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(Dollar Amounts in Millions except Per Share Information and as Otherwise Noted) 

During 2002, the Company began its Customer Service Project (CSP). This project centers on stocking a broader inventory in each of our stores and displaying it so our customers can service themselves. The Company believes the CSP will shift our inventory-stocking model from its historical mix of approximately 60% store and 40% distribution center to approximately 75% store and 25% distribution center (DC). We believe this can be accomplished by expanding the inventory in the stores to the CSP format (discussed below), and then by subsequently reducing the distribution center inventory. This would allow us to operate in the future with inventory turns similar to, or just slightly lower than, the periods before the CSP, and would have a lower impact on cash flows from operations in the future. 

The mix of inventory stocked at the store versus the distribution center locations was as follows: 

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The inventory stocked under the CSP format consists of a core stocking level of approximately $62 thousand per location. Existing stores which have not yet converted to the CSP format stock some, but not all, of the inventory stocked under the CSP format. Existing stores converted to the CSP format have experienced increases in their inventory levels as they fill out the product selection. New stores, prior to commencement of the CSP, opened with approximately $25 thousand of inventory per location, and would grow this amount to approximately $50 thousand after operating for twelve months. The Company currently intends to convert approximately 40 stores per month to the CSP format and to continue opening all new stores with the CSP format. 

We added $74 to the existing inventories in 2004T. The growth was primarily driven by four factors. The first factor was the growth of the Company’s sales, and the inventory necessary to support the business; this resulted in approximately $19 of additional inventory. The second factor was the aforementioned price inflation on inbound product; this resulted in 

approximately $13 of additional inventory. The third factor was the combined impact of the number of store locations opened (new stores) and the number of existing stores converted to the CSP format (converted stores). Combined, the new stores and converted stores resulted in approximately $19 of additional inventory. The final factor was expansion of our manufacturer direct purchasing. Inventory purchased in this fashion turns slower than if purchased thru other suppliers, and resulted in approximately $23 of additional inventory. While the inventory growth has impacted the Company’s working capital model, the added depth of inventory allowed the Company to avoid certain ‘fill in’ buys during the year. These ‘fill in’ buys, while a necessary component of our supply chain, are typically at a premium and adversely impact gross margins. The Company expects the factors cited above will cause inventory to grow in 2005. 

Net cash used in investing activities was: 

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The 2004 increase in net cash used in investing activities resulted primarily from the increase in purchases of capital equipment and the reduction in marketable securities. The 2003 decrease in net cash used in investing activities resulted primarily from the reduction in marketable securities, which more than offset the absence of the proceeds from the DIY Business sale which the Company received in 2002. 

The Company had future commitments for leased facilities and for leased vehicles at December 31, 2004. The Company had $9.7 and $6.5 of long-term debt related to an Industrial Revenue Bond (IRB) at December 31, 2004 and 2003, respectively. The future contractual cash obligations related to the commitments are as follows: 

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