $3.6 million for fiscal 2002 and 2001, respectively. Certain of these stores incurred operating losses during fiscal 2002 as a result of their remaining open for a portion of the year. All stores were closed prior to the end of fiscal 2002.

Liquidity and Capital Resources

      In January 2004, we completed a refinancing of our debt that included the redemption of approximately 94% of our outstanding $280.0 million 12% senior notes and the issuance of $225.0 million 7% senior subordinated notes. The new 7% senior subordinated notes mature on January 15, 2014 and require semi-annual interest payments on January 15 and July 15. We also amended our senior credit facility, increasing the amount of our facility by $75.0 million to $400.0 million, consisting of a $255.0 million term loan and a $145.0 million revolving credit facility. The new term loan is to be repaid in eleven installments consisting of nine $1.275 million dollar payments made semiannually beginning in June 2004. The last two payments are for approximately $121.8 million each in December 2008 and at maturity, June 2009. The revolving credit facility matures in June 2008. At February 1, 2004 there were no borrowings under the revolving credit facility. Interest accrues under the new credit facility at a variable rate, which is a function of the spread over the Alternate Base Rate (as defined in the agreement) or the Eurodollar Rate (as defined in the agreement) depending on our borrowing decisions. The senior credit facility that we amended was established in June 2003 when we replaced our $300.0 million senior credit facility with a new $325.0 million senior collateralized, asset based credit facility consisting of a $200.0 million term loan and a $125.0 million revolving credit commitment. We used proceeds from the June 2003 senior credit facility to redeem the remaining $9.5 million in aggregate principal amount of our 11% senior subordinated notes, including accrued and unpaid interest

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      In conjunction with the above mentioned transactions, we applied the provisions of EITF 98-14 “Debtor’s Accounting for Changes in Line of Credit or Revolving Debt Arrangements” for the revolving credit portion of the credit facilities and EITF 96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” for the term portion of the credit facilities. In total in 2003, we incurred a loss on debt retirement of $49.5 million that included early redemption premiums, the write-off of certain financing fees, a prorata adjustment representing the unamortized fair market value swap adjustment (as noted below) and other direct costs. The carrying value of deferred debt issuance costs totaling $10.3 million (as of the January 2004 transaction date) is being amortized to interest expense over the corresponding life of the respective portion of the senior credit facility or the 7% senior subordinated notes.

      Our intention is to redeem the remaining $14.9 million of the 12% senior notes in December 2004 when callable at 106% of their principal amount plus accrued and unpaid interest. We anticipate that we will incur a charge associated with this transaction of approximately $0.9 million for the redemption premium, write-offs associated with deferred financing fees and fair value adjustment of the related interest rate swap that we entered into in February 2002 as discussed below.

      During February 2002, we entered into an interest rate swap agreement that effectively converted the interest rate payment obligation on $100.0 million of our 12% senior notes to a floating rate in order to hedge the fair value of such notes against potential movements in market interest rates. On June 5, 2003, we terminated the swap agreement and received in consideration thereof the sum of $6.0 million, which represented the fair market value of the swap agreement on that date. Upon redemption in January 2004 of approximately 94% of the 12% senior notes associated with the swap agreement, we wrote off approximately 94% of the unamortized fair market value adjustment as an offset to the loss on debt retirement. The remaining fair market value adjustment is currently reflected on our consolidated balance sheet as part of our long-term debt. This amount will be amortized as an offset to interest expense through the maturity date of the 12% senior notes (June 15, 2006) or will be written off upon their anticipated earlier redemption as described above.

      On April 5, 2004, we entered into an interest rate swap agreement to effectively convert $100.0 million of our 7% senior subordinated notes due 2014 to a floating rate, set quarterly in arrears, equal to the 6 month LIBOR + 283 basis points. The agreement is for the term of the notes. The hedge will be accounted for as a “fair value” hedge; accordingly, the fair value of the derivative and changes in the fair value of the underlying debt will be reported on our consolidated balance sheet and recognized in results of operations. Based upon our assessment of effectiveness of the hedge, changes in the fair value of this derivative and the underlying debt are not expected to result in a material impact on net income.

      Debt is an important part of our overall capitalization. While we are still highly leveraged, our outstanding debt continues to decline. Our outstanding debt balance at the end of fiscal 2003 was $520.3 million, a decrease of $150.5 million from our outstanding debt of $670.8 million at the end of fiscal 2001. Our primary cash requirements include working capital (primarily inventory), interest on our debt and capital expenditures. We intend to finance our cash requirements with cash flow from operations, borrowings under our senior credit facility and short-term trade credit relating to extended payment terms for inventory

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      Our cash balance has improved due to higher sales and operating profit and reduced interest expense. The availability under our senior credit facility has increased $100.0 million as a result of our 2003 Refinancing. This increase in availability is partially offset by the outstanding loan balance of our senior credit facility being $53.0 million higher in fiscal 2003 than in fiscal 2002 primarily due to the increase in the term portion of the credit facility and $6.1 million of additional letter of credit commitments relative to fiscal 2002. Finally, our borrowing capacity was $24.5 million lower at February 3, 2003 due to borrowing base restrictions under our prior credit facility.

      At the end of fiscal 2003, we had net working capital of $574.9 million, an increase of $46.1 million, or 8.7%, compared to fiscal 2002. Working capital increased primarily due to: (1) a $21.7 million increase in cash due to our increasing sales and profitability; (2) a $15.5 million increase in inventories consistent with the acquisition of new product types in support of our new merchandise programs; and (3) a $15.6 million increase in receivables primarily as a result of new vendor rebate and cooperative advertising programs. These increases were partially offset by working capital decreases from: (1) a $3.4 million increase in accounts payable relating to increased inventory purchases; (2) a $6.1 million increase in accrued payroll related expenses primarily as a result of increased workers compensation reserves; and (3) a $2.6 million increase in current liabilities due to the required amortization payments on our new term loan.

Analysis of Cash Flows

      During fiscal 2003, net cash provided by operating activities was $50.6 million compared to $35.9 million of cash provided by operating activities during fiscal 2002. The most significant components of the change are: (1) a cash outflow of $39.2 million during fiscal 2003 related to premiums paid to purchase debt; (2) a cash inflow during fiscal 2003 of $6.0 million associated with the termination of our interest rate swap agreement; and (3) a decrease in cash used to support working capital requirements as inventory growth offset by accounts payable was $12.1 million during fiscal 2003 compared to $18.4 million during fiscal 2002.

      During fiscal 2002, net cash provided by operating activities was $35.9 million compared to $7.9 million of cash used in operating activities during fiscal 2001. The significant components of the change are: (1) net income for fiscal 2002 of $21.8 million compared to a loss of $17.2 million in the fiscal 2001 period, which is partially offset by $25.4 million of non-cash inventory and fixed asset charges during the 2001 period as a result of our PEP; (2) net changes in other assets and liabilities, whereby $44.0 million was used during fiscal 2002 compared to $55.4 million during fiscal 2001; (3) a $4.4 million premium payment made during fiscal 2002 as part of our retirement of $71.7 million of outstanding 11% senior subordinated notes; and (4) an $8.8 million payment made during fiscal 2001 as a result of our settlement of certain class action lawsuits.

      Net cash used in investing activities totaled $19.2 million in fiscal 2003, compared to $6.6 million used in investing activities during fiscal 2002. Capital expenditures increased to $16.1 million during fiscal 2003 as compared to $9.6 million during the comparable period in fiscal 2002. The increase in capital expenditures relates to the upgrade of certain information systems along with the purchase of certain leased assets. In addition, during the fiscal 2002 period we received $2.2 million in proceeds from certain fixed asset sales and $4.2 million in cash proceeds from the sale of 13 stores in west Texas.

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      Net cash used in investing activities totaled $6.6 million in fiscal 2002 compared to $10.1 million used in investing activities during fiscal 2001. The decrease in cash used in investing activities during fiscal 2002 was the result of: (1) $4.2 million in proceeds from the sale of 13 stores in west Texas in fiscal 2002; and (2) $2.6 million less in capital expenditures in fiscal 2002 than in the comparable 2001 period. These sources of cash were offset in part by $3.3 million less in proceeds from assets held for sale in fiscal 2002.

      We have budgeted approximately $20.0 million for capital expenditures for fiscal 2004, primarily for new stores and general corporate purposes. We opened, relocated or expanded 27 stores in fiscal 2003 and expect to open, relocate or expand approximately 45 stores in fiscal 2004. We anticipate that the majority of these stores will be financed under arrangements structured as operating leases that require minimal capital expenditures for fixtures and store equipment. For the remainder of our planned new, relocated or expanded stores, we expect to spend approximately $125,000 per store for leasehold improvements. In addition to capital expenditures, each new store, except for relocated stores, will require an estimated investment in working capital, principally for inventories, of approximately $300,000.

      Net cash used in financing activities totaled $9.7 million in fiscal 2003, compared to $29.9 million used in financing activities during fiscal 2002. As a result of our 2003 Refinancing, we generated $22.5 million of net financing proceeds. In fiscal 2002, we sold approximately 6.9 million shares of our common stock in an underwritten public offering and used the proceeds to redeem a portion of our 11% senior subordinated notes. The stock sales and note redemption resulted in net cash proceeds of $6.4 million. The most significant components of the change in financing activities year over year relate to: (1) net cash received from the 2003 Refinancing provided $16.1 million more in cash than the sale of stock and note redemption in fiscal 2002; (2) net payments on normal loan activity during fiscal 2003 were $7.0 million higher than net loan payments in fiscal 2002; (3) payments on capital lease obligations in fiscal 2003 were $6.0 million higher than in fiscal 2002 primarily resulting from the buy-out of certain lease obligations; and (4) stock option exercises in fiscal 2003 provided $15.8 million of additional cash year over year. The following table highlights the components of our 2003 Refinancing and its effect on our financing activities for fiscal 2003 ($ in thousands):

      Net cash used in financing activities totaled $29.9 million in fiscal 2002 compared to $23.0 million provided by financing activities in fiscal 2001. In fiscal 2002, we issued additional stock and used the proceeds to redeem a portion of our 11% senior subordinated notes. Those fiscal 2002 transactions resulted in net cash proceeds of $6.4 million. In fiscal 2001 we completed a refinancing that provided $37.2 million in net cash proceeds. The most significant components of the change in financing activities year over year relate to: (1) net cash received from the refinancing in fiscal 2001 provided $30.8 million more in cash than the sale of stock and note redemption in fiscal 2002; (2) net payments on normal loan activity during fiscal 2002 were $23.7 million higher than net loan payments in fiscal 2001.

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Off-Balance Sheet Arrangements and Contractual Obligations

      We lease our office and warehouse facilities, all but one of our retail stores, and some of our equipment. Certain of the equipment leases are classified as capital leases and, accordingly, the equipment and related obligation are recorded on our balance sheet. However, substantially all of our store leases are operating leases with private landlords and provide for monthly rental payments based on a contractual amount. The majority of these lease agreements are for base lease periods ranging from 10 to 20 years, with three to five renewal options of five years each. Certain store leases also provide for contingent rentals based upon a percentage of sales in excess of a stipulated minimum. We believe that the long duration of our store leases offer security for our store locations without the risks associated with real estate ownership.

      We currently have leases for our corporate headquarters and an adjacent parking lot with a landlord, which until November 2002, was a related party. Previously we had entered into sale-leaseback or other financing arrangements with related parties. We believe that the terms of the transactions with the related parties were no less favorable than terms we may have been able to receive from independent third parties at the time of the applicable transaction. We also believe that these transactions as a whole are not material to our financial statements. For more information on related party transactions, refer to Note 4 of the Consolidated Financial Statements.

      In order to facilitate an understanding of our contractual obligations and commercial commitments, the following data is provided ($ in thousands):