CSK Auto 10Q/A 2004 Q3 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A


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


				For the quarterly period ended August 1, 2004


		o		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 001-13927

CSK Auto Corporation

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of Incorporation or organization)		86-0765798 (I.R.S. Employer Identification No.)


645 E. Missouri Ave. Suite 400, Phoenix, Arizona (Address of principal executive offices)		85012 (Zip Code)

(602) 265-9200
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year,
if changed since last report)

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. Yesþ Noo.

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

As of September 7, 2004, CSK Auto Corporation had 45,278,966 shares of common stock outstanding.

Explanatory Note

As previously disclosed in the Current Report on Form 8-K as filed by CSK Auto Corporation, (the “Company”) on April 18, 2005, the Audit Committee of the Board of Directors of the Company and management of the Company concluded that, due to certain accounting errors, the Company’s annual financial statements for the fiscal years ended February 1, 2004 (fiscal 2003) and February 2, 2003 (fiscal 2002), and the related interim financial statements for each of the quarters within those years, as well as the first three quarters for the fiscal year ended January 30, 2005 (fiscal 2004), should be restated.

The restatements contained in this Form 10-Q/A for the quarterly period ended August 1, 2004 reflect corrections and adjustments required as a result of the following items.

1. In the course of the Company’s review of its lease accounting practices, the Company identified accounting errors pertaining to the evaluation of lease terms (thus impacting the amortization of leasehold improvements), free rent periods (i.e., rent holidays), straight-lining of minimum lease payments, the classification of landlord incentives/allowances, and the treatment of costs incurred for certain stores that are constructed and subsequently transferred to our landlords.

2. The Company has historically recognized estimated vendor allowances in a systematic manner ratably over a performance period that ran from October through September. This recognition period was initially selected to match the expected benefits to be received with expected costs the Company was incurring to perform promotional activities. The Company reevaluated this accounting convention and concluded that the recognition period should be corrected to the contractual period which corresponds to a calendar year because substantially all allowances are determined and collected based on purchases from vendors in the calendar year.

3. The Company also recently identified vendor allowances recorded in prior periods that will not be collected and has determined that the amounts were recorded in error and should not have been recognized in earlier periods. In addition, we identified certain vendor allowances recorded in improper periods.

4. The Company implemented a voluntary change in accounting for inventory costs from the Last-In, First-Out (LIFO) method to the First-In, First-Out (FIFO) method of accounting for inventories in fiscal 2004. Such a change in inventory accounting method requires a retroactive restatement of prior periods and has a material impact on the Company’s historical financial statements. The Company believes the change is preferable because it will result in reported inventory cost on our balance sheet that approximates replacement costs instead of higher historical costs under LIFO. A preferability letter from our independent registered public accounting firm, PricewaterhouseCoopers LLP, was filed with the Securities and Exchange Commission on May 2, 2005 as part of the Company's Annual Report on Form 10-K.

See Note 1, Accounting Change and Restatements of Financial Statements, in the accompanying Consolidated Financial Statements (including the notes thereto), and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the impact of these restatements. This amended Quarterly Report on Form 10-Q/A amends and restates only those items of the previously filed Form 10-Q for the thirteen and twenty-six weeks ended August 1, 2004 and August 3, 2003, that have been affected by these restatements. In order to preserve the nature and character of the disclosures set forth in such items as originally filed, no attempt has been made in this amendment to modify or update the disclosures in the original Quarterly Report on Form 10-Q except for the foregoing restatements. As a result, this amended Quarterly Report on Form 10-Q/A contains forward-looking information that has not been updated for events subsequent to the date of the original filing, and all information contained in this amended Quarterly Report on Form 10-Q/A and the original Report on Form 10-Q is subject to updating and supplementing as provided in the periodic reports that the Company has filed and/or will file with the SEC after the original filing date of the Quarterly Report on Form 10-Q.

TABLE OF CONTENTS


	Page
PART I — Financial Information
Item 1. Financial Statements (unaudited) – As Restated
Consolidated Balance Sheets		4
Consolidated Statements of Operations		5
Consolidated Statement of Stockholders’ Equity		6
Consolidated Statements of Cash Flows		7
Notes to Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		30
Item 1. Legal Proceedings		32
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		32
Item 3. Defaults Upon Senior Securities		33
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 5. Other Information		33
Item 6. Exhibits and Reports on Form 8-K		33
Signature		35
Exhibit 31.1
Exhibit 31.2
Exhibit 32.0

PART I

FINANCIAL INFORMATION

Item 1.Financial Statements

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	August 1,			February 1,
	2004			2004
	(Restated)			(Restated)
ASSETS
Cash and cash equivalents	$	44,615		$	37,221
Receivables, net of allowances of $773 and $1,577, respectively		87,724			91,932
Inventories		556,111			522,849
Deferred income taxes		53,019			67,857
Prepaid expenses and other current assets		19,908			21,123


Total current assets		761,377			740,982


Property and equipment, net		138,915			140,275
Leasehold interests, net		11,371			12,278
Goodwill		127,069			127,069
Other assets, net		32,249			27,388


Total assets	$	1,070,981		$	1,047,992


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	206,022		$	177,150
Accrued payroll and related expenses		43,824			47,498
Accrued expenses and other current liabilities		48,403			49,617
Current maturities of long term debt		2,787			2,743
Current maturities of capital lease obligations		6,910			10,240

Total current liabilities		307,946			287,248


Long term debt		489,357			498,726
Obligations under capital leases		9,630			15,017
Deferred income taxes		4,683			3,333
Other liabilities		51,886			45,257

Total non-current liabilities		555,556			562,333

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 58,000,000 shares authorized, 45,278,186 and 46,497,936 shares issued and outstanding at August 1, 2004 and February 1, 2004, respectively		453			465
Additional paid-in capital		447,569			466,576
Stockholder receivable		(65	)		(73	)
Accumulated deficit		(240,478	)		(268,557	)

Total stockholders’ equity		207,479			198,411


Total liabilities and stockholders’ equity	$	1,070,981		$	1,047,992

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	August 1,		August 3,		August 1,		August 3,
	2004		2003		2004		2003
	(Restated)		(Restated)		(Restated)		(Restated)
Net sales	$	409,057	$	418,514	$	806,111	$	795,963
Cost of sales		214,989		228,790		423,348		443,386


Gross profit		194,068		189,724		382,763		352,577
Other costs and expenses:
Operating and administrative		160,498		158,748		319,210		307,707
Store closing costs		561		43		887		136


Operating profit		33,009		30,933		62,666		44,734
Interest expense, net		7,966		13,610		16,580		27,880
Loss on debt retirement		—		4,315		—		4,315


Income before income taxes		25,043		13,008		46,086		12,539
Income tax expense		9,779		4,992		18,007		4,733


Net income	$	15,264	$	8,016	$	28,079	$	7,806


Basic earnings per share:
Net income	$	0.33	$	0.18	$	0.61	$	0.17


Shares used in computing per share amounts		46,184		45,217		46,349		45,183


Diluted earnings per share:
Net income	$	0.33	$	0.18	$	0.60	$	0.17


Shares used in computing per share amounts		46,466		45,499		46,675		45,274

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)


							Additional
	Common Stock						Paid-in			Stockholder			Accumulated			Total
	Shares			Amount			Capital			Receivable			Deficit			Equity
Balances at February 1, 2004 (Restated)		46,497,936		$	465		$	466,576		$	(73	)	$	(268,557	)	$	198,411
Exercise of options		52,652			—			531			—			—			531
Issuances of restricted stock		2,554			—			45			—			—			45
Tax benefit relating to stock option exercises		—			—			169			—			—			169
Repurchase and retirement of common stock		(1,274,956	)		(12	)		(19,752	)		—			—			(19,764	)
Recovery of stockholder receivable		—			—			—			8			—			8
Net income (Restated)		—			—			—			—			28,079			28,079


Balances at August 1, 2004 (Restated)		45,278,186		$	453		$	447,569		$	(65	)	$	(240,478	)	$	207,479

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Twenty-Six Weeks Ended
	August 1,			August 3,
	2004			2003
	(Restated)			(Restated)
Cash flows from operating activities:
Net income	$	28,079		$	7,806
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		15,652			17,534
Amortization of deferred financing costs		965			2,367
Amortization of long term debt fair market value adjustment		(53	)		(307	)
Amortization of other items		2,133			1,900
Accretion of debt discount		28			461
Losses on disposal of property, equipment and other assets		478			549
Tax benefit relating to stock option exercises		169			302
Write off of debt issuance costs		—			2,268
Premium paid on early retirement of debt		—			(350	)
Proceeds from interest rate swap termination		—			6,031
Deferred income taxes		16,187			3,803
Change in operating assets and liabilities:
Receivables		5,332			13,672
Inventories		(38,707	)		(15,530	)
Prepaid expenses and other current assets		1,215			(2,978	)
Accounts Payable		26,398			9,360
Accrued payroll, accrued expenses and other current liabilities		(4,062	)		(1,204	)
Other operating activities		(265	)		1,347


Net cash provided by operating activities		53,549			47,031


Cash flows from investing activities:
Capital expenditures		(14,528	)		(7,379	)
Proceeds from sales of PP&E		16			23
Other investing activities		(1,669	)		(1,689	)

Net cash used in investing activities		(16,181	)		(9,045	)


Cash flows from financing activities:
Borrowings under senior credit facility		20,600			281,000
Payments under senior credit facility		(21,875	)		(283,000	)
Retirement of balance of 11% senior subordinated notes		—			(9,547	)
Payment of debt issuance costs		(892	)		(4,047	)
Payments on capital lease obligations		(8,975	)		(5,814	)
Proceeds from seller financing arrangements		650			1,120
Payments from seller financing arrangements		(101	)		(82	)
Proceeds from repayment of stockholder receivable		8			168
Proceeds from exercise of stock options		531			2,867
Repurchase of common stock		(19,764	)		—
Other financing activities		(156	)		(146	)


Net cash used in financing activities		(29,974	)		(17,481	)


Net increase in cash and cash equivalents		7,394			20,505
Cash and cash equivalents, beginning of period		37,221			15,519


Cash and cash equivalents, end of period	$	44,615		$	36,024

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Thirteen and Twenty-six Weeks Ended August 1, 2004

CSK Auto Corporation is a holding company. At August 1, 2004, CSK Auto Corporation had no business activity other than its investment in CSK Auto, Inc. (“Auto”), a wholly owned subsidiary. On a consolidated basis, CSK Auto Corporation and its subsidiaries are referred to herein as the “Company”, “we”, “us”, or “our”.

Auto is a specialty retailer of automotive aftermarket parts and accessories. At August 1, 2004, we operated 1,123 stores in 19 states as a fully integrated company and single business segment under three brand names: Checker Auto Parts, founded in 1969 and operating in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii; Schuck’s Auto Supply, founded in 1917 and operating in the Pacific Northwest and Alaska; and Kragen Auto Parts, founded in 1947 and operating primarily in California.

Note 1 — Accounting Change and Restatements of Financial Statements

We implemented a voluntary change in accounting for inventories, which is effected by a retroactive restatement of our historical financial statements. In addition, we identified errors in our accounting for leases and vendor allowances, which required a restatement of our previously issued historical financial statements.

Change in inventory accounting method

We historically used the last-in, first-out (“LIFO”) method for accounting for inventories. In the fourth quarter of fiscal 2004, we changed our method of determining the cost of inventories to the first-in, first-out (“FIFO”) method. We have applied this accounting change retroactively by restating prior period financial statements as required by Accounting Principles Board Opinion No. 20,Accounting Changes.

Our inventory levels over the last five years have increased modestly due to new store openings and growth. During the same time, we were able to reduce the overall unit costs of our inventories. In this environment, our LIFO method of accounting was resulting in an increasing difference between the carrying cost of inventories on our balance sheet and our current product acquisition costs. The carrying cost on our balance sheet under LIFO reflected the higher prices paid for inventories in prior periods and also included higher costs paid for inventories purchased in connection with business acquisitions the last of which occurred in fiscal 1999. Since we do not expect the pricing environment for most products we purchase to change dramatically in the foreseeable future, this difference between LIFO cost and replacement cost can be expected to continue and possibly increase as we continue to pursue strategies to reduce our product acquisition costs. In the fourth quarter of fiscal 2004, we changed to the FIFO method of inventory accounting which will result in reported inventory cost on our balance sheet that approximates replacement costs, which we believe is preferable to continuing to report our inventories at the higher costs we experienced in prior years.

Although the primary effect of the change was a decrease in inventory on our balance sheet, it also has a significant impact on our determination of cost of sales because of differences in unit costs and increases in the amount of vendor allowances and inventory purchasing and handling costs that will remain in inventory at period end under FIFO. As shown in the tables below, the change had the effect of decreasing our cost of sales and increasing our gross profit by approximately $3.2 million and $4.1 million in the thirteen and twenty six weeks ended August 1, 2004. The change increased our cost of sales and decreased our gross profit by approximately $4.6 million and $18.4 million in the thirteen and twenty-six weeks ended August 3, 2003.

Lease accounting restatement

We operate in excess of 1,100 leased locations, primarily consisting of retail stores but also including warehouses, distribution centers and our corporate office facilities. We identified accounting errors pertaining to the evaluation of lease terms (thus impacting our amortization of leasehold improvements), free rent periods (i.e., rent holidays), straight-lining of minimum escalating lease payments, the classification of landlord incentives/allowances, and the treatment of costs incurred for certain stores which are constructed and subsequently transferred to our landlords. We have corrected these errors by restating prior period financial statements.

We reevaluated our lease terms for our operating leases, which resulted in a reduction to the useful life assumption for depreciating leasehold improvements. We previously depreciated leasehold improvements over the term of the lease which consisted of the initial term and could include one renewal option period but no more than 15 years in total. We now include renewal option periods when determining the life of our leasehold improvements only if they are to be included in the lease term as defined in Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” as amended. The impact of this change increased our annual depreciation expense for the earlier years of the leases.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

over the lease term. This correction also increases our reported capital expenditures (investing cash flows) and our operating cash flows we report in our Consolidated Statements of Cash Flows.

We identified a small number of stores where the extent of our monetary involvement in the construction of the store (based on the excess of our construction costs over the landlord’s reimbursement to us of such costs) results in the Company being considered the owner of the property during the construction period and in capitalization of the construction costs as an asset and recording the landlord reimbursement as construction debt under Emerging Issues Task Force (“EIFT”) No. 97-10, “The Effect of Lessee Involvement in Asset Construction (“EITF 97-10”).

We also identified situations where we did not straight-line escalating rent or recognize rent for free rent periods. The net effect of the required adjustments to address these errors increased rent expenses in our historical financial statements.

The Company’s overall cash flow was not impacted by these corrections.

Vendor allowance restatements

We historically recognized estimated vendor allowances in a systematic manner ratably over our expected performance period that ran from October through September. This recognition period was initially selected to match the estimated benefits to be received with estimated costs the Company was incurring to perform promotional activities required to earn the vendor allowances. We reevaluated this accounting convention and concluded that the recognition period should be corrected to the contractual period which corresponds to a calendar year because substantially all allowances are determined and collected based on purchases from vendors in the calendar year.

We also identified vendor allowances recorded in fiscal 2003 that will not be collected and have determined that the amounts were recorded because of errors in earlier periods. In addition, we identified certain vendor allowances recorded in improper periods. We have applied the changes required retroactively by restating prior period financial statements.

Effect of restatements on retained earnings

The cumulative effect of the accounting restatements and the retroactive accounting change increased our accumulated deficit at February 2, 2003 by approximately $112.8 million and consisted of approximately $78.4 million attributable to the inventory method change, approximately $11.8 million for the lease accounting errors and approximately $22.6 million for the vendor allowance errors.

The effect of the above mentioned errors and accounting change on our previously reported financial statements are detailed below. The effect of the errors and accounting change are presented for the following statements:

	•	Consolidated Balance Sheet as of August 1, 2004 and February 1, 2004;

	•	Consolidated Statements of Operations for the Thirteen and Twenty-six weeks ended August 1, 2004 and August 3, 2003;

	•	Consolidated Statement of Stockholders’ Equity as of August 1, 2004; and

	•	Consolidated Statements of Cash Flows for the Twenty Six Weeks Ended August 1, 2004 and August 3, 2003.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED BALANCE SHEET
as of August 1, 2004
(in thousands)
(Unaudited)


							Vendor Allowances
							Change in									Inventory
	As Previously						Recognition			Other			As Corrected			Accounting			As
	Reported			Leases			Period			Items			and Restated			Change			Restated

ASSETS

Cash and cash equivalents	$	44,615												44,615					$	44,615
Receivables, net of allowances		133,551						(28,826	)		(17,001	)		87,724						87,724
Inventories		695,423												695,423			(139,312	)		556,111
Deferred income taxes		—						11,435			6,738			18,173			34,846			53,019
Prepaid expenses and other current assets		19,908												19,908						19,908

Total current assets		893,497						(17,391	)		(10,263	)		865,843			(104,466	)		761,377


Property and equipment, net		123,499			15,416									138,915						138,915
Leasehold interests, net		11,371												11,371						11,371
Goodwill, net		127,069												127,069						127,069
Other assets, net		32,249												32,249						32,249


Total assets	$	1,187,685			15,416			(17,391	)		(10,263	)		1,175,447			(104,466	)	$	1,070,981


LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable	$	206,022												206,022					$	206,022
Accrued payroll and related expenses		43,824												43,824						43,824
Accrued expenses and other current liabilities		48,403												48,403						48,403
Deferred income taxes		13,230												13,230			(13,230	)		—
Current maturities of long term debt		2,550			237									2,787						2,787
Current maturities of capital lease obligations		6,910												6,910						6,910

Total current liabilities		320,939			237			—			—			321,176			(13,230	)		307,946


Long term debt		482,590			6,767									489,357						489,357
Obligations under capital leases		9,630												9,630						9,630
Deferred income taxes		14,471			(9,030	)								5,441			(758	)		4,683
Other		20,697			31,189									51,886						51,886

Total non-current liabilities		527,388			28,926			—			—			556,314			(758	)		555,556


Commitments and Contingencies
Stockholders’ equity
Common Stock		453												453						453
Additional paid-in capital		447,569												447,569						447,569
Stockholder receivable		(65	)											(65	)					(65	)
Accumulated deficit		(108,599	)		(13,747	)		(17,391	)		(10,263	)		(150,000	)		(90,478	)		(240,478	)

Total stockholders’ equity		339,358			(13,747	)		(17,391	)		(10,263	)		297,957			(90,478	)		207,479


Total liabilities and stockholders’ equity	$	1,187,685			15,416			(17,391	)		(10,263	)		1,175,447			(104,466	)	$	1,070,981

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED BALANCE SHEET
as of February 1, 2004
(in thousands)
(Unaudited)


							Vendor Allowances
							Change in									Inventory
	As Previously						Recognition			Other			As Corrected			Accounting
	Reported			Leases			Period			Items			and Restated			Change			As Restated

ASSETS
Cash and cash equivalents	$	37,221												37,221					$	37,221
Receivables, net of allowances		136,523						(29,147	)		(15,444	)		91,932						91,932
Inventories		666,263												666,263			(143,414	)		522,849
Deferred income taxes		787						11,562			6,127			18,476			49,381			67,857
Prepaid expenses and other current assets		21,123												21,123						21,123

Total current assets		861,917			—			(17,585	)		(9,317	)		835,015			(94,033	)		740,982


Property and equipment, net		124,813			15,462									140,275						140,275
Leasehold interests, net		12,278												12,278						12,278
Goodwill, net		127,069												127,069						127,069
Other assets, net		27,388												27,388						27,388


Total assets	$	1,153,465			15,462			(17,585	)		(9,317	)		1,142,025			(94,033	)	$	1,047,992


LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable	$	177,150												177,150					$	177,150
Accrued payroll and related expenses		47,498												47,498						47,498
Accrued expenses and other current liabilities		49,617												49,617						49,617
Current maturities of long term debt		2,550			193									2,743						2,743
Current maturities of capital lease obligations		10,240												10,240						10,240

Total current liabilities		287,055			193			—			—			287,248			—			287,248


Long term debt		492,463			6,263									498,726						498,726
Obligations under capital leases		15,017												15,017						15,017
Deferred income taxes		13,121			(8,727	)								4,394			(1,061	)		3,333
Other		14,251			31,006									45,257						45,257

Total non-current liabilities		534,852			28,542			—			—			563,394			(1,061	)		562,333


Commitments and Contingencies
Stockholders’ equity
Common Stock		465												465						465
Additional paid-in capital		466,576												466,576						466,576
Stockholder receivable		(73	)											(73	)					(73	)

Accumulated deficit		(135,410	)		(13,273	)		(17,585	)		(9,317	)		(175,585	)		(92,972	)		(268,557	)


Total stockholders’ equity		331,558			(13,273	)		(17,585	)		(9,317	)		291,383			(92,972	)		198,411


Total liabilities and stockholders’ equity	$	1,153,465			15,462			(17,585	)		(9,317	)		1,142,025			(94,033	)	$	1,047,992

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS
for the Thirteen Weeks Ended August 1, 2004
(in thousands, except per share data)
(Unaudited)


						Vendor Allowances
	As					Change in								Inventory
	Previously					Recognition			Other			As Corrected		Accounting
	Reported		Leases			Period			Items			and Restated		Change			As Restated

Net sales	$	409,057										$	409,057				$	409,057
Cost of sales		217,740		8			(36	)		503			218,215		(3,226	)		214,989

Gross profit		191,317		(8	)		36			(503	)		190,842		3,226			194,068
Other costs and expenses:
Operating and administrative		160,437		61									160,498					160,498
Store closing costs		561											561					561

Operating profit		30,319		(69	)		36			(503	)		29,783		3,226			33,009
Interest expense		7,592		374									7,966					7,966

Income (loss) before income taxes		22,727		(443	)		36			(503	)		21,817		3,226			25,043
Income tax expense (benefit)		8,869		(174	)		14			(198	)		8,511		1,268			9,779

Net income (loss)	$	13,858		(269	)		22			(305	)	$	13,306		1,958		$	15,264

Basic earnings per share:
Net income (loss) per share	$	0.30		(0.00	)		0.00			(0.01	)	$	0.29		0.04		$	0.33
Shares used in computing per share amounts		46,184																46,184

Diluted earnings per share:
Net income (loss) per share	$	0.30		(0.00	)		0.00			(0.01	)	$	0.29		0.04		$	0.33
Shares used in computing per share amounts		46,466																46,466

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS
for the Thirteen Weeks Ended August 3, 2003
(in thousands, except per share data)
(Unaudited)


						Vendor Allowances
	As					Change in								Inventory
	Previously					Recognition			Other			As Corrected		Accounting
	Reported		Leases			Period			Items			and Restated		Change			As Restated

Net sales	$	418,514										$	418,514				$	418,514
Cost of sales		224,812		8			(1,901	)		1,297			224,216		4,574			228,790

Gross profit		193,702		(8	)		1,901			(1,297	)		194,298		(4,574	)		189,724

Other costs and expenses:
Operating and administrative		158,475		273									158,748					158,748
Store closing costs		43											43					43

Operating profit		35,184		(281	)		1,901			(1,297	)		35,507		(4,574	)		30,933
Interest expense		13,251		359									13,610					13,610
Loss on debt retirement		4,315											4,315					4,315

Income (loss) before income taxes		17,618		(640	)		1,901			(1,297	)		17,582		(4,574	)		13,008
Income tax expense (benefit)		6,804		(252	)		747			(510	)		6,789		(1,797	)		4,992

Net income (loss)	$	10,814		(388	)		1,154			(787	)	$	10,793		(2,777	)	$	8,016

Basic earnings per share:
Net income (loss) per share	$	0.24		(0.01	)		0.03			(0.02	)	$	0.24		(0.06	)	$	0.18
Shares used in computing per share amounts		45,217																45,217

Diluted earnings per share:
Net income (loss) per share	$	0.24		(0.01	)		0.03			(0.02	)	$	0.24		(0.06	)	$	0.18
Shares used in computing per share amounts		45,499																45,499

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS
for the Twenty-six Weeks Ended August 1, 2004
(in thousands, except per share data)
(Unaudited)


						Vendor Allowances
	As					Change in								Inventory
	Previously					Recognition			Other			As Corrected		Accounting
	Reported		Leases			Period			Items			and Restated		Change			As Restated

Net sales	$	806,111										$	806,111				$	806,111

Cost of sales		426,198		17			(321	)		1,556			427,450		(4,102	)		423,348


Gross profit		379,913		(17	)		321			(1,556	)		378,661		4,102			382,763

Other costs and expenses:
Operating and administrative		319,182		28									319,210					319,210
Store closing costs		887											887					887

Operating profit		59,844		(45	)		321			(1,556	)		58,564		4,102			62,666
Interest expense		15,847		733									16,580					16,580


Income (loss) before income taxes		43,997		(778	)		321			(1,556	)		41,984		4,102			46,086
Income tax expense (benefit)		17,186		(306	)		126			(612	)		16,394		1,613			18,007


Net income (loss)	$	26,811		(472	)		195			(944	)	$	25,590		2,489		$	28,079

Basic earnings per share:

Net income (loss) per share	$	0.58		(0.01	)		0.00			(0.02	)	$	0.55		0.05		$	0.61
Shares used in computing per share amounts		46,349																46,349

Diluted earnings per share:

Net income (loss) per share	$	0.57		(0.01	)		0.00			(0.02	)	$	0.55		0.05		$	0.60
Shares used in computing per share amounts		46,675																46,675

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS
for the Twenty-six Weeks Ended August 3, 2003
(in thousands, except per share data)
(Unaudited)


						Vendor Allowances
	As					Change in								Inventory
	Previously					Recognition			Other			As Corrected		Accounting			As
	Reported		Leases			Period			Items			and Restated		Change			Restated

Net sales	$	795,963										$	795,963				$	795,963
Cost of sales		427,237		16			(3,460	)		1,180			424,973		18,413			443,386

Gross profit		368,726		(16	)		3,460			(1,180	)		370,990		(18,413	)		352,577

Other costs and expenses:
Operating and administrative		307,198		509									307,707					307,707
Store closing costs		136											136					136

Operating profit		61,392		(525	)		3,460			(1,180	)		63,147		(18,413	)		44,734
Interest expense		27,187		693									27,880					27,880
Loss on debt retirement		4,315											4,315					4,315

Income (loss) before income taxes		29,890		(1,218	)		3,460			(1,180	)		30,952		(18,413	)		12,539
Income tax expense (benefit)		11,553		(479	)		1,360			(464	)		11,970		(7,237	)		4,733

Net income (loss)	$	18,337		(739	)		2,100			(716	)	$	18,982		(11,176	)	$	7,806

Basic earnings per share:
Net income (loss) per share	$	0.41		(0.02	)		0.05			(0.02	)	$	0.42		(0.25	)	$	0.17
Shares used in computing per share amounts		45,183																45,183

Diluted earnings per share:
Net income (loss) per share	$	0.41		(0.02	)		0.05			(0.02	)	$	0.42		(0.25	)	$	0.17
Shares used in computing per share amounts		45,274																45,274

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENT OF CASH FLOWS
for the Twenty-six Weeks Ended August 1, 2004
($ in thousands)
(Unaudited)


							Vendor Allowances
	As						Change in									Inventory
	Previously						Recognition			Other			As Corrected			Accounting			As
	Reported			Leases			Period			Items			and Restated			Change			Restated

Cash Flows provided by operating activities:
Net income (loss)	$	26,811			(472	)		192			(944	)		25,590			2,489		$	28,079
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation & amortization on PP&E		13,781			1,871									15,652						15,652
Amortization of other items		2,133												2,133						2,133
Amortization of deferred financing costs		965												965						965
Amortization of long term debt fair market value adjustment		(53	)											(53	)					(53	)
Accretion of debt discount		28												28						28
Loss on disposal of property, equipment and other assets		606			(128	)								478						478
Tax benefit relating to stock option exercises		169												169						169
Deferred income taxes		15,367			(306	)		126			(613	)		14,574			1,613			16,187

Changes in operating assets and liabilities:
Receivables		4,096						(321	)		1,557			5,332						5,332
Inventories		(34,605	)											(34,605	)		(4,102	)		(38,707	)
Prepaid expenses and other current assets		1,215												1,215						1,215
Accounts payable		26,398												26,398						26,398
Accrued payroll, accrued expenses, & other current liabilities		(4,062	)											(4,062	)					(4,062	)
Other operating activities		(448	)		183									(265	)					(265	)


Net cash provided by operating activities		52,401			1,148			—			—			53,549			—			53,549


Capital expenditures		(12,831	)		(1,697	)								(14,528	)					(14,528	)
Other investing activities		(1,653	)											(1,653	)					(1,653	)


Net cash used in investing activities:		(14,484	)		(1,697	)		—			—			(16,181	)		—			(16,181	)


Borrowings under senior credit facility		20,600												20,600						20,600
Payments under senior credit facility		(21,875	)											(21,875	)					(21,875	)
Payment of debt issuance costs		(892	)											(892	)					(892	)
Payments on capital lease obligations		(8,975	)											(8,975	)					(8,975	)
Proceeds from exercise of stock options		531												531						531
Proceeds from seller financing arrangements		—			650									650						650
Payments on seller financing arrangements		—			(101	)								(101	)					(101	)
Repurchase of common stock		(19,764	)											(19,764	)					(19,764	)
Recovery of stockholder’s receivable		8												8						8
Other financing activities		(156	)											(156	)					(156	)


Net cash provided by (used in) financing activities:		(30,523	)		549			—			—			(29,974	)		—			(29,974	)


Net increase in cash		7,394																		7,394
Cash and cash equivalents, beginning of period		37,221																		37,221

Cash and cash equivalents, end of period	$	44,615																	$	44,615

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONSOLIDATED STATEMENT OF CASH FLOWS
for the Twenty-six Weeks Ended August 3, 2003
(in thousands)
(Unaudited)


							Vendor Allowances
	As						Change in									Inventory
	Previously						Recognition			Other			As Corrected			Accounting			As
	Reported			Leases			Period			Items			and Restated			Change			Restated

Cash Flows provided by operating activities:
Net income (loss)	$	18,337			(739	)		2,101			(717	)		18,982			(11,176	)	$	7,806
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation & amortization on PP&E		15,437			2,097									17,534						17,534
Amortization of other items		1,900												1,900						1,900
Amortization of deferred financing costs		2,367												2,367						2,367
Amortization of long term debt fair market value adjustment		(307	)											(307	)					(307	)
Accretion of debt discount		461												461						461
Loss on disposal of property, equipment and other assets		560			(11	)								549						549
Tax benefit relating to stock option exercises		302												302						302
Write off of debt issuance costs		2,268												2,268						2,268
Premium paid on early retirement of debt		(350	)											(350	)					(350	)
Proceeds from interest rate swap termination		6,031												6,031						6,031
Deferred income taxes		10,623			(479	)		1,360			(464	)		11,040			(7,237	)		3,803

Changes in operating assets and liabilities:
Receivables		15,952						(3,461	)		1,181			13,672						13,672
Inventories		(33,943	)											(33,943	)		18,413			(15,530	)
Prepaid expenses and other current assets		(2,978	)											(2,978	)					(2,978	)
Accounts payable		9,360												9,360						9,360
Accrued payroll, accrued expenses, & other current liabilities		(1,204	)											(1,204	)					(1,204	)
Other operating activities		676			671									1,347						1,347


Net cash provided by operating activities		45,492			1,539			—			—			47,031			—			47,031


Capital expenditures		(4,802	)		(2,577	)								(7,379	)					(7,379	)
Other investing activities		(1,666	)											(1,666	)					(1,666	)


Net cash used in investing activities:		(6,468	)		(2,577	)		—			—			(9,045	)		—			(9,045	)


Borrowings under senior credit facility		281,000												281,000						281,000
Payments under senior credit facility		(283,000	)											(283,000	)					(283,000	)
Retirement of balance of 11% senior subordinated notes		(9,547	)											(9,547	)					(9,547	)
Payment of debt issuance costs		(4,047	)											(4,047	)					(4,047	)
Payments on capital lease obligations		(5,814	)											(5,814	)					(5,814	)
Proceeds from exercise of stock options		2,867												2,867						2,867
Proceeds from seller financing arrangements		—			1,120									1,120						1,120
Payments on seller financing arrangements		—			(82	)								(82	)					(82	)
Recovery of stockholder’s receivable		168												168						168
Other financing activities		(146	)											(146	)					(146	)


Net cash provided by (used in) financing activities:		(18,519	)		1,038			—			—			(17,481	)		—			(17,481	)


Net increase in cash		20,505																		20,505
Cash and cash equivalents, beginning of period		15,519																		15,519

Cash and cash equivalents, end of period	$	36,024																	$	36,024

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2 — Basis of Presentation

We prepared the unaudited consolidated financial statements included herein in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all information and footnotes required by generally accepted accounting principles for fiscal year end financial statements. In the opinion of management, the consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of our financial position and the results of our operations. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto for the fiscal year ended February 1, 2004 (fiscal 2003), as restated, as included in our Annual Report on Form 10-K, dated January 30, 2005, filed with the SEC on May 2, 2005.

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation. This has no impact on our previously reported financial position, results of operations or cash flows.

Note 3 — Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities”, which addressed accounting for special-purpose and variable interest entities. In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities”, which superseded FIN 46. The effective date of FIN 46R is the end of the first reporting period that ends after March 15, 2004, unless the entity is considered to be a special-purpose entity. Companies that have adopted FIN 46 prior to the effective date of FIN 46R will either continue to apply FIN 46 until the effective date of FIN 46R or apply the provision of FIN 46R at an earlier date. We have adopted the provisions of FIN 46R with no impact on our financial statements.

Note 4 — Inventories

Inventories are valued at the lower of cost or market, cost being determined utilizing the First-in First-out (“FIFO”) method. In most instances, we retain the ability to return damaged, obsolete and excess merchandise inventory to our vendors. In situations where we do not have a right to return merchandise inventory (generally for certain import products), we may from time to time record an allowance representing an estimated loss for the difference between the cost of any damaged, obsolete or excess product and the estimated retail selling price. Inventory levels and margins earned on all products are monitored monthly. Quarterly, we assess whether we expect to sell any significant amount of inventory below cost and, if so, record an estimated allowance. We refer to this allowance as an obsolescence allowance.

At each balance sheet reporting date, we adjust our inventory carrying balances by the capitalization of certain operating and overhead administrative costs associated with purchasing and handling of inventory, an estimation of vendor allowances that remain in ending inventory at period end, and an estimation of allowances for inventory shrinkage and obsolescence as follows:


	August 1, 2004			February 1, 2004(1)
	(Restated)			(Restated)
				($ in millions)
FIFO cost	$	585.4		$	557.0

Administrative and overhead costs		41.0			39.6

Vendor allowances		(56.8	)		(60.4	)

Shrinkage		(13.5	)		(13.4	)


Net inventory	$	556.1		$	522.8

FIFO cost, capitalized administration and overhead costs, and vendor allowance amounts have been adjusted from those previously reported in our Form 10-

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

K , filed with the SEC on May 2, 2005, to reflect the correct balances. Net inventory did not change.

Note 5 — Store Closing Costs

On an on-going basis, store locations are reviewed and analyzed based on several factors including market saturation, store profitability, and store size and format. In addition, we analyze sales trends and geographical and competitive factors to determine the viability and future profitability of our store locations. If a store location does not meet our required performance, it is considered for closure. As a result of past acquisitions, we have closed numerous locations due to store overlap with previously existing store locations.

We account for the costs of closed stores in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS No. 146, costs of operating lease commitments for a closed store are recognized as expense at fair value at the time we cease operating the store. Fair value of the liability is determined as the present value of future cash flows discounted using a credit-adjusted risk free rate. Accretion expense represents interest on our recorded closed store liabilities at the same credit adjusted risk free rate used to discount the cash flows. In addition, SFAS No. 146 also requires that the amount of remaining lease payments owed be reduced by estimated sublease income (but not to an amount less than zero). Sublease income in excess of costs associated with the lease is recognized as it is earned and included as a reduction to operating and administrative expense in the accompanying financial statements.

The allowance for store closing costs is included in accrued expenses and other long term liabilities in the accompanying financial statements and primarily represents the discounted value of the following future net cash outflows related to closed stores: (1) future rents to be paid over the remaining terms of the lease agreements for the stores (net of estimated probable sublease income); (2) lease commissions associated with the anticipated store subleases; and (3) contractual expenses associated with the closed store vacancy periods. Certain operating expenses, such as utilities and repairs, are expensed as incurred and no provision is made for employee termination costs.

As of August 1, 2004, we had a total of 148 store locations included in the allowance for store closing costs. Of this total, 13 locations were vacant and 135 locations were subleased. In addition to these stores, we had 55 service centers of which 3 were vacant and 52 were subleased. Future rental payments will be made through the expiration of the non-cancelable leases, the longest of which runs through January 2018.

Activity in the allowance for store closings and the related payments for the first half of fiscal 2004 are as follows ($ in thousands):


Balance, beginning of year	$	12,148
Store closing costs:
Provision for store closing costs		106
Revisions in estimates		(12	)
Accretion		287
Operating expenses and other		506

Store closing costs, net		887
Payments:
Rent expense, net of sublease income		(1,553	)
Occupancy and other expenses		(481	)
Lease buyouts and sublease commissions		(2,103	)

Total payments		(4,137	)


Balance as of August 1, 2004	$	8,898

We expect cash outflows for vacant stores (which includes certain operating expenses that are expensed as incurred), sublease losses and lease buyouts to be approximately $7.0 million during fiscal 2004. We expect the remainder of cash outflows relating to these stores to occur primarily during fiscal 2005 through 2007.

Note 6 — Debt

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Outstanding debt, excluding capital leases, is comprised of the following ($ in thousands):


	August 1,			February 1,
	2004			2004
	(Restated)			(Restated)
Senior credit facility — term loan	$	253,725		$	255,000
Senior credit facility — revolving credit commitment		—			—
12% senior notes		14,910			14,910
Unamortized original issue discount on 12% senior notes		(121	)		(149	)
7% senior subordinated notes		225,000			225,000
Seller financing arrangements		7,004			6,456


Notes and loans, including current maturities		500,518			501,217
SFAS No. 133 fair market value adjustments		(8,573	)		—
$100.0 million of 7% senior subordinated notes 12% senior notes		199			252

Total debt		492,144			501,469
Less:
Current maturities under senior credit facility		2,550			2,550
Seller financing arrangements		237			193

Total long term debt	$	489,357		$	498,726

On August 10, 2004, we amended our senior credit facility to provide for an immediate reduction of the interest rate on the term loan of 25 basis points and an opportunity for an additional 25 basis points reduction of the interest rate on such term loan upon the achievement of certain conditions, as more particularly set forth in the amendment. The amendment also provides for a one-year extension of the term loan maturity to August 2010.

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 semi-annually in arrears, equal to the 6 month LIBOR + 283 basis points. The agreement is for the term of the notes. The hedge is 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 the results of operations. Based upon our assessment of effectiveness of the hedge, changes in the fair value of this derivative and the underlying debt will not have a significant effect on our consolidated results of operations. At August 1, 2004, the fair value of the interest rate swap approximated $8.6 million, which is included as an increase in other long-term liabilities with an identical amount reflected as a basis adjustment to the 7% senior subordinated notes on the accompanying Consolidated Balance Sheet.

Note 7 — Earnings Per Share

Calculation of the numerator and denominator used in computing per share amounts is summarized as follows (in thousands):


	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 1, 2004		August 3, 2003		August 1, 2004		August 3, 2003
	(Restated)		(Restated)		(Restated)		(Restated)
Numerator for basic and diluted EPS:
Net income (Restated)	$	15,264	$	8,016	$	28,079	$	7,806


Denominator for basic EPS:
Weighted average shares outstanding (basic)		46,184		45,217		46,349		45,183


Denominator for diluted EPS:
Weighted average shares outstanding (basic)		46,184		45,217		46,349		45,183

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Thirteen Weeks Ended				Twenty-six Weeks Ended
	August 1, 2004		August 3, 2003		August 1, 2004		August 3, 2003
	(Restated)		(Restated)		(Restated)		(Restated)
Effect of dilutive stock options		282		282		326		91


Weighted average shares outstanding (diluted)		46,466		45,499		46,675		45,274


Shares excluded as a result of anti-dilution:
Stock options		473		652		375		2,056

Note 8 — Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires expanded and more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results.

We have stock-based employee compensation plans, which are described more fully in Note 11 of the Notes to Consolidated Financial Statements in our 2003 Annual Report on Form 10-K filed with the SEC on April 15, 2004. We continue to apply the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for those plans. No material stock-based employee compensation expense is reflected in net income for the thirteen or twenty-six weeks ended August 1, 2004 or August 3, 2003 as the intrinsic value of all options granted under those plans was zero. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” ($ in thousands, except per share amounts):


	Thirteen Weeks						Twenty-six Weeks
	Ended						Ended
	August 1,			August 3,			August 1,			August 3,
	2004			2003			2004			2003
	(Restated)			(Restated)			(Restated)			(Restated)
Net income — as reported	$	15,264		$	8,016		$	28,079		$	7,806
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income taxes		(164	)		(157	)		(335	)		(402	)

Net income — pro forma	$	15,100		$	7,859		$	27,744		$	7,404


Earnings per share — basic:
As reported	$	0.33		$	0.18		$	0.61		$	0.17
Pro forma	$	0.33		$	0.17		$	0.60		$	0.16
Earnings per share — diluted:
As reported	$	0.33		$	0.18		$	0.60		$	0.17
Pro forma	$	0.33		$	0.17		$	0.60		$	0.16

During the second quarter of fiscal 2004, our stockholders approved a new Stock and Incentive Plan which allows for the issuance of a variety of equity-based awards, including stock options and restricted stock.

Note 9 — Stock Repurchase Program

On June 8, 2004, our Board of Directors approved a share repurchase program that authorized our purchase of shares of our common stock with an aggregate purchase price not to exceed $25.0 million. The program provides that we may buy shares in the open market or in privately negotiated transactions and that we will base our decisions on whether to repurchase shares and the timing of any such repurchases on factors including the stock price, our cash and debt levels, and general economic and market conditions. Shares of stock repurchased under the program will be retired and returned to the status of authorized and unissued shares. This

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

program will expire in December 2005. During the second quarter of fiscal 2004, we repurchased approximately 1.3 million shares of our common stock at a cost of approximately $19.8 million under this program.

Note 10 — Legal Matters

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 to mitigate potential future tax related liability.

We believe that we have a strong basis under California law for disputing the payment of this assessment, and in October 2003 we timely filed a Petition for Redetermination with the Board. In May 2004, we received a response from the Board indicating that the district office that conducted the audit upheld its position and requested confirmation of our desire to proceed with the scheduling of an appeals conference concerning this matter. We responded affirmatively to the Board’s letter in May 2004 and are presently waiting for formal scheduling by the Board of an appeals conference before an appeals division attorney or auditor. 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 the 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.

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

Accounting Change and Restatements of Financial Statements

Change in inventory accounting method

Although the primary effect of the change was a decrease in inventory on our balance sheet, it also has a significant impact on our determination of cost of sales because of differences in unit costs and increases in the amount of vendor allowances and inventory purchasing and handling costs that will remain in inventory at period end under FIFO. The change had the effect of decreasing our cost of sales and increasing our gross profit by approximately $3.2 million and $4.1 million in the thirteen and twenty-six weeks ended August 1, 2004. The change increased our cost of sales and decreased our gross profit by approximately $4.6 million and $18.4 million in the thirteen and twenty-six weeks ended August 3, 2003.

Lease accounting restatement

We reevaluated our lease terms for our operating leases, which resulted in a reduction to the useful life assumption for depreciating leasehold improvements. We previously depreciated leasehold improvements over the term of the lease which consisted of the initial term and could include one renewal option period but no more than 15 years in total. We now include renewal option periods when determining the life of our leasehold improvements only if they are included in the lease term as defined in Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” as amended. The impact of this increased our annual depreciation expense for the earlier years of the leases.

We previously recorded build-out allowances received from landlords as an offset to the amounts capitalized as leasehold improvements. We are now recording such allowances as a deferred rent liability with a related increase in recorded leasehold improvements or property assets resulting in an increase to depreciation expense while the amortization of the deferred rent liability reduces operating rent expense over the lease term. This correction also increases our reported capital expenditures (investing cash flows) and our operating cash flows we report in our Consolidated Statements of Cash Flows.

The Company’s overall cash flow was not impacted by these corrections.

Vendor allowance restatements

Overview

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 August 1, 2004, through our wholly owned subsidiary CSK Auto, Inc., we operated 1,123 stores in 19 states under one fully integrated operating format and three brand names:

	•	Checker Auto Parts, founded in 1969, with 419 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;

	•	Schucks Auto Supply, founded in 1917, with 225 stores in the Pacific Northwest and Alaska; and

	•	Kragen Auto Parts, founded in 1947, with 479 stores primarily in California.

In the following discussion, we refer to the thirteen and twenty-six week periods ended on August 1, 2004 and August 3, 2003, respectively, as the “second quarter” and “first half” of those respective fiscal years.

During the first half of fiscal 2004, we opened 16 stores, relocated 4 stores and closed 7 stores in addition to the 4 stores closed upon relocation. Our goal for fiscal 2004 is to open approximately 45 stores, consisting of approximately 35 new stores and 10 relocated stores. During fiscal 2004, we expect to close approximately 10 stores (in addition to approximately 10 stores closed due to relocation) for a net increase of approximately 25 stores.

During the first half of fiscal 2004, we were faced with many challenges. We experienced 5.2% same store sales increases during the first quarter of fiscal 2004 and same store sales decreases of 2.5% during the second quarter of fiscal 2004. We believe our sales during the second quarter of fiscal 2004 were negatively impacted by higher gas prices and milder summer temperatures in many of our key markets. Despite the sales environment, our gross profit rate increased almost 50 basis points compared to the same period of last year. Our inventory management process allowed us to effectively control our inventory with only a slight increase compared to the same period of last year. We will continue to: (1) analyze our operating and administrative expenses to further reduce our cost structure; (2) review and refine our core product categories, such as batteries, brakes, shocks, starters and alternators, to ensure that we are meeting our customers’ expectations; (3) add new product offerings as we deem appropriate to give our customers additional reasons to shop our stores; and (4) review our marketing programs, sales promotions, event marketing and sports sponsorships to build customer awareness and help drive store traffic. Our primary objective is to remain focused on our long-term goals and initiatives of: (1) reducing our debt while maximizing our return on investment; (2) accelerating our store growth; (3) continuing to strengthen our vendor partnerships to reduce costs from the supply chain and reduce our merchandise inventory; and (4) reducing our operating and administrative expenses.

Automotive Information Systems, Inc. (“AIS”) is a wholly owned subsidiary of CSK Auto, Inc. that provides diagnostic vehicle repair information to automotive technicians, automotive replacement parts manufacturers, automotive test equipment manufacturers, and to DIY consumers. We are continuing to examine 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. We do not anticipate that any potential transaction will have a material effect on our fiscal 2004 consolidated results of operations or our financial condition.

The following discussion and analysis presents factors that affected our consolidated results of operations for the thirteen and twenty-six weeks ended August 1, 2004 and our consolidated financial position at that date. The following information should be read

in conjunction with the consolidated financial statements and notes included in this Form 10-Q/A as well as the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K, dated January 30, 2005 (“2004 Annual Report”), which was filed with the Securities and Exchange Commission on May 2, 2005.

Results of Operations

The following table expresses the statements of operations as a percentage of sales for the periods shown:


	Thirteen Weeks Ended						Twenty-six Weeks Ended
	August 1,			August 3,			August 1,			August 3,
	2004			2003			2004			2003
	(Restated)			(Restated)			(Restated)			(Restated)
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		52.6			54.7			52.5			55.7

Gross profit		47.4			45.3			47.5			44.3
Operating and administrative		39.2			37.9			39.6			38.7
Store closing costs		0.2			—			0.1			—

Operating profit		8.0			7.4			7.8			5.6
Interest expense		1.9			3.3			2.1			3.5
Loss on debt retirement		—			1.0			—			0.5

Income before income taxes		6.1			3.1			5.7			1.6
Income tax expense		2.4			1.2			2.2			0.6

Net Income		3.7	%		1.9	%		3.5	%		1.0	%

Thirteen Weeks Ended August 1, 2004 Compared to Thirteen Weeks Ended August 3, 2003

Net sales for the second quarter of fiscal 2004 decreased 2.3% to $409.1 million from $418.5 million for the second quarter of fiscal 2003. Same store sales decreased 2.5% (negative 2.5% for retail and negative 2.7% for commercial). We believe our sales during the second quarter of fiscal 2004 were negatively impacted by higher gas prices and milder summer temperatures in many of our key markets. During the quarter we experienced weaker than anticipated demand for products in heat-related categories (for example, air conditioning, cooling accessories, batteries, starters, alternators and water pumps).

Gross profit was $194.1 million, or 47.4% of net sales, for the second quarter of fiscal 2004 as compared to $189.7 million, or 45.3% of net sales, for the second quarter of fiscal 2003. Gross profit, as a percent to sales, increased during the quarter primarily due to lower acquisition costs on selected products, improvements in our balance of sales through our category management systems, and reduced store inventory shrinkage as a result of improved store procedures and enhanced inventory control systems.

Operating and administrative expenses were $160.5 million or 39.2% of net sales in the second quarter of fiscal 2004, compared to $158.7 million or 37.9% of net sales in the second quarter of fiscal 2003. The increase is primarily attributable to higher payroll rates and benefit-related expenses.

Interest expense for the second quarter of fiscal 2004 decreased to $8.0 million from $13.6 million in the second quarter of fiscal 2003 primarily as a result of the lower interest rate and corresponding reduced interest expense associated with our January 2004 refinancing.

Income tax expense for the second quarter of fiscal 2004 was $9.8 million, compared to $5.0 million for the comparable period of fiscal 2003. Our effective tax rate increased slightly to 39.0% from 38.4% primarily as a result of the non-deductibility of certain employee benefits and a reduction in employment based state tax credits as a percentage of pretax income.

Net income increased to $15.3 million, or $0.33 per diluted common share, for the second quarter of fiscal 2004, compared to net income of $8.0 million, or $0.18 per diluted common share, for the second quarter of fiscal 2003.

Twenty-six Weeks Ended August 1, 2004 Compared to Twenty-six Weeks Ended August 3, 2003

Net sales for the first half of fiscal 2004 increased 1.3% to $806.1 million from $796.0 million for the first half of fiscal 2003. Same store sales increased 1.1% (1.1% for retail and 1.5% for commercial). During the first quarter of fiscal 2004 same store sales increased 5.2% and were strong in core product categories such as batteries, brakes, shocks and rotating electric parts. We believe our sales during the second quarter of fiscal 2004 were negatively impacted by higher gas prices and milder summer temperatures in many of our key markets. Same store sales decreased primarily due to weak demand for products in heat-related categories.

Gross profit was $382.8 million, or 47.5% of net sales, for the first half of fiscal 2004 as compared to $352.6 million, or 44.3% of net sales, for the first half of fiscal 2003. The increased gross profit margin dollars and percent are a result of our continuing efforts to lower the acquisition costs of our core products and our ability to source our promotional products at more favorable terms. In addition, we have reduced our store inventory shrinkage through improved store procedures and enhanced inventory control systems.

Operating and administrative expenses were $319.2 million or 39.6% of net sales in the first half of fiscal 2004, compared to $307.7 million or 38.7% of net sales in the first half of fiscal 2003. The increase year over year is primarily attributable to increased store count and higher payroll rates and benefit-related costs.

Interest expense for the first half of fiscal 2004 decreased to $16.6 million from $27.9 million in the first half of fiscal 2003 primarily as a result of the lower interest rate and corresponding reduced interest expense associated with our January 2004 refinancing.

Income tax expense for the first half of fiscal 2004 was $18.0 million, compared to $4.7 million for the comparable period of fiscal 2003. Our effective tax rate increased slightly to 39.1% from 37.7% primarily as a result of the non-deductibility of certain employee benefits and a reduction in employment based state tax credits as a percentage of pretax income.

Net income increased to $28.1 million, or $0.60 per diluted common share, for the first half of fiscal 2004, compared to net income of $7.8 million, or $0.17 per diluted common share, for the first half of fiscal 2003.

Liquidity and Capital Resources

Overview of Liquidity

Our primary cash requirements include working capital (primarily inventory), interest on our debt and capital expenditures. We are required to make only minimal debt amortization payments prior to fiscal 2009 other than payments on capital leases and seller financing arrangements. We intend to fund our cash requirements with cash flows from operating activities, borrowings under our senior credit facility and short-term trade credit relating to extended payment terms for inventory purchases. The following table outlines our liquidity:


	August 1,		February 1,
	2004		2004
	($ in thousands)
Cash	$	44,615	$	37,221
Availability under revolving line of credit		113,616		120,068
Working capital (Restated)		453,431		453,734

Availability under our revolving line of credit decreased during the first half of fiscal 2004 relative to prior periods, primarily due to the issuance of letters of credit relating to our increased purchases of import products.

On June 8, 2004, our Board of Directors approved a share repurchase program that authorized the purchase of shares of our common stock with an aggregate purchase price not to exceed $25.0 million. The program provides that we may buy shares in the open market or in privately negotiated transactions and that we will base our decisions on whether to repurchase shares and the timing of any such repurchases on factors including the stock price, our cash and debt levels, and general economic and market conditions. Shares of stock repurchased under the program will be retired and returned to the status of authorized and unissued shares. This program will expire in December 2005. During the second quarter of fiscal 2004, we repurchased approximately 1.3 million shares of our common stock at a cost of approximately $19.8 million under this program.

We lease our office and warehouse facilities, all but one of our retail stores, and much of our equipment. Substantially all of our store leases are operating leases with private landlords and provide for monthly rental payments based on a contractual amount. These leases generally require minimal initial cash outlay and we expect that substantially all of our new store locations will be leased pursuant to similar operating leases.

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


	Payments Due by Fiscal Year (Restated)
Contractual Obligation	Total		2004 (1)		2005 – 2006		2007 – 2008		Thereafter
Long-term debt (2,4)	$	500,639	$	1,379	$	20,637	$	5,957	$	472,666
Interest on long-term debt (4)		214,876		14,890		51,979		51,193		96,814
Capital lease obligations		20,918		4,771		11,139		3,142		1,866
Operating lease obligations (3,4)		726,257		59,662		219,354		167,592		279,649


Total contractual obligations	$	1,462,690	$	80,702	$	303,109	$	227,884	$	850,995

(1)		Represents the period from August 2, 2004 to January 30, 2005.

(2)		Change from fiscal year 2003 annual report due to the extension of our term loan to August 10, 2010.

(3)		Operating lease obligations are not reduced to reflect sublease income. Changes from fiscal year 2003 annual report due primarily to new stores and lease extensions.

(4)		As part of our Lease Accounting Restatement, we identified a small number of stores where the extent of our monetary involvement in the construction of the store (based on the excess of our constructions costs over the landlord’s reimbursement to us of such costs) results in capitalization of the construction costs as an asset and recording the landlord reimbursement as construction debt under Emerging Issues Task Force (“EITF”) No. 97-10, “the Effect of Lease Involvement in Asset Construction (“EITF 97-10”). These payments were previously shown in the contractual obligation table as operating lease obligations. They have been reclassified as long-term debt and interest payments.

Other commercial commitments consist of standby letters of credit totaling $31.4 million, the latest of which expire in April 2005. Our inventory purchase commitments are cancelable and therefore not included in the above table.

Analysis of Cash Flows

The following table summarizes our cash flows from operating activities:


	Twenty-six Weeks Ended
	August 1, 2004			August 3, 2003
	(Restated)			(Restated)
	($ in thousands)
Net income	$	28,079		$	7,806
Non-cash expenses and adjustments		35,559			28,527
Change in inventory, net of accounts payable		(12,309	)		(6,170	)
Proceeds from interest rate swap termination		—			6,031
Changes in other operating assets and liabilities		2,220			10,837

Cash flows from operating activities	$	53,549		$	47,031

During the first half of fiscal 2004, net cash provided by operating activities was $53.5 million compared to $47.0 million of cash provided by operating activities during the first half of fiscal 2003. The change primarily relates to the following: (1) an increase of $20.3 million in net income resulting primarily from improved gross profit as discussed above and lower interest expense. This was offset by an increase of our inventory purchases (net of accounts payable) by $6.1 million. Cash flows from operations during the first half of fiscal 2003 were favorably impacted by $6.0 million associated with the termination of an interest rate swap agreement.

Net cash used in investing activities totaled $16.2 million for the first half of fiscal 2004, compared to $9.0 million used during the comparable period of fiscal 2003. Capital expenditures during the first half of fiscal 2004 were $7.1 million higher than in the first half of fiscal 2003 as a result of additions made to support new store growth, additional capital upgrades to existing stores and the purchase of certain leased assets.

Net cash used in financing activities totaled $30.0 million in the first half of fiscal 2004 compared to $17.5 million used in financing activities in the comparable period of fiscal 2003. During the first half of fiscal 2004, we utilized approximately $19.8 million of our cash to repurchase and subsequently retire approximately 1.3 million shares of our common stock; no such purchases were made in fiscal 2003. Payments on capital leases were $3.2 million higher in the first half of fiscal 2004 than in the comparable period of fiscal 2003 due to $4.5 million of lease buyouts during fiscal 2004 offset by $1.3 million of lower monthly lease payments. Payments for debt issuance costs were $3.2 million less during the first half of fiscal 2004 than in the first half of fiscal 2003. Also, during the first half of fiscal 2003 we retired $9.5 million of our 11% senior subordinated notes. No debt retirements occurred during the first half of fiscal 2004.

Store Closures

We account for the costs of closed stores in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. Under SFAS No. 146, costs of operating lease commitments for a closed store are recognized as expense at fair value at the time we cease operating the store. Fair value of the liability is determined as the present value of future cash flows discounted using a credit-adjusted risk free rate. Accretion expense represents interest on our recorded closed store liabilities at the same credit adjusted risk free rate used to discount the cash flows. In addition, SFAS No. 146 also requires that the amount of remaining lease payments owed be reduced by estimated sublease income (but not to an amount less than zero). Sublease income in excess of costs associated with the lease is recognized as it is earned and included as a reduction to operating and administrative expense in the accompanying financial statements.

Activity in the allowance for store closings and the related payments for the first half of fiscal 2004 are as follows ($ in thousands):


Balance, beginning of year	$	12,148
Store closing costs:

Provisions for store closing costs		106
Revisions in estimates		(12	)
Accretion		287
Operating expenses and other		506

Store closing costs, net		887
Payments:
Rent expense, net of sublease income		(1,553	)
Occupancy and other expenses		(481	)
Lease buyouts and sublease commissions		(2,103	)

Total payments		(4,137	)


Balance as of August 1, 2004	$	8,898

Factors Affecting Liquidity and Capital Resources

Sales Trends

Our business is somewhat seasonal in nature, with the highest sales typically 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 product to increase.

Our same store sales increased 1.1% during the first half of fiscal 2004, which was comprised of 5.2% same store sales increases during the first quarter of fiscal 2004 and same store sales decreases of 2.5% during the second quarter of fiscal 2004. We believe higher gas prices and milder summer temperatures in many of our key markets adversely impacted our sales during the second quarter of fiscal 2004. Based on our trends and in recognition of our 7.8% same store sales increase in the second half of fiscal 2003, we would expect same store sales to decline 2.0% to 3.5% during the third quarter of fiscal 2004 and to be flat to negative 2% for the fourth quarter of fiscal 2004.

Inflation

We do not believe our operations have been materially affected by inflation. We believe that we will be able to mitigate the effects of future merchandise cost increases principally through economies of scale resulting from increased volumes of purchases, selective forward buying and the use of alternative suppliers.

Debt Covenants

Our credit agreement contains negative covenants and restrictions on actions by us and our subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions not in the ordinary course of business, investments, loans, advances and acquisitions, payment of dividends, transactions with Affiliates (as defined in the credit agreement), change in business conducted, and certain prepayments (other than in the ordinary course of business) and amendments of subordinated indebtedness. Our credit agreement requires that we meet certain financial covenants, ratios and tests, including a maximum leverage ratio and a minimum interest coverage ratio. The Consolidated Leverage Ratio is “Consolidated Total Funded Debt”, as defined in the credit agreement, divided by “Consolidated EBITDA” as defined in the credit agreement. The Interest Coverage Ratio is “Consolidated EBITDA”, as defined in the credit agreement, divided by “cash interest expense”, as defined in the credit agreement. At August 1, 2004 we were in compliance with the related covenants. We anticipate meeting all required covenants under our existing credit agreement in fiscal 2004.

A breach of the covenants, ratios, or restrictions contained in our credit agreement could result in an event of default thereunder. Upon the occurrence of such an event of default, the lenders under our credit agreement could elect to declare all amounts outstanding under the credit agreement, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under the credit agreement accelerate the payment of the indebtedness, we cannot be assured that our assets would be sufficient to repay in full that indebtedness, which is collateralized by substantially all of our assets.

Although we have significantly reduced our outstanding debt over recent years, we are still highly leveraged. The degree to which we are leveraged could have important consequences on our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes. A substantial portion of our cash flow from operations must be dedicated to the payment of interest on our indebtedness, thereby reducing the funds available for other purposes. We are substantially more leveraged than some of our competitors, which might place us at a competitive disadvantage to those competitors that have lower debt service obligations and significantly greater operating and financial flexibility than we do. We may not be able to adjust rapidly to changing market conditions and we may be more vulnerable in the event of a downturn in general economic conditions or in our business.

Interest Rates

Financial market risks relating to our operations result primarily from changes in interest rates. Interest earned on our cash equivalents as well as interest paid on our variable rate debt and interest received or paid on our interest rate swap is sensitive to changes in interest rates. Our variable rate debt relates to borrowings under our senior credit facility, which is primarily vulnerable to movements in the LIBOR rate. We hold no market risk sensitive instruments for trading purposes.

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 semi-annually in arrears, equal to the 6 month LIBOR + 283 basis points. The agreement is for the term of the notes. We entered into the interest rate swap to hedge the changes in the fair value of the underlying fixed rate debt that result from changes in the general level of market interest rates. The hedge is 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 the results of operations. Based upon our assessment of effectiveness of the hedge, changes in the fair value of this derivative and the underlying debt will not have a significant effect on our consolidated results of operations. At August 1, 2004, the fair value of the interest rate swap approximated $8.6 million, which is included as an increase in other long-term liabilities with an identical amount reflected as a basis adjustment to the 7% senior subordinated notes on the accompanying Consolidated Balance Sheet.

At August 1, 2004, including the $100.0 million of senior subordinated notes that are subject to the interest rate swap agreement, 70% of our outstanding debt was at variable interest rates and 30% of our outstanding debt was at fixed interest rates. With $354.0 million in variable rate debt outstanding, a 1% change in the LIBOR rate to which this variable rate debt is tied would result in a $3.5 million change in our annual interest expense. This estimate assumes that our debt balance remains constant for an annual period and the interest rate change occurs at the beginning of the period.

Critical Accounting Matters

For a discussion of our critical accounting matters, please refer to our 2004 Annual Report.

Recent Accounting Pronouncements

Forward-looking Statements

Certain statements contained in the foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. They discuss, among other things, expected growth, future store development and relocation strategy, business strategies, future revenues and future performance. The forward-looking statements are subject to risks, uncertainties and assumptions, including, but not limited to, competitive pressures and impacts, demand for our products, factors impacting procurement of import products, fluctuations in and the overall condition of the economy, timing and number of equity awards issued and the market value of such awards, inflation, consumer debt levels, factors impacting consumer spending and driving habits, conditions affecting new store development, weather conditions, and litigation and regulatory matters. Actual results may differ materially from anticipated results described in these forward-looking statements. Additional information regarding these and other risks that may cause differences are contained in our periodic and other filings with the Securities and Exchange Commission.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

See “Factors Affecting Liquidity and Capital Resources” above.

Item 4.Controls and Procedures

As previously disclosed under Item 8. Consolidated Financial Statements and Supplementary Data, in our Annual Report on Form 10-K for the fiscal year ended January 30, 2005 filed with the Securities and Exchange Commission on May 2, 2005, management concluded that as of January 30, 2005 the Company did not maintain effective internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”), as the Company had identified the following material weaknesses:

	•	The Company did not maintain effective controls over the completeness and accuracy of its accounting for lease related assets, liabilities and expenses. Specifically, the Company’s controls over the selection, application and monitoring of its accounting policies related to the effect of the amortization periods for leasehold improvements, rent holidays, straight-lining of minimum lease payments, lease incentives and lessee involvement in asset construction practices were ineffective to ensure that such transactions were accounted for in conformity with generally accepted accounting principles. This control deficiency resulted in the restatement of our consolidated financial statements for the fiscal years ended February 1, 2004 and February 2, 2003, the restatement of each of the quarters in the fiscal year ended February 1, 2004, and the restatement of each of the first three quarters in and an adjustment to the consolidated financial statements for the fiscal year ended January 30, 2005.

	•	The Company did not maintain effective controls over the completeness and valuation of our vendor allowance receivable account and related cost of sales. Specifically, the Company did not maintain effective controls over the review and approval process for initial vendor allowance agreements; the monitoring of modifications to existing vendor allowance agreements; and the accuracy of our recording of various vendor allowance transactions. This control deficiency resulted in the restatement of our consolidated financial statements for the fiscal years ended February 1, 2004 and February 2, 2003, the restatement of each of the quarters in the fiscal year ended February 1, 2004, and the restatement of each of the first three quarters in and an adjustment to the consolidated financial statements for the fiscal year ended January 30, 2005.

	•	The Company did not maintain effective controls over the valuation of our inventory allowance accounts for shrinkage and obsolescence and related cost of sales. Specifically, the Company did not have effective supervisory and review controls over our process to determine the inventory shrinkage allowance and the method of valuing certain slow-moving inventory in accordance with generally accepted accounting principles. This control deficiency resulted in audit adjustments to the consolidated financial statements for the fiscal year ended January 30, 2005.

	•	The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with the Company’s financial reporting requirements. Specifically, this control deficiency directly contributed to each of the above described material weaknesses and also resulted in audit adjustments to our consolidated financial statements for the fiscal year ended January 30, 2005 related to the return to vendor accounts receivable and self-insurance accrued liability accounts.

These material weaknesses could result in a misstatement of the Company’s accounts in a future period that would result in a material misstatement to the Company’s annual or interim financial statements that would not be prevented or detected.

In our fiscal 2004 Annual Report, management outlined the following plan for remediation of the material weaknesses:

The Company has made and will continue to make improvements to internal control over financial reporting that we believe will remediate the material weaknesses described above. Specifically, with regard to our lease accounting practices, management intends to:

	•	Require a formal accounting review of each new or amended lease transaction by a management level associate;

	•	Provide additional educational resources to accounting personnel regarding lease accounting guidance applicable to the various lease accounting matters that arise in the course of the Company’s business;

	•	Implement additional processes and procedures to (i) enhance the communication between the real estate/property management departments and accounting personnel concerning various aspects of the Company’s lease transactions, and (ii) have key accounting personnel more closely monitor the Company’s lease transactions; and

	•	Hire additional or reassign staff to facilitate the additional workload needed to handle lease accounting requirements, which go well beyond the approval and processing of lease payments.

With regard to our accounting for vendor allowances, management intends to address the material weaknesses in the accounting and estimation for vendor allowances as follows:

	•	Improve the training of personnel in the accounting and merchandising departments with respect to the Company’s contract review and approval procedures and vendor allowance policies;

	•	Enhance the staffing of personnel in the merchandising department;

	•	Clarify the duties and responsibilities of the Company personnel who interact directly with vendors to reinforce accountability;

	•	Monitor closely vendor agreements with allowances tied to specific purchase volumes to determine when specified criteria are met and when allowances have been earned by the Company; and

	•	Implement a more formalized quarterly process for updating of estimates by vendor including reconciliation to the general ledger accounts.

With regard to our estimation and calculation of the required inventory shrink and obsolescence allowances, management will reassign the review responsibility to permit a more complete review and require that certain data inputs be verified by the reviewer.

With regard to the capabilities and experience of our accounting organization, we intend to:

	•	Implement the organizational structure changes required to facilitate effective supervisory review;

	•	Evaluate the necessity of additional key finance and accounting personnel to facilitate a more effective monitoring and review process; and

	•	Provide for greater review and oversight for key significant accounts.

Although the Company has begun to implement certain of the above-described actions, it is still evaluating the appropriate remediation measures required in order to address the above-described deficiencies. Progress relative to our remediation measures with respect to the above material weaknesses will be disclosed in our subsequent Exchange Act reports.

Nevertheless, in light of the material weaknesses described above, the Company has implemented additional processes and procedures and performed additional analysis and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with generally accepted accounting principles. With regard to accounting for lease related assets in particular, we changed our procedures regarding the review, analysis and recording of new and amended leases, including the selection and monitoring of appropriate assumptions and factors affecting lease accounting and leasehold depreciation practices. Accordingly, management believes that the financial statements included in this Form 10-Q/A fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

Evaluation of Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. In making this evaluation, we considered the material weaknesses in our internal control over financial reporting that we previously identified (as more fully described above). Based on that evaluation, our Chairman and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this quarterly report.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended August 1, 2004, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.Legal Proceedings

Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


	Issuer Purchases of Equity Securities (1)
						Total
						Number of
						Shares		Dollar Value
						Purchased		of Shares
	Total			Average		as Part of		That May Yet
	Number of			Price		Publicly		be Purchased
	Shares			Paid per		Announced		Under the
Period	Purchased			Share		Plans		Plan
June 8, 2004		—			—		—	$	25,000,000
June 8, 2004 to July 4, 2004		475,756	(2)	$	17.50		475,756		16,674,270
July 5, 2004 to August 1, 2004		799,200			14.31		799,200		5,234,924

As of August 1, 2004		1,274,956		$	15.50		1,274,956	$	5,234,924

(1)		On June 8, 2004, our Board of Directors approved a share repurchase program authorizing us to acquire up to $25.0 million of our common stock. The program expires in December 2005. See Note 9 to the Consolidated Financial Statements.

(2)		Represents shares purchased in a privately negotiated transaction with Investcorp S. A., formerly one of the Company’s significant shareholders, at an approximate 1% discount from the average market price of our common

stock on the date of purchase. Charles K. Marquis, a member of our Board of Directors, is employed by Investcorp.

Item 3.Defaults upon Senior Securities

NONE

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

We held our annual meeting of stockholders on June 16, 2004. The following are the results of certain matters voted upon at the meeting:

I. Stockholders elected seven directors to serve until our 2005 Annual Meeting of the Stockholders. The stockholders voted as follows:


Directors	Votes for		Withheld
Maynard L. Jenkins Jr.		31,659,440		9,374,772
James G. Bazlen		31,690,231		9,343,981
Morton Godlas		33,787,833		7,246,379
Terilyn A. Henderson		33,806,868		7,227,344
Charles K. Marquis		33,937,335		7,096,877
Charles J. Philippin		33,806,858		7,227,354
William A. Shutzer		30,194,731		10,839,481

There were no votes against or broker non-votes with respect to the election of directors.

II. Stockholders ratified the appointment of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending January 30, 2005. The stockholders voted as follows:

For: 40,681,707 Against: 347,195 Abstain: 5,310 Broker non-vote: 0

III. Stockholders approved the adoption of the 2004 Executive Incentive Program covering certain senior executives. The stockholders voted as follows:

For: 40,530,914 Against: 481,750 Abstain: 21,548 Broker non-vote: 0

IV. Stockholders approved the adoption of the 2004 Stock and Incentive Plan. The stockholders voted as follows:

For: 27,958,583 Against: 4,635,180 Abstain: 21,213 Broker non-vote: 8,413,926

Item 5.Other Information

None.

Item 6.Exhibits and Reports on Form 8-K

(a) Exhibits:

31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.0	Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

On June 3, 2004, we filed a current report on Form 8-K to report under Items 9 and 12 thereof, the issuance of a press release announcing our financial results for the first quarter of fiscal 2004.

On June 9, 2004, we filed a current report on Form 8-K to report under Item 9 thereof, the placement of slides from an investor’s conference on our web site.

On July 8, 2004, we filed a current report on Form 8-K to report under Item 9 thereof, our comparable store sales for the nine weeks ended July 4, 2004 and revised projections of the second quarter of fiscal 2004.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			CSK Auto Corporation

			By:	/s/ DON W. WATSON


		Don W. Watson Chief Financial Officer and Duly Authorized Officer

June 10, 2005

EXHIBIT INDEX


Exhibit
Number		Description

31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.0		Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

CSK Auto (CAO) Inactive 10-Q/A2004 Q3 Quarterly report (amended)

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