CSK Auto 10Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended October 29, 2006


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

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

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

Large accelerated filerþ Accelerated filero Non-accelerated filero

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

As of August 1, 2007, there were 43,959,709 shares of our common stock outstanding.

TABLE OF CONTENTS


		Page
Explanatory Note			2
Forward-Looking Statements			3

PART I – Financial Information

Item 1.	Financial Statements (unaudited)
	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		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		45

PART II – Other Information

Item 1.	Legal Proceedings		52
Item 1A.	Risk Factors		52
Item 6.	Exhibits		52

Signature			53
EX-31.01
EX-31.02
EX-32.01

As used herein, the terms “CSK,” “CSK Auto,” “the Company,” “we,” “us,” and “our” refer to CSK Auto Corporation and its subsidiaries, including its operating subsidiary, CSK Auto, Inc. and its subsidiaries. The term “Auto” as used herein refers to our operating subsidiary, CSK Auto, Inc., and its subsidiaries.

You may obtain, free of charge, copies of this Quarterly Report on Form 10-Q for the quarterly period ended October 29, 2006 (this “Quarterly Report”) as well as our Annual Report on Form 10-K and Current Reports on Form 8-K (and amendments to those reports) filed with or furnished to the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after such reports have been filed or furnished by accessing our website atwww.cskauto.com,then clicking “Investors.” Information contained on our website is not part of this Quarterly Report.

Explanatory Note

As a result of significant delays in completing our consolidated financial statements for the year ended January 29, 2006 (“fiscal 2005”), we were unable to timely file with the SEC this Quarterly Report and our Quarterly Reports on Form 10-Q for the quarterly periods ended April 30, 2006, July 30, 2006 and May 6, 2007. The aforementioned delay was due to the Company’s devotion of substantial internal and external resources towards the completion of its Annual Report on Form 10-K for fiscal 2005 (the “2005 10-K”), which was filed with the SEC on May 1, 2007. The 2005 10-K contained restatements of prior years’ financial statements to correct accounting errors and irregularities of the type identified in the Company’s Audit Committee-led independent accounting investigation (the “Audit Committee-led investigation”) that was conducted in fiscal 2006 (defined below). The Company did not amend its prior Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement adjustments, including its Quarterly Reports on Form 10-Q for each of the first three quarterly periods in fiscal 2005. The financial statements and related financial information contained in such previously filed reports are superseded by the information in the 2005 10-K and in any later filed reports, and accordingly, the financial statements and related financial information contained in reports filed prior to the 2005 10-K should not be relied upon. The interim financial information for fiscal 2005 included in this Quarterly Report was restated as described in Note 2 to the consolidated financial statements included herein.

The Company filed its Annual Report on Form 10-K for the fiscal year ended February 4, 2007 (“fiscal 2006”) on July 9, 2007 and amended that filing on August 15, 2007 with a Form 10-K/A (the Form 10-K as so amended, the “2006 10-K”) to amend Note 20 — Quarterly Results (unaudited) in Part II Item 8, Financial Statements and Supplementary Data, to correct inadvertent errors in our interim period results of operations reported for fiscal 2005 as more fully described in Note 2 to the consolidated financial statements included herein. Due to the delay of the filing of this Quarterly Report, certain information presented herein relates to events that occurred subsequent to October 29, 2006. For additional information regarding the Company, the Audit Committee-led investigation and its results, our business, operations, risks and results, please refer to our 2006 10-K and Current Reports on Form 8-K filed with the SEC subsequent to July 9, 2007.

We are filing our Quarterly Reports on Form 10-Q for the quarterly periods ended April 30, 2006 and July 30, 2006 with the SEC contemporaneously with the filing of this Quarterly Report.

Note Concerning Forward-Looking Information

Certain statements contained in this Quarterly Report are forward-looking statements and are usually identified by words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “could,” “should” or other similar expressions. We intend forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect current views about our plans, strategies and prospects and speak only as of the date of this Quarterly Report.

We believe that it is important to communicate our future expectations to our investors. However, forward-looking statements are subject to risks, uncertainties and assumptions often beyond our control, including, but not limited to, competitive pressures, the overall condition of the national and regional economies, factors affecting import of products, factors impacting consumer spending and driving habits such as high gas prices, war and terrorism, natural disasters and/or extended periods of inclement weather, consumer debt levels and inflation, demand for our products, integration and management of any current and future acquisitions, conditions affecting new store development, relationships with vendors, risks related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX” and such Section, “SOX 404”) and litigation and regulatory matters. Actual results may differ materially from anticipated results described in these forward-looking statements. For more information related to these and other risks, please refer to the Risk Factors section in the 2006 10-K. In addition to causing our actual results to differ, the factors listed and referred to above may cause our intentions to change from those statements of intention set forth in this Quarterly Report. Such changes in our intentions may cause our results to differ. We may change our intentions at any time and without notice based upon changes in such factors, our assumptions or otherwise.

Except as required by applicable law, we do not intend and undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, you should not place undue reliance upon forward-looking statements and should carefully consider these risks and uncertainties, together with the other risks described from time to time in our other reports and documents filed with the SEC.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)


	October 29,			January 29,
	2006			2006
ASSETS
Cash and cash equivalents	$	26,250		$	17,964
Receivables, net of allowances of $384 and $435, respectively		39,171			29,861
Inventories		516,363			508,507
Deferred income taxes		41,232			37,806
Prepaid expenses and other current assets		17,514			20,047

Total current assets		640,530			614,185

Property and equipment, net		169,442			174,112
Intangibles, net		68,614			71,807
Goodwill		224,937			223,507
Deferred income taxes		8,041			20,845
Other assets, net		36,282			35,578

Total assets	$	1,147,846		$	1,140,034


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	237,406		$	208,507
Accrued payroll and related expenses		60,964			48,483
Accrued expenses and other current liabilities		84,727			89,141
Current maturities of long-term debt		73,054			42,465
Current maturities of capital lease obligations		8,885			9,500

Total current liabilities		465,036			398,096


Long-term debt		451,445			507,523
Obligations under capital leases		13,990			18,106
Other liabilities		46,801			60,152

Total non-current liabilities		512,236			585,781


Commitments and contingencies

Stockholders’ equity:
Common stock, $0.01 par value, 90,000,000 shares authorized, 43,889,202 and 43,830,322 shares issued and outstanding at October 29, 2006 and January 29, 2006, respectively		439			438
Deferred compensation		—			(1,735	)
Additional paid-in capital		431,709			426,560
Accumulated deficit		(261,574	)		(269,106	)

Total stockholders’ equity		170,574			156,157

Total liabilities and stockholders’ equity	$	1,147,846		$	1,140,034

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2006		2005		2006		2005
			(Restated)				(Restated)
Net sales	$	483,075	$	415,919	$	1,435,585	$	1,247,799
Cost of sales		256,188		220,892		760,950		655,028

Gross profit		226,887		195,027		674,635		592,771
Other costs and expenses:
Operating and administrative		201,056		161,144		582,815		480,181
Investigation and restatement costs		6,736		—		22,368		—
Store closing costs		364		901		1,045		1,916

Operating profit		18,731		32,982		68,407		110,674
Interest expense		13,308		7,554		34,628		24,719
Loss on debt retirement		90		—		19,426		1,600

Income before income taxes and cumulative effect of change in accounting principle		5,333		25,428		14,353		84,355
Income tax expense		2,175		9,931		5,855		33,040

Income before cumulative effect of change in accounting principle		3,158		15,497		8,498		51,315
Cumulative effect of change in accounting principle, net of tax		—		—		966		—

Net income	$	3,158	$	15,497	$	7,532	$	51,315


Basic earnings per share:
Income before cumulative effect of change in accounting principle	$	0.07	$	0.35	$	0.19	$	1.15
Cumulative effect of change in accounting principle		—		—		0.02		—

Net income per share	$	0.07	$	0.35	$	0.17	$	1.15

Shares used in computing per share amounts		43,867		43,787		43,855		44,683


Diluted earnings per share:
Income before cumulative effect of change in accounting principle	$	0.07	$	0.35	$	0.19	$	1.14
Cumulative effect of change in accounting principle		—		—		0.02		—

Net income per share	$	0.07	$	0.35	$	0.17	$	1.14

Shares used in computing per share amounts		44,050		44,121		44,065		45,049

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)


					Additional
	Common Stock				Paid-in			Deferred			Accumulated			Total
	Shares		Amount		Capital			Compensation			Deficit			Equity
Balances at January 29, 2006		43,830,322	$	438	$	426,560		$	(1,735	)	$	(269,106	)	$	156,157
Restricted stock		26,669		—		(205	)		—			—			(205	)
Adoption of SFAS No. 123R (Note 3)		—		—		(1,735	)		1,735			—			—
Exercise of options		32,211		1		433			—			—			434
Compensation expense, stock-based awards		—		—		1,591			—			—			1,591
Warrants and call options, net of tax		—		—		390			—			—			390
Discount on senior exchangeable notes, net of tax		—		—		4,675			—			—			4,675
Net income		—		—		—			—			7,532			7,532

Balances at October 29, 2006		43,889,202	$	439	$	431,709		$	—		$	(261,574	)	$	170,574

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Thirty-Nine Weeks Ended
	October 29,			October 30,
	2006			2005
				(Restated)
Cash flows provided by (used in) operating activities:
Net income	$	7,532		$	51,315
Adjustments:
Depreciation and amortization of property and equipment		30,154			24,051
Amortization of other items		4,869			2,680
Amortization of debt discount and deferred financing costs		4,606			1,504
Stock-based compensation expense		3,325			385
Tax benefit relating to exercise of stock options		—			485
Write downs on disposal of property, equipment and other assets		2,617			488
Loss on debt retirement		8,496			1,600
Deferred income taxes		5,230			30,810
Changes in operating assets and liabilities:
Receivables		(9,310	)		(2,931	)
Inventories		(9,726	)		(48,559	)
Prepaid expenses and other current assets		2,533			11,162
Accounts payable		28,899			41,307
Accrued payroll, accrued expenses and other current liabilities		3,289			17,185
Other operating activities		(1,329	)		(1,472	)

Net cash provided by operating activities		81,185			130,010


Cash flows used in investing activities:
Capital expenditures		(25,093	)		(24,165	)
Business acqusitions		(3,173	)		—
Other investing activities		(1,335	)		(1,062	)

Net cash used in investing activities		(29,601	)		(25,227	)


Cash flows provided by (used in) financing activities:
Payments under senior credit facility — term loan		—			(252,450	)
Borrowings under senior credit facility — line of credit		63,100			144,000
Payments under senior credit facility — line of credit		(88,100	)		(114,000	)
Borrowings under term loan facility		350,000			—
Payments of debt issuance costs		(12,337	)		(6,280	)
Proceeds from issuance of 3.375% exchangeable notes		—			125,000
Retirement of of 3.375% exchangeable notes		(125,000	)		—
Retirement of of 7% senior notes		(224,960	)		—
Payments on capital lease obligations		(7,703	)		(8,232	)
Proceeds from seller financing arrangements		428			3,720
Payments on seller financing arrangements		(346	)		(264	)
Proceeds from repayment of stockholder receivable		—			10
Proceeds from exercise of stock options		434			830
Purchase of common stock		—			(25,029	)
Net proceeds from termination of common stock call option and warrants		1,555			—
Premium on common stock call option		—			(26,992	)
Premium from common stock warrants		—			17,820
Other financing activities		(369	)		(224	)

Net cash used in financing activities		(43,298	)		(142,091	)


Net increase (decrease) in cash		8,286			(37,308	)
Cash and cash equivalents, beginning of period		17,964			56,229

Cash and cash equivalents, end of period	$	26,250		$	18,921

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

CSK Auto Corporation is a holding company. At October 29, 2006, 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 October 29, 2006, we operated 1,307 stores in 22 states, with our principal concentration of stores in the Western United States, under the following four brand names (referred to collectively as “CSK stores”): 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; Kragen Auto Parts, founded in 1947 and operating primarily in California; and Murray’s Discount Auto Stores, founded in 1972 and operating in the Midwest. At October 29, 2006, we also operated five value concept retail stores under the Pay N Save brand name in the Phoenix, Arizona metropolitan area, offering primarily tools, hardware, housewares and other household goods, and seasonal items, three of which were closed during the first quarter of our fiscal year ending February 3, 2008 (“fiscal 2007”) and two of which were converted to clearance centers stocked primarily with product from the former Pay N Save store locations.

In December 2005, we purchased all of the outstanding stock of Murray’s Inc. and its subsidiary, Murray’s Discount Auto Stores, Inc. (collectively herein, “Murray’s”). As of the acquisition date, Murray’s operated 110 automotive parts and accessories retail stores in Michigan, Illinois, Ohio and Indiana — states in which the Company previously had no significant market presence.

Note 1 — Basis of Presentation

We prepared the unaudited consolidated financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP 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 4, 2007 (“fiscal 2006”) as included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on July 9, 2007 and Form 10-K/A filed with the SEC on August 15, 2007 (the “2006 10-K/A” and the Form 10-K as so amended, the “2006 10-K”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

For the description of our significant accounting policies, see Note 1 — Summary of Significant Accounting Policies to the consolidated financial statements included in Item 8 of our 2006 10-K.

Note 2 — Audit Committee Investigation and Restatement of Consolidated Financial Statements

Overview

The Company’s consolidated financial statements for fiscal 2004 and 2003 and the quarterly financial information for the first three quarterly periods in fiscal 2005 and all of fiscal 2004 included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2006 (“fiscal 2005”) filed May 1, 2007 (the “2005 10-K”) were restated to correct errors and irregularities of the type identified in the course of an Audit Committee-led independent accounting investigation (referred to herein as the “Audit Committee-led investigation”) conducted during fiscal 2006 and other accounting errors and irregularities identified by the Company in the course of the restatement process relative to the 2005 10-K. The Company’s consolidated financial statements for the thirteen and thirty-nine weeks ended October 30, 2005 included in this Quarterly Report on Form 10-Q (“Quarterly Report”) have been restated to correct for the effect of errors and irregularities identified relative to these periods.

The errors and irregularities identified in the course of the Audit Committee-led investigation primarily related to the Company’s historical accounting for inventories and vendor allowances. However, during the course of the investigation and restatement process, the Company identified a number of other accounting errors and irregularities that were corrected in the restatement. The Audit Committee-led investigation is described in greater detail in Note 12 — Legal Matters.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Audit Committee-led investigation and restatement process resulted in legal, accounting consultant and audit expenses of approximately $25.7 million in fiscal 2006, approximately $6.7 million and $22.4 million of which were incurred in the thirteen and thirty-nine week periods ended October 29, 2006, respectively. Legal, accounting consultant and audit expenses relative to the SEC investigation, completion of the restatement process (relative to the 2005 10-K filed May 1, 2007) and completion of our fiscal 2006 delinquent filings have continued into fiscal 2007; however, we do not expect such expenditures to be of the same magnitude in the aggregate as those incurred in fiscal 2006 relative to the Audit Committee-led investigation and the restatement process.

Subsequent to filing our 2005 10-K and Form 10-K for the fiscal year ended February 4, 2007, the Company filed the Form 10-K/A on August 15, 2007 to amend Note 20 — Quarterly Results (unaudited) in Part II Item 8, Financial Statements and Supplementary Data, in the Form 10-K for fiscal 2006 to correct the interim results of operations reported for fiscal 2005 as a result of an error in the manner in which the Company reported vendor allowances in interim periods. Although affecting interim periods in fiscal 2005, this error did not affect the annual results of operations for fiscal 2005 and had no affect on 2006. The restated financial information for the thirteen and thirty-nine weeks ended October 30, 2005 included in this Quarterly Report reflects the subsequent restatement of the interim information included in the 2006 10-K/A.

The following summarizes the impact of the restatement on our statement of operations for the periods noted and should be read in conjunction with the accompanying consolidated financial statements and notes thereto (in thousands, except per share data).


	Thirteen Weeks Ended			Thirty-Nine Weeks Ended
	October 30, 2005			October 30, 2005
Net income, as previously reported	$	10,517		$	31,620

Increase in net sales		7,601			23,232
Increase in cost of sales		(7,306	)		(11,725	)
Increase in vendor allowance recognition		6,493			20,076
Other adjustments		1,386			1,133
Decrease (increase) in interest expense		31			(264	)

Total restatement adjustments		8,205			32,452
Increase in income tax provision		3,225			12,757

Impact of restatement items, net of taxes		4,980			19,695

Net income, as restated	$	15,497		$	51,315


Earnings per share:
Basic, as previously reported	$	0.24		$	0.71
Impact of restatement items, net of taxes		0.11			0.44

Basic, as restated	$	0.35		$	1.15


Diluted, as previously reported	$	0.24		$	0.70
Impact of restatement items, net of taxes		0.11			0.44

Diluted, as restated	$	0.35		$	1.14

Net sales restatement adjustments

The Company determined that it had understated net sales for the value of core returns received from customers when a core was returned in exchange for the purchase of a new inventory item. The Company refers to a recyclable auto part, which may or may not have been purchased from a Company store, as a “core.” These cores are returned to vendors for cash consideration or to settle an obligation to return a given number of cores to vendors in situations where the Company does not pay for the core component of the inventory as part of the inventory acquisition cost. The Company charges customers who purchase a new part a specified amount for a core, which exceeds the value of the core, and refunds to customers that same amount if a used core is returned at the point of sale of the new part or upon returning the used part to the store at a later date. Previously, the Company recorded the cash received from the customer within net sales. The Company would also record the cash refunded to customers within net sales which would offset the

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

revenue on the transaction in situations where a core was returned. This accounting treatment understated the Company’s net sales and cost of sales, as the exchange with the customer involves the sale of a new auto part to the customer for cash and the return from the customer of a used auto part core. The restatement reflects the value of the cores received from customers as an increase in the Company’s net sales and cost of sales with no effect on gross profit dollar amounts or net income.

The Company had previously accounted for the redemption of Company sponsored mail-in cash rebates as an increase to cost of sales. The Company occasionally sponsors mail-in rebate programs to stimulate sales of particular products and at any one time may have several of these programs in effect. The Company properly estimated, based on historical experience, the amount of rebates that will be paid and was previously accruing this estimate as an increase to cost of sales. Estimates were adjusted to actual redemptions at conclusion of the redemption period. To properly account for mail-in rebates, the restatement corrected the classification of such amounts as a reduction of net sales instead of an increase to cost of sales with no effect on gross profit dollar amounts or net income.

The Company began estimating and accruing an allowance for sales returns in the third quarter of fiscal 2005. At that time, the Company believed the effect (cumulative and in any one period) of not historically recording an allowance was not material to previously issued consolidated financial statements. The Company has determined that the third quarter of fiscal 2005 estimate was in error as it excluded from the calculation methodology certain historical return data that should have been included. The restatement reflected an estimated allowance that includes all relevant historical return data in the estimation methodology based on historical experience.

The table below summarizes the net sales adjustments which increased net sales together with all inventory and cost of sales adjustments, which increased our cost of sales ($ in thousands):



	Thirteen Weeks Ended			Thirty-Nine Weeks Ended
	October 30, 2005			October 30, 2005
Net sales adjustments
Core returns from customers	$	8,793		$	25,885
Rebates to customers		(1,121	)		(2,469	)
Allowance for sales returns		(71	)		(184	)

Increase in net sales	$	7,601		$	23,232


Cost of sales related to net sales adjustments
Core returns from customers	$	(8,793	)	$	(25,885	)
Rebates to customers		1,121			2,469
Allowance for sales returns		(54	)		(146	)

Increase in cost of sales related to net sales adjustments		(7,726	)		(23,562	)


Other cost of sales adjustments
Shrink adjustments		367			17
In-transit inventory		618			551
General ledger adjustments		(1,638	)		1,960
Warranty cost adjustments		1,612			6,027
Overhead cost capitalization		(262	)		1,764
Other		(277	)		1,518

Other cost of sales adjustments		420			11,837

Increase in cost of sales	$	(7,306	)	$	(11,725	)

Inventory and cost of sales restatement adjustments

We identified accounting errors and irregularities related to our inventory and cost of sales transactions. As discussed in “Net sales restatement adjustments” above, we determined that net sales and cost of sales were understated for the value of core returns received from customers and were overstated for Company sponsored mail-in cash rebates. Additionally, the restatement reflected an estimated sales returns allowance that includes all relevant returns in the estimation methodology based on historical experience, which also impacts cost of sales.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In addition, we did not properly record the results of physical inventory counts done annually at each of our distribution centers, warehouses and stores. This also distorted our shrink history by location which affected our allowance for inventory shrinkage. To calculate the restatement adjustments, we had to review physical inventory reconciliations for each distribution center, warehouse and store for each of the Company’s fiscal years ended February 4, 2001 through fiscal 2005 to identify errors, correct the errors and then recalculate an allowance for shrink for each location. Improper inventory balances accumulated over a number of years in in-transit accounts (i.e., store returns to the Company’s warehouses, distribution centers and return centers; and to vendors), which required adjustment. In addition, certain inventory balances were recorded to certain inventory general ledger accounts that were being systematically amortized to cost of sales in inappropriate periods. The Company also did not properly oversee the processes for accounting for inventory warranty obligations and did not establish adequate accruals for warranty returns from customers. We further reviewed our practice for capitalizing inventory overheads (purchasing, warehousing and distribution costs) and identified errors in the costs included as well as errors in the inventory amounts used in the calculations resulting from error and other restatement adjustments.

Vendor allowance restatement adjustments

We identified accounting errors and irregularities related to our vendor allowances that also affected cost of sales. We restated vendor allowances in our Annual Report on Form 10-K for the fiscal year ended January 30, 2005. We subsequently identified additional vendor allowances recorded in prior periods that had not been collected. We then determined that certain recorded amounts were errors or irregularities in estimation that should not have been recognized in earlier periods and identified additional instances in which vendor allowances that were collected were recorded in the incorrect periods. We further identified improper vendor debits related to instances in which amounts not owed us were deducted from vendor payments, and, if not accepted by vendors, were subsequently paid back to the vendors with the recognition and payback recorded in different accounting periods. The Company also identified errors in the application of GAAP to provisions in certain of the vendor agreements. We capitalize earned vendor allowances in inventory, which reduces cost of sales when the inventory is sold. Once we determined the proper earned amounts by periods, we had to reconstruct the amounts capitalized by vendor at each balance sheet date to determine the restatement adjustment to cost of sales. Restatement of vendor allowances and the related capitalization to inventory decreased our cost of goods sold by $6,493,000 and $20,076,000 for the thirteen and thirty-nine week periods ended October 30, 2005, respectively.

Other restatement adjustments

During the Audit Committee-led investigation and restatement process, errors and irregularities were found in other balance sheet accounts. The restatement also corrected for known errors in prior periods that were not corrected at that time because they were not material. The affected balance sheet accounts have been restated to conform those accounts to GAAP, as well as to record certain expenses in the proper periods. During the restatement process, the Company identified leasing arrangements that were not properly evaluated under GAAP, including a master leasing arrangement for vehicles that was accounted for in error as an operating lease when it should have been classified as a capital lease. As a result, our fixed assets, total debt, operating and administrative expenses and interest expense have been restated. We found problems with accruals for incentive compensation with the result of expenses not being recognized in proper periods. We determined that a substantial portion of store fixtures held for future use in a warehouse were no longer useable and identified other accounting errors with surplus store fixtures, which overstated fixed assets and misstated operating and administrative expenses. We found unsubstantiated general ledger balances for store supplies and that our accounting convention for store supplies overstated other current assets and misstated operating and administrative expenses. Restatement of these accounts (increased) decreased our operating and administrative expense and interest expense as follows ($ in thousands):

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Thirteen Weeks Ended			Thirty-Nine Weeks Ended
	October 30, 2005			October 30, 2005
Decrease in operating lease expense	$	858		$	3,119
Increase in depreciation expense		(581	)		(1,694	)
Increase in store fixtures and supplies		(155	)		(329	)
Increase in employee compensation and benefits		(378	)		(713	)
Other		1,642			750

Decrease in operating and administrative expense	$	1,386		$	1,133


Increase in capital lease interest expense	$	(37	)	$	(467	)
Decrease in other interest expense		68			203

Decrease (increase) in interest expense	$	31		$	(264	)

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

	•		Consolidated Statement of Operations for the thirteen weeks ended October 30, 2005;

	•		Consolidated Statement of Operations for the thirty-nine weeks ended October 30, 2005; and

	•		Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 30, 2005.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED OCTOBER 30, 2005
(Unaudited)
(In thousands, except per share data)


			Net Sales,
	As Previously		Inventory and			Vendor						As
	Reported		Cost of Sales			Allowances			Other			Restated

Net sales	$	408,318	$	7,601		$	—		$	—		$	415,919
Cost of sales		220,079		7,306			(6,493	)		—			220,892

Gross profit		188,239		295			6,493			—			195,027
Operating and administrative		162,521		(225	)*		—			(1,152	)*		161,144
Store closing costs		910		—			—			(9	)*		901

Operating profit		24,808		520			6,493			1,161			32,982
Interest expense		7,585		—			—			(31	)		7,554
Loss on debt retirement		—		—			—			—			—

Income before income taxes		17,223		520			6,493			1,192			25,428
Income tax expense		6,706		204			2,552			469			9,931

Net income	$	10,517	$	316		$	3,941		$	723		$	15,497


Basic earnings per share:
Net income per share	$	0.24	$	—		$	0.09		$	0.02		$	0.35
Shares used in computing per share amounts		43,787											43,787

Diluted earnings per share:
Net income per share	$	0.24	$	—		$	0.09		$	0.02		$	0.35
Shares used in computing per share amounts		44,121											44,121

* Adjustments total $1,386 and represent other restatement adjustments on page 12.

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2005
(Unaudited)
(In thousands, except per share data)


			Net Sales,
	As Previously		Inventory and			Vendor						As
	Reported		Cost of Sales			Allowances			Other			Restated

Net sales	$	1,224,567	$	23,232		$	—		$	—		$	1,247,799
Cost of sales		663,379		11,725			(20,076	)		—			655,028

Gross profit		561,188		11,507			20,076			—			592,771
Operating and administrative		481,351		561	*		—			(1,731	)*		480,181
Store closing costs		1,879		—			—			37	*		1,916

Operating profit		77,958		10,946			20,076			1,694			110,674
Interest expense		24,455		—			—			264			24,719
Loss on debt retirement		1,600		—			—			—			1,600

Income before income taxes		51,903		10,946			20,076			1,430			84,355
Income tax expense		20,283		4,302			7,891			564			33,040

Net income	$	31,620	$	6,644		$	12,185		$	866		$	51,315


Basic earnings per share:
Net income per share	$	0.71	$	0.15		$	0.27		$	0.02		$	1.15
Shares used in computing per share amounts		44,683											44,683

Diluted earnings per share:
Net income per share	$	0.70	$	0.15		$	0.27		$	0.02		$	1.14
Shares used in computing per share amounts		45,049											45,049

* Adjustments total $1,133 and represent other restatement adjustments on page 12.

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2005
(Unaudited)
(In thousands)


				Net Sales,
	As Previously			Inventory and			Vendor						As
	Reported			Cost of Sales			Allowances			Other			Restated

Cash flows provided by (used in) operating activities:
Net income	$	31,620		$	6,644		$	12,185		$	866		$	51,315
Adjustments:
Depreciation and amortization of property and equipment		22,357			—			—			1,694			24,051
Amortization of other items		2,680			—			—			—			2,680
Amortization of deferred financing costs		1,497			—			—			7			1,504
Stock-based compensation expense		385			—			—			—			385
Tax benefit relating to exercise of stock options		216			—			—			269			485
Write downs on disposal of property, equipment and other assets		488			—			—			—			488
Loss on debt retirement		1,600			—			—			—			1,600
Deferred income taxes		18,053			4,302			7,891			564			30,810
Changes in operating assets and liabilities:
Receivables		31,155			2,634			(35,902	)		(818	)		(2,931	)
Inventories		(31,288	)		(20,707	)		3,436			—			(48,559	)
Prepaid expenses and other current assets		4,339			6,545			—			278			11,162
Accounts payable		25,742			3,285			12,390			(110	)		41,307
Accrued payroll, accrued expenses and other current liabilities		17,276			55			—			(146	)		17,185
Other operating activities		1,089			(2,758	)		—			197			(1,472	)

Net cash provided by operating activities		127,209			—			—			2,801			130,010


Cash flows provided by (used in) investing activities:
Capital expenditures		(24,322	)		—			—			157			(24,165	)
Other investing activities		(1,062	)		—			—			—			(1,062	)

Net cash provided by (used in) investing activities:		(25,384	)		—			—			157			(25,227	)


Cash flows provided by (used in) financing activities:
Payments under senior credit facility — term loan		(252,450	)		—			—			—			(252,450	)
Borrowings under senior credit facility — line of credit		144,000			—			—			—			144,000
Payments under senior credit facility — line of credit		(114,000	)		—						—			(114,000	)
Payments of debt issuance costs		(6,280	)		—			—			—			(6,280	)
Proceeds from issuance of 3.375% exchangeable notes		125,000			—			—			—			125,000
Payments on capital lease obligations		(5,227	)		—			—			(3,005	)		(8,232	)
Proceeds from seller financing arrangements		3,720			—			—			—			3,720
Payments on seller financing arrangements		(264	)		—			—			—			(264	)
Proceeds from repayment of stockholder receivable		10			—			—			—			10
Proceeds from exercise of stock options		830			—			—			—			830
Purchase of common stock		(25,029	)		—			—			—			(25,029	)
Premium on common stock call option		(26,992	)		—			—			—			(26,992	)
Premium from common stock warrants		17,820			—			—			—			17,820
Other financing activities		(224	)		—			—			—			(224	)

Net cash used in financing activities:		(139,086	)		—			—			(3,005	)		(142,091	)


Net decrease in cash and cash equivalents		(37,261	)		—			—			(47	)		(37,308	)
Cash and cash equivalents, beginning of period		56,548			—						(319	)		56,229

Cash and cash equivalents, end of period	$	19,287		$	—		$	—		$	(366	)	$	18,921

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 3 — Accounting Change for Share-Based Compensation

Effective January 30, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R,Share-Based Payment, using the modified-prospective method and began recognizing compensation expense for its share-based compensation plans based on the fair value of the awards. Share-based payments include stock option grants, restricted stock and a share-based compensation plan under the Company’s long-term incentive plan (the “LTIP”). Prior to January 30, 2006, the Company accounted for its stock-based compensation plans as prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. In accordance with the modified-prospective transition method of SFAS No. 123R, the Company has not restated prior periods. Accordingly, the Company’s financial statements for the third quarter of fiscal 2005 reflect accounting as prescribed by APB No. 25 and the third quarter of fiscal 2006 reflects SFAS No. 123R.

Total share-based compensation expense included in operating and administrative expenses in the Company’s statement of operations for the thirteen and thirty-nine weeks ended October 29, 2006 was approximately $1,196,000 and $1,734,000, respectively. In addition, the Company incurred $1,591,000 ($966,000 net of income tax benefit) of transition expense upon adoption of SFAS No. 123R, which is shown as a cumulative effect of a change in accounting principle.

2004 Stock and Incentive Plan

In June 2004, our shareholders approved the CSK Auto Corporation 2004 Stock and Incentive Plan (the “Plan”), which replaces all of the following previously existing plans: (1) the 1996 Associate Stock Option Plan; (2) the 1996 Executive Stock Option Plan; (3) the 1999 Executive Stock Option Plan; and (4) the CSK Auto Corporation Directors Stock Plan. Approximately 1.9 million options to purchase shares of our common stock granted under these prior plans were still outstanding at the inception of the Plan. These options can still be exercised by the grantees according to the provisions of the prior plans. Pursuant to the provisions of the Plan, any options cancelled under the prior plans will be added to shares available for issuance under the Plan.

The Plan is administered by the Compensation Committee of our Board of Directors, which has broad authority in administering and interpreting the Plan. We believe the Plan promotes and closely aligns the interests of our employees and directors with our stockholders by permitting the award of stock-based compensation and other performance-based compensation. We believe the Plan will strengthen our ability to reward performance that enhances long-term stockholder value and attract and retain outstanding employees and executives. Plan participation is limited to employees of the Company, any subsidiary or parent of the Company and directors of the Company.

The Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, stock units, incentive bonuses and other stock unit awards. Under the Plan at its inception, the number of shares as to which options, stock appreciation rights, restricted stock, stock units, incentive bonuses or other stock unit awards may be granted is 4.0 million shares of our common stock plus any shares subject to awards made under the prior plans that were outstanding on the effective date of the Plan. The number of shares that can be granted for certain of the items listed above may be restricted per the Plan document. Pursuant to the Plan, in no event will any option be exercisable more than 10 years after the date the option is granted, although we have typically granted options with seven year terms. The Company has generally granted stock options and restricted stock with three-year vesting periods. However, stock options granted to our directors under the Plan vest in one year and awards under the LTIP vest over four years. As of October 29, 2006, there were approximately 2.2 million shares available for grant.

Stock Options

In the fourth quarter of 2005, the Board of Directors approved the acceleration of the vesting of all “underwater” stock options (those stock options previously granted with exercise prices above $15.90, the market price of the Company’s stock on January 27, 2006) previously awarded to employees and executive officers. Option awards not “underwater” at January 27, 2006 and granted subsequent to the Board’s action are not included in the acceleration and will vest equally over the service period established in the award, typically three years. The primary purpose of the accelerated vesting was to enable the Company to avoid recognizing future compensation expense associated with these options upon the adoption of SFAS No. 123R in the first quarter of fiscal 2006. The Company’s Board of Directors took this action with the belief that it was in the best interest of shareholders as it would reduce the Company’s reported non-cash compensation expense in future periods.

As a result of the vesting acceleration, options to purchase approximately 770,775 shares became exercisable immediately; however, restrictions on the sale of any such shares obtained by way of the exercise of accelerated options were imposed to minimize unintended personal benefits to the option holders. Sales of such shares may not occur until the original vesting dates, and sales of any such shares by officers and employees who terminate their employment with the Company (subject to certain exceptions in the case of retirement, death, disability and change of control) are disallowed for three years following the later of the date of their termination of employment or their exercise of the options.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SFAS No. 123R requires share-based compensation expense recognized since January 30, 2006 to be based on the following: a) grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for unvested options granted prior to the adoption date; and b) grant date fair value estimated in accordance with the provisions of SFAS No. 123R for unvested options granted subsequent to the adoption date. The Company uses the Black-Scholes option-pricing model to value all options, and the straight-line method to amortize this fair value as compensation cost over the requisite service period. Total share-based compensation expense included in operating and administrative expense in the accompanying consolidated statements of operations for the thirteen and thirty-nine weeks ended October 29, 2006 was approximately $196,000 and $1,158,000, respectively, for the unvested options granted prior to the adoption date. The remaining unrecognized compensation cost related to unvested awards as of October 29, 2006 (net of estimated forfeitures) was approximately $1.8 million and the weighted-average period of time over which this cost will be recognized is 1.3 years. Under SFAS No. 123R, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. A summary of the Company’s stock option activity for the thirty-nine weeks ended October 29, 2006 and other information is as follows:


										Options Exercisable
				Weighted		Weighted						Weighted
				Average		Average		Aggregate				Average		Aggregate
	Number of			Grant		Fair		Intrinsic		Options		Exercisable		Intrinsic
	Shares			Price		Value		Value		Exercisable		Price		Value
Balance at January 29, 2006		3,207,409		$	14.31
Granted at market price		—		$	—	$	—
Exercised		(32,211	)	$	12.10
Cancelled		(350,852	)	$	20.09

Balance at October 29, 2006		2,824,346		$	13.63			$	6,476,000		2,455,142	$	13.62	$	5,784,000

The weighted average remaining contractual life of all options outstanding at October 29, 2006 was 3.5 years.

The following table summarizes values for stock options exercised ($ in thousands):


	Thirteen Weeks				Thirty-Nine Weeks
	Oct. 29,		Oct. 30,		Oct. 29,		Oct. 30,
	2006		2005		2006		2005
Cash received	$	169	$	102	$	434	$	830
Tax benefits	$	—	$	292	$	—	$	485

SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on when employees exercise stock options and the current market price), the amounts of operating cash flows recognized for such excess tax deductions for stock option exercises were $292,000 and $485,000 for the thirteen and thirty-nine weeks ended October 30, 2005, respectively.

Restricted Stock

The Company has in effect a performance incentive plan for the Company’s management under which the Company awards shares of restricted stock that vest equally over a three-year period. Unvested shares are forfeited when an employee ceases employment except in certain specific circumstances, wherein vesting is accelerated (e.g., change of control). For the thirty-nine weeks ended October 29, 2006, the Company did not grant any restricted stock, whereas the Company granted 5,000 shares and 69,883 shares of restricted stock during the thirteen and thirty-nine week periods ended October 30, 2005, respectively. For accounting purposes, restricted stock is valued at the grant date fair value of the common stock. The Company’s accounting for restricted stock was not affected by the adoption of SFAS No. 123R. At January 29, 2006, the Company had approximately $1.7 million of deferred compensation costs related to unvested restricted stock included in stockholders’ equity. In accordance with SFAS No. 123R, the deferred compensation balance of $1.7 million as of January 29, 2006 was reclassified to additional paid-in capital. Total share-based compensation expense for restricted stock included in operating and administrative expense in the accompanying consolidated statements of operations for the thirteen and thirty-nine weeks ended October 29, 2006 was approximately $62,000 and $433,000, respectively; total share-based compensation expense for restricted stock included in operating and administrative expense in the accompanying consolidated statements of operations for the thirteen and thirty-nine weeks ended October 30, 2005 was

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

approximately $172,000 and $385,000, respectively. The remaining unrecognized compensation cost related to unvested awards as of October 29, 2006 (net of estimated forfeitures) was approximately $786,000, and the weighted-average period of time over which this cost will be recognized is approximately 1.5 years. A summary of the Company’s restricted stock activity for the thirty-nine weeks ended October 29, 2006 and other information is as follows:


						Aggregate
	Number of			Weighted Average		Intrinsic
	Shares			Grant Price		Value
Non-vested at January 29, 2006		137,779		$	14.72
Granted		—		$	—
Released		(41,105	)	$	14.72
Cancelled		(35,998	)	$	14.46

Balance at October 29, 2006		60,676		$	14.89	$	914,000

Long-Term Incentive Plan

In fiscal 2005, the Compensation Committee of our Board of Directors adopted the LTIP. The LTIP was established within the framework of the Plan, pursuant to which cash-based incentive bonus awards may be granted based upon the satisfaction of specified performance criteria. The Board also approved and adopted forms of Incentive Bonus Unit Award Agreements used to evidence the awards under the LTIP. Under the terms of the LTIP, participants (senior executive officers only) were awarded a certain number of incentive units that are subject to a four-year vesting period (25% per year, with the first vesting period ending in fiscal 2007) as well as stock performance criteria. Subject to specific terms and conditions governing a change in control of the Company, each incentive bonus unit, when vested, represents the participant’s right to receive a cash payment from the Company on specified payment dates equal to the amounts, if any, by which the average of the per share closing prices of the Company’s common stock on the New York Stock Exchange over a specified period of time (after release by the Company of its fiscal year earnings) (the “measuring period”) exceeds $20 per share (which figure is subject to certain adjustments in the event of a change in the Company’s capitalization).

For accounting purposes, the awards granted under the LTIP are considered to be service-based, cash settled stock appreciation rights (“SARs”). The award is classified as a liability as the LTIP requires the units to be paid in cash. The Company does not have the option to pay the participant in any other form. While the amount of cash, if any, that will ultimately be received by the participant is not known until the end of the measuring period, the only condition that determines whether the award is vested is whether the employee is still employed by the Company (i.e., completes the required service) at the payment date. Since the amount of cash to be received by the participant is indeterminate at the grant date, SARs are subject to variable plan accounting treatment prior to adoption of SFAS No. 123R whereby the intrinsic value of the award is recognized each period (multiplied by the related percentage of service rendered). Financial Accounting Standards Board (“FASB”) Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans(“FIN 28”) requires that the compensation cost for such awards be recognized over the service period for each separately vesting tranche of award as though the award were, in substance, multiple awards.

The Company concluded that, for purposes of initial recognition, the initial award date occurred on June 28, 2005, as both the number of units that each initial participant was entitled to and the exercise price were known by such initial participants at that date. However, since the Company’s stock price did not exceed $20 per share at any time from the measurement date through the end of fiscal 2005, no compensation cost was recognized, and no pro-forma expense for this award is reflected in the SFAS No. 123 disclosures.

The LTIP units are classified as a liability award under SFAS No. 123R, and as such, must be measured at fair value at the grant date and recognized as compensation cost over the service period in accordance with FIN 28. The modified prospective transition rules under SFAS No. 123R require that for an outstanding instrument that previously was classified as a liability and measured at intrinsic value, an entity should recognize the effect of initially measuring the liability at its fair value, net of any related tax effect, as the cumulative effect of a change in accounting principle. At the beginning of fiscal 2006, the Company recorded $966,000, net of $625,000 income tax benefit, as a cumulative effect of a change in accounting principle for the LTIP fair value liability under SFAS No. 123R upon adoption. Total share-based compensation expense included in operating and administrative expense in the accompanying consolidated statements of operations for the thirteen and thirty-nine weeks ended October 29, 2006 was approximately $938,000 and $143,000, respectively, related to the LTIP units. At October 29, 2006, the Company had a liability of $1,735,000 and approximately $2.0 million of unrecognized compensation cost related to LTIP units. As a liability based instrument, the LTIP awards will be remeasured at each balance sheet date, such that the net compensation expense recorded over the full four-year vesting period of the LTIP units will equal the cash payments, if any, made by the Company to the LTIP participants.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Pro Forma Information

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the thirteen and thirty-nine weeks ended October 30, 2005 (in thousands, except per share data):


	Thirteen			Thirty-Nine
	Weeks Ended			Weeks Ended
	October 30, 2005			October 30, 2005
	(Restated)			(Restated)
Net income — as reported	$	15,497		$	51,315
Add: Stock-based employee compensation expense included in reported net income, net of related income taxes		104			239
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income taxes		(667	)		(1,686	)

Net income — pro forma	$	14,934		$	49,868


Earnings per share — basic:
As reported	$	0.35		$	1.15
Pro forma		0.34			1.12
Earnings per share — diluted:
As reported	$	0.35		$	1.14
Pro forma		0.34			1.11
As reported shares:
Basic		43,787			44,683
Diluted		44,121			45,049
Pro forma shares used in calculation:
Basic		43,787			44,683
Diluted		44,148			45,066

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes model and is based on the following assumptions:


	Thirteen			Thirty-Nine
	Weeks			Weeks
	Ended			Ended
	October 30,			October 30,
	2005			2005
Dividend yield		0%			0%
Risk free interest rate		4.14	%		3.86%-4.14%
Expected life of options		6			6
Expected volatility		26.53	%		26.53%-33.36	%

Dividend Yield– The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.

Risk-Free Interest Rate– This is the U.S. Treasury rate for the date of the grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Expected Life– This is the period of time over which the options granted are expected to remain outstanding and is based on the mid-point option term under Staff Accounting Bulletin No. 107,Share Based Payment.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Expected Volatility– The Company uses actual historical changes in the closing market price of our stock to calculate volatility based on the expected life of the option as it is management’s belief that this is the best indicator of future volatility. An increase in the expected volatility will increase compensation expense.

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 123R-3,Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional paid-in-capital pool as prescribed in SFAS No. 123R or the alternative method as described in the FSP. An entity that adopts SFAS No. 123R using the modified prospective application transition method may make a one-time election to adopt the transition method described in this FSP. We have elected to calculate the additional paid-in-capital pool as prescribed in the FSP (referred to as the “short-cut” method) effective with our adoption of SFAS No. 123R.

Note 4 — Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155,Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. This statement simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS No. 155 also eliminates the guidance in SFAS No. 133 Implementation Issue No. D1,Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, which provides such beneficial interests are not subject to SFAS No. 133. SFAS No. 155 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a Replacement of FASB Statement No. 125, by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for financial instruments acquired or issued after the beginning of our fiscal year 2007. The Company does not expect the adoption of SFAS No. 155 to have a material impact on its financial condition, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140. SFAS No. 156 amends SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS No. 156 to have a material impact on its financial condition, results of operations or cash flows.

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes.FIN 48 will be effective for the Company beginning in the first quarter of fiscal 2007. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position and results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(“SAB 108”). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for financial statements covering the first fiscal year ending after November 15, 2006. The Company does not expect the adoption of SAB 108 to have an impact on its financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which clarifies the definition of fair value, establishes a framework for measuring fair value within GAAP and expands the disclosures on fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial condition, results of operations or cash flows.

Note 5 — Business Acquisition

On December 19, 2005, we acquired all of the outstanding stock of Murray’s, a private company headquartered in Belleville, Michigan, that operated 110 automotive parts and accessories retail stores in Michigan, Illinois, Ohio and Indiana. The purchase price was $180.9 million. As of January 29, 2006, $2.8 million of the purchase price was recorded in other accrued liabilities. The Murray’s acquisition complemented our existing operations and expanded our markets served from 19 to 22 states. The acquisition was funded from borrowings under a $325.0 million senior secured asset-based revolving credit facility and from the issuance of the 4 5/8% (now 6 3/4%) senior exchangeable notes. See Note 10 — Long-Term Debt.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

This transaction has been accounted for in accordance with SFAS No. 141,Business Combinations, and accordingly the financial position and results of operations have been included in our operations since the date of acquisition. In accordance with SFAS No. 141, the purchase price was allocated to the fair value of the assets acquired and liabilities assumed, including identifiable intangible assets. The allocation of purchase price resulted in an inventory fair value adjustment of $2.8 million, which was expensed to cost of sales in fiscal 2005 and 2006 corresponding to the periods in which the inventory was sold. The excess of purchase price over the fair value of net assets acquired resulted in $104.5 million of non-tax deductible goodwill primarily related to the anticipated future earnings and cash flows of the Murray’s retail stores, as well as cost reductions management expects as a result of integrating administrative functions (including operations, finance, human resources, purchasing and information technology). Of the $59.1 million of identifiable intangible assets, $49.4 million was assigned to the Murray’s trade name and trademarks (with a life of 30 years), $9.3 million was assigned to leasehold interests (with an average life of 17 years) and $0.4 million was assigned to customer relationships (with a life of 10 years). In addition, we recorded a $7.5 million liability for leasehold interests for operating leases that had rental commitments in excess of current market conditions (with an average life of 18 years). See Note 8 — Goodwill and Other Intangible Assets.

The final purchase price allocation recorded in fiscal 2005 was as follows ($ in thousands):


Cash and cash equivalents	$	480
Receivables		2,963
Inventories		51,363
Deferred income taxes		3,628
Prepaids and other assets		2,872

		61,306
Property and equipment		20,041
Trade name and trademarks		49,400
Customer relationships		370
Leasehold interests		9,324
Goodwill		104,541
Other long-term assets		65

Total assets acquired		245,047

Accounts payable and accrued liabilities		36,494
Unfavorable leasehold interests		7,482
Deferred income taxes		19,320
Other liabilities		804

Total liabilities assumed		64,100

Fair value of net assets acquired	$	180,947

Employee termination and relocation costs have been recorded in the above purchase price allocation. As of the acquisition date, the Company began to formulate a plan to terminate or relocate certain Murray’s employees. The Company finalized the appropriate staffing levels in Murray’s departments (including operations, finance, human resources, purchasing and information technology) and the experience levels required to perform certain general and administrative functions, and paid approximately $1.2 million in severance and relocation costs in fiscal 2006. The Company did not close any Murray’s stores as a result of the acquisition.

In August 2006, we purchased a franchised Murray’s store for approximately $1.8 million. Net of liabilities assumed, the Company paid approximately $1.5 million in cash and recorded approximately $1.4 million in goodwill.

Note 6 — Inventories

Inventories are valued at the lower of cost or market, cost being determined utilizing the First-in, First-Out (“FIFO”) method. At each balance sheet date, we adjust our inventory carrying balances by an estimated allowance for inventory shrinkage that has occurred since the taking of physical inventories and an allowance for inventory obsolescence, each of which is discussed in greater detail below.

•

We reduce the FIFO carrying value of our inventory for estimated loss due to shrinkage since the most recent physical inventory. Our store shrinkage estimates are determined by dividing the shrinkage loss based on the most recent physical inventory by the sales for that store since its previous physical inventory. That percentage is multiplied by sales since the last physical inventory through period end. Our shrinkage expense for the thirteen and thirty-nine weeks ended October 29, 2006 was approximately $7.9 million and $24.9 million, respectively, and approximately $7.2 million and $22.4 million, respectively, for the thirteen and thirty-nine weeks ended October 30, 2005. While the shrinkage accrual is based on recent experience, there is a risk that actual losses may be higher or lower than expected.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•

In certain instances, we retain the right to return obsolete and excess merchandise inventory to our vendors. In situations where we do not have a right to return, we record an allowance representing an estimated loss for the difference between the cost of any obsolete or excess inventory and the estimated retail selling price. Inventory levels and margins earned on all products are monitored monthly. Quarterly, we make an assessment if we expect to sell any significant amount of inventory below cost and, if so, estimate the amount of allowance to record.

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. The components of ending inventory are as follows ($ in thousands):


	October 29,			January 29,
	2006			2006
FIFO Cost	$	579,318		$	559,359
Administrative and overhead costs		28,647			31,679
Vendor allowances		(72,210	)		(67,959	)
Shrinkage		(18,457	)		(12,488	)
Obsolescence		(935	)		(2,084	)

Net inventory	$	516,363		$	508,507

Note 7 — Property and Equipment

Property and equipment are comprised of the following ($ in thousands):


	October 29,			January 29,
	2006			2006			Estimated Useful life
Land	$	348		$	348
Buildings		14,626			14,198		15 - 25 years
Leasehold improvements		154,942			146,690		Shorter of lease term or useful life
Furniture, fixtures and equipment		169,370			164,745		3 - 10 years
Property under capital leases		95,815			94,220		5 - 15 years or life of lease
Purchased software		11,857			9,141		5 years

		446,958			429,342
Less: accumulated depreciation and amortization		(277,516	)		(255,230	)

Property and equipment, net	$	169,442		$	174,112

Accumulated amortization of property under capital leases totaled approximately $72.7 million and $67.4 million at October 29, 2006 and January 29, 2006, respectively.

We evaluate the carrying value of long-lived assets on an annual basis to determine whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and an impairment loss should be recognized. Such evaluation is based on the expected utilization of the related asset and the corresponding useful life.

Note 8 — Goodwill and Other Intangible Assets

We completed our annual goodwill impairment test as of February 4, 2007, the last day of our 2006 fiscal year, and we determined that no impairment of goodwill existed. Under SFAS No. 142,Goodwill and Other Intangible Assets, the Company’s stores, including the recently acquired Murray’s stores, are considered components with similar economic characteristics that can be aggregated into one reporting unit for goodwill impairment testing.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Our intangible assets, excluding goodwill, consist of favorable leasehold interests, license agreements, trade names and trademarks, and customer relationship intangibles resulting from business acquisitions. Amortization expense related to intangible assets is computed on a straight-line basis over the respective useful lives. Leasehold interests associated with store closures are written off at the time of closure.

Of the $59.1 million of identifiable intangible assets resulting from our fiscal 2005 acquisition of Murray’s, $49.4 million was assigned to Murray’s trade name and trademarks (with a life of 30 years), $9.3 million was assigned to leasehold interests asset (with an average life of 17 years) and $0.4 million was assigned to customer relationships (with a life of 10 years). The excess purchase price over identifiable tangible and intangible assets was approximately $104.5 million, which was recorded as goodwill. See Note 5 — Business Acquisition.

On January 21, 2005, the Company sold a subsidiary that provides diagnostic vehicle repair information. In connection with the sale, the Company was granted a license of the diagnostic software that was valued at approximately $4.4 million and is being amortized over seven years.

The changes in intangible assets, including goodwill, for the thirty-nine weeks ended October 29, 2006 are as follows ($ in thousands):


	Carrying											Carrying
	Value as of											Value as of
	January 29, 2006			Additions		Amortization			Adjustments			Oct. 29, 2006
*Amortized intangible assets:*
Leasehold interests	$	28,556			—		—			(44	)	$	28,512
Accumulated amortization		(10,111	)		—		(1,457	)		44			(11,524	)

		18,445			—		(1,457	)		—			16,988

License agreement		4,417			—		—			—			4,417
Accumulated amortization		(631	)		—		(473	)		—			(1,104	)

		3,786			—		(473	)		—			3,313

Tradenames and trademarks		49,400			—		—			—			49,400
Accumulated amortization		(190	)		—		(1,236	)		—			(1,426	)

		49,210			—		(1,236	)		—			47,974

Customer relationships		370			—		—			—			370
Accumulated amortization		(4	)		—		(27	)		—			(31	)

		366			—		(27	)		—			339


Amortized intangibles, net		71,807			—		(3,193	)		—			68,614


*Unamortized intangible assets:*
Goodwill		223,507			1,430		—			—			224,937

Total intangible assets, net	$	295,314		$	1,430	$	(3,193	)	$	—		$	293,551

Estimated amortization expense relating to intangible assets for the next five fiscal years is listed below ($ in thousands):


Fiscal 2007	$	4,204
Fiscal 2008		4,127
Fiscal 2009		4,050
Fiscal 2010		3,993
Fiscal 2011		3,947

	$	20,321

Note 9 — 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 even if we are contractually committed for future rental costs. As a result of past acquisitions, we have closed numerous locations due to store overlap with previously existing store locations.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 date 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 October 29, 2006, we had a total of 177 locations included in the allowance for store closing costs, consisting of 124 store locations and 53 service centers. Of the store locations, 15 locations were vacant and 109 locations were subleased. Of the service centers, 3 were vacant and 50 were subleased. Future rent expense will be incurred through the expiration of the non-cancelable leases.

Activity in the allowance for store closing costs and the related payments for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 are as follows ($ in thousands):


	Thirty-Nine Weeks Ended
	October 29,			October 30,
	2006			2005
				(Restated)
Balance, beginning of year	$	7,033		$	7,774

Store closing costs:
Provision for store closing costs		174			122
Other revisions in estimates		(110	)		925
Accretion		226			314
Operating expenses and other		755			555

Total store closing costs		1,045			1,916

Payments:
Rent expense, net of sublease recoveries		(1,819	)		(1,697	)
Occupancy and other expenses		(707	)		(564	)
Sublease commissions and buyouts		(198	)		(381	)

Total payments		(2,724	)		(2,642	)

Ending balance	$	5,354		$	7,048

Net cash outflows for closed store locations were approximately $0.9 million for the remainder of fiscal 2006. These cash outflows were funded and future cash outflows are expected to be funded from normal operating cash flows. We closed 12 stores during the thirty-nine weeks ended October 29, 2006 (including four stores closed due to relocation). These closures generally occurred near the end of the lease terms, which resulted in minimal closed store costs. We closed one store during the remainder of fiscal 2006.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 10 — Long-Term Debt

Overview

Outstanding debt, excluding capital leases, is as follows ($ in thousands):


	October 29,		January 29,
	2006		2006
Term loan facility	$	350,000	$	—
Senior credit facility		69,000		94,000
6.75% senior exchangeable notes, carrying balance decreased in fiscal 2006 by $7.3 million discount in accordance with EITF No. 06-6		92,667		100,000
7% senior subordinated notes, carrying balance decreased in fiscal 2005 by $6.7 million relating to SFAS No. 133 hedge accounting adjustment		40		218,279
3.375% senior exchangeable notes		—		125,000
Seller financing arrangements		12,792		12,709

Total debt		524,499		549,988
Less: Current portion of term loan facility		3,487		—
Senior credit facility⁽¹⁾		69,000		42,000
Current maturities of seller financing arrangements		567		465

Total debt (non-current)	$	451,445	$	507,523


⁽¹⁾		This portion of the revolving line of credit represents the expected paydown in the following 12-month period.

Fiscal 2006 Refinancing Transactions

Our inability to timely file our fiscal 2005 consolidated financial statements with the SEC as a result of both the Audit Committee-led investigation and the need to restate our financial statements created potential default implications under our borrowing agreements. As a result, in the second quarter of fiscal 2006, we completed a tender offer for our 7% senior subordinated notes (“7% Notes”), in which we repurchased $224.96 million of the 7% Notes, and we repaid all $125.0 million of our 3³/8% senior exchangeable notes (“3³/8% Notes”) upon the acceleration of their maturity. We entered into a $350.0 million term loan facility (“Term Loan Facility”), proceeds from which were used to pay the tender offer consideration for the 7% Notes and to repay the 3³/8% Notes upon their acceleration. We also entered into a waiver with respect to our senior secured revolving line of credit (“Senior Credit Facility”) and a supplemental indenture to the indenture under which our 4 ⁵/8% senior exchangeable notes (“4⁵/8% Notes”) were originally issued.

Fiscal 2005 Financing Transactions

In fiscal 2005, we completed the following transactions: (1) the issuance of $125.0 million of 3³/8% Notes and the purchase of a call option and issuance of a warrant for shares of our common stock in connection with the issuance of the 3³/8% Notes, (2) the establishment of a $325.0 million Senior Credit Facility, and (3) the issuance of $100.0 million of 4⁵/8% Notes. We paid premiums of $27.0 million for the call option and received premiums of $17.8 million from the sale of the warrants. We used the proceeds from the issuance of the 3³/8% Notes, borrowings under the Senior Credit Facility and cash on hand to repay in full $251.2 million of indebtedness outstanding under our previously existing senior credit facility (including accrued and unpaid interest), repurchase approximately $25.0 million of our common stock and pay fees and expenses directly related to the transactions. We used the proceeds from the issuance of the 4⁵/8% Notes, borrowings under the Senior Credit Facility and cash on hand to acquire Murray’s in December 2005 for approximately $180.9 million.

Term Loan Facility

In order to repay the 7% Notes and the 3³/8% Notes described below, we entered into a $350.0 million Term Loan Facility in June 2006. The loans under the Term Loan Facility (“Term Loans”) bear interest at a base rate or the LIBOR rate, plus a margin that will fluctuate depending upon the rating of the Term Loans. The Term Loans are guaranteed by the Company and CSKAUTO.COM, Inc., a wholly owned subsidiary of Auto. The Term Loans are secured by a second lien security interest in certain assets, primarily inventory and receivables, of Auto and the guarantors and by a first lien security interest in substantially all of their other assets. The Term Loans call for repayment in consecutive quarterly installments, which began on December 31, 2006, in an amount equal to

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

0.25% of the aggregate principal amount of the Term Loans, with the balance payable in full on the sixth anniversary of the closing date, or June 30, 2012. Costs associated with the Term Loan Facility were approximately $10.8 million and, beginning June 30, 2006, are being amortized to interest expense following the interest method over the six-year term of the facility.

The Term Loan Facility contains, among other things, limitations on liens, indebtedness, mergers, disposition of assets, investments, payments in respect of capital stock, modifications of material indebtedness, changes in fiscal year, transactions with affiliates, lines of business, and swap agreements. Auto is also subject to financial covenants under the Term Loan Facility measuring its performance against standards set for leverage and fixed charge coverage. The Term Loan Facility also contains certain financial covenants, one of which is the requirement of a minimum Fixed Charge Coverage Ratio (as defined in the Term Loan Facility) of 1.4:1 until December 31, 2008 and 1.45:1 thereafter. The Term Loan Facility also requires that a leverage ratio test be met. The maximum leverage ratio permitted was 3.75:1 at the end of fiscal 2006 and is 3.95:1, 3.85:1, 3.75:1 and 3.50:1 for the first, second, third and fourth quarters, respectively, of fiscal 2007. The leverage ratio further declines to 3.25:1 at the end of fiscal 2008 and 3.00:1 at the end of fiscal 2009. The leverage ratios for fiscal 2007 reflect the April 27, 2007 second amendment of the Term Loan Facility in which certain fiscal 2007 leverage ratios were modified as set forth above to provide greater flexibility along with the elimination of undrawn letters of credit from the definition of debt. See Note 13 — Subsequent Events.

Senior Credit Facility — Revolving Line of Credit

At October 29, 2006 and January 29, 2006, Auto had a $325.0 million senior secured revolving line of credit. Auto is the borrower under the agreement and it is guaranteed by the Company and CSKAUTO.COM, Inc. Borrowings under the Senior Credit Facility bear interest at a variable interest rate based on one of two indices, either (i) LIBOR plus an applicable margin that varies (1.25% to 1.75%) depending upon Auto’s average daily availability under the agreement measured using certain borrowing base tests, or (ii) the Alternate Base Rate (as defined in the agreement). The Senior Credit Facility matures in July 2010.

During the second quarter of fiscal 2006, we entered into a waiver under the Senior Credit Facility to allow us until June 13, 2007 to file certain periodic reports with the SEC. Costs associated with the waiver were approximately $1.6 million, were recorded as deferred financing fees in fiscal 2006, and are being amortized through July 2010. See Note 13 — Subsequent Events for a discussion of subsequent waiver to the Senior Credit Facility.

Availability under the Senior Credit Facility is limited to the lesser of the revolving commitment of $325.0 million and a borrowing base limitation. The borrowing base limitation is based upon a formula involving certain percentages of eligible inventory and eligible accounts receivable owned by Auto. As a result of the limitations imposed by the borrowing base formula, at October 29, 2006, Auto could only borrow up to an additional $133.3 million of the $325.0 million facility in addition to the $69.0 million borrowed under the revolving credit facility at October 29, 2006 at an average interest rate of approximately 6.929%, and the $32.2 million of letters of credit outstanding under the Senior Credit Facility at that date. At each balance sheet date, we classify, as a current liability, balances outstanding under the revolving portion of the Senior Credit Facility we expect to repay during the following 12 months. Loans under the Senior Credit Facility are collateralized by a first priority security interest in certain of our assets, primarily inventory and accounts receivable, and a second priority security interest in certain of our other assets. The Senior Credit Facility contains negative covenants and restrictions on actions by Auto and its subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions, investments, loans, advances and acquisitions, payment of dividends, transactions with affiliates, change in business conducted and certain prepayments and amendments of indebtedness. In addition, under the terms of the waiver we entered into with respect to the Senior Credit Facility in June 16, 2006, Auto has been required to maintain a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the agreement) and will be required to do so until the termination of such waiver and all future waivers. See Note 13 — Subsequent Events.

In the second quarter of fiscal 2005, in connection with the early termination of our prior senior credit facility, consisting of a $255.0 million term loan and a $145.0 million revolving credit facility, we recorded a $1.6 million loss on debt retirement resulting from the write-off of certain deferred financing fees.

4⁵/8% Notes Refinanced into 6³/4% Notes

In June 2006, we commenced a cash tender offer and consent solicitation with respect to our $100.0 million of 4⁵/8% Notes. We did not purchase any notes in the tender offer because holders of a majority of the outstanding 4⁵/8% Notes did not tender in the offer prior to its expiration date. We later obtained the consent of the holders of a majority of the 4⁵/8% Notes to enter into a supplemental indenture to the indenture under which the 4⁵/8% Notes were originally issued that (i) waived any default arising from Auto’s failure to file certain financial information with the Trustee for the notes, (ii) exempted Auto from compliance with the SEC filing covenants in the indenture until June 30, 2007, (iii) increased the interest rate of the notes to 6³/4% per year until December 15, 2010 and 6¹/2% per year thereafter, and (iv) increased the exchange rate of the notes from 49.8473 shares of our common stock per $1,000 principal

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

amount of notes to 60.6061 shares of our common stock per $1,000 principal amount of notes (hereinafter, these notes are referred to as the “6³/4% Notes”). All other terms of the indenture are unchanged. Costs associated with the tender offer and supplemental indenture were approximately $0.5 million and were recognized in operating and administrative expenses in the second quarter of fiscal 2006. Under the registration rights agreement entered into in connection with the sale of the 4⁵/8% Notes and described below, additional interest of 25 basis points began to accrue on these Notes in March 2006 and increased to 50 basis points in June 2006. In total, we incurred approximately $1.5 million in additional interest expense in fiscal 2006 related to the increase in the coupon interest rate to 6³/4% and the additional interest expense under the registration rights agreement. Also, in accordance with Emerging Issues Task Force (“EITF”) No 06-6,Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments, the changes to the 6³/4% Notes were recorded in fiscal 2006 as a modification, not an extinguishment, of the debt. The Company recorded the increase in the fair value of the exchange option as a debt discount with a corresponding increase to additional paid-in-capital in stockholders’ equity. The debt discount was $7.7 million and is being amortized to interest expense following the interest method to the first date the noteholders could require repayment. Total amortization on the debt discount was $0.4 million as of October 29, 2006.

The 6³/4% Notes are exchangeable into cash and shares of our common stock. Upon exchange of the 6³/4% Notes, we will deliver cash equal to the lesser of the aggregate principal amount of notes to be exchanged and our total exchange obligation and, in the event our total exchange obligation exceeds the aggregate principal amount of notes to be exchanged, shares of our common stock in respect of that excess. The following table represents key terms of the 6³/4% Notes:



	Terms			6³/4% Notes
	Interest Rate			6.75% per year until December 15, 2010; 6.50% thereafter
	Exchange Rate			60.6061 shares per $1,000 principal (equivalent to an initial exchange price of approximately $16.50 per share)
	Maximum CSK shares exchangeable			6,060,610 common shares, subject to adjustment in certain circumstances
	Maturity date			December 15, 2025
	Guaranteed by			CSK Auto Corporation and all of Auto’s present and future domestic subsidiaries, jointly and severally, on a senior basis
	Dates that the noteholders may require Auto to repurchase some or all for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest			December 15, 2010, December 15, 2015, and December 15, 2020 or following a fundamental change as described in the indenture
	Issuance costs being amortized over a 5-year period, corresponding to the first date the noteholders could require repayment			$3.7 million
	Auto will not be able to redeem notes			Prior to December 15, 2010
	Auto may redeem for cash some or all of the notes			On or after December 15, 2010, upon at least 35 calendar days notice
	Redemption price			Equal to 100% of the principal amount plus any accrued and unpaid interest and additional interest, if any, to, but not including, the redemption date

Prior to their stated maturity, the 6³/4% Notes are exchangeable by the holder only under the following circumstances:

	•		During any fiscal quarter (and only during that fiscal quarter) commencing after January 29, 2006, if the last reported sale price of our common stock is greater than or equal to 130% of the exchange price for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter;

	•		If the 6³/4% Notes have been called for redemption by Auto; or

	•		Upon the occurrence of specified corporate transactions, such as a change in control, as described in the indenture under which the 6³/4% Notes were issued.

If the 6³/4% Notes become exchangeable, the corresponding debt will be reclassified from long-term to current for as long as the notes remain exchangeable.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

EITF No. 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, provides guidance for distinguishing between permanent equity, temporary equity, and assets and liabilities. The embedded exchange feature in the 6³/4% Notes providing for the issuance of common shares to the extent our exchange obligation exceeds the debt principal and the embedded put options and the call options in the debt each meet the requirements of EITF No. 00-19 to be accounted for as equity instruments. As such, the share exchange feature and the put options and call options embedded in the debt have not been accounted for as derivatives (which would be marked to market each reporting period). In the event the 6³/4% Notes are exchanged, the exchange will be accounted for in a similar manner to a conversion with no gain or loss (as the cash payment of principal reduces the recorded liability issued at par) and the issuance of common shares would be recorded in stockholders’ equity. Any accrued interest on the debt will not be paid separately upon an exchange and will be reclassified to equity. Incremental net shares for the 6³/4% Notes exchange feature will be included in our future diluted earnings per share calculations for those periods in which our average common stock price exceeds $16.50.

We have entered into a registration rights agreement with respect to the 6³/4% Notes and the underlying shares of our common stock into which the 6³/4% Notes are potentially exchangeable. Under its terms, we are paying additional interest of 50 basis points on the 6³/4% Notes until the earlier of the date the 6³/4% Notes are no longer outstanding or the date two years after the date of their issuance, as we have failed to meet certain filing and effectiveness deadlines with respect to the registration of the 6³/4% Notes and the underlying shares of our common stock. In the event the debt is exchanged, the additional interest will no longer be payable.

7% Notes

In July 2006, we completed a tender offer for our 7% Notes, in which we repurchased virtually all of the 7% Notes for the principal amount of $224.96 million. We purchased the balance of the 7% Notes in the fourth quarter of fiscal 2006. Unamortized deferred financing fees at the time of repurchase were $4.5 million, and costs associated with the transaction were approximately $0.5 million, all of which was recognized as a loss on debt retirement during the second quarter of fiscal 2006. In connection with the repurchase of the 7% Notes, we terminated our interest rate swap agreement, which was intended to hedge the fair value of $100.0 million of the 7% Notes. Consideration of $11.1 million was paid to terminate the swap, of which $10.4 million represented the fair value liability and $0.7 million represented accrued interest. The $10.4 million was recognized as a loss during the second quarter of fiscal 2006.

3³/8% Notes

In July 2006, we repaid all the 3³/8% Notes upon the acceleration of their maturity for the principal amount of $125.0 million. Unamortized deferred financing fees at the time of repayment were $4.0 million, and costs associated with the transaction were approximately $0.1 million, all of which was recognized as a loss on debt retirement during the second quarter of fiscal 2006. In September 2006, the equity call option and warrant contracts were terminated and settled with the counterparty. We elected a cash settlement and received approximately $3.0 million for the call option and paid proceeds of $1.4 million for the warrant contract. These amounts represented the fair value of the contracts at the termination date and were recorded as additional paid-in capital in fiscal 2006.

Seller Financing Arrangements

Seller financing arrangements relate to debt established for stores in which we were the seller-lessee and did not recover substantially all construction costs from the lessor. In those situations, we recorded our total cost in property and equipment and amounts funded by the lessor as a debt obligation in the accompanying balance sheet in accordance with EITF No. 97-10,The Effect of Lessee Involvement in Asset Construction.A portion of the rental payments made to the lessor is charged to interest expense and reduces the corresponding debt based on amortization schedules.

Debt Covenants

Certain of our debt agreements at October 29, 2006 contained negative covenants and restrictions on actions by us and our subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions, investments, loans, advances and acquisitions, payment of dividends, transactions with affiliates, change in business conducted, and certain prepayments and amendments of indebtedness. In addition, Auto is, under certain circumstances, subject to a minimum ratio of consolidated earnings before interest, taxes, depreciation, amortization and rent expense, or EBITDAR, to fixed charges (as defined in the agreement the “Fixed Charge Coverage Ratio”) under a Senior Credit Facility financial maintenance covenant. Although the Fixed Charge Coverage Ratio was not applicable under the terms of the Senior Credit Facility during the quarter ended October 29, 2006, under the terms of the waiver we entered into with respect to the Senior Credit Facility during the second quarter of fiscal 2006,

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Auto is required to maintain a minimum 1:1 Fixed Charge Coverage Ratio until the termination of such waiver and all subsequent waivers. The Term Loan Facility also requires us to maintain compliance with certain financial covenants. See Note 13 — Subsequent Events for a discussion of our compliance with these covenants.

A breach of the covenants or restrictions contained in our debt agreements could result in an event of default thereunder. Upon the occurrence of an event of default under our Senior Credit Facility or the Term Loan Facility, the lenders could elect to terminate the commitments thereunder (in the case of the Senior Credit Facility only), declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable and exercise the remedies of a secured party against the collateral granted to them to secure such indebtedness. 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 either the Senior Credit Facility or the Term Loan Facility accelerate the payment of the indebtedness due thereunder, 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. At October 29, 2006, we were in compliance with or had obtained waivers with respect to the covenants under all our debt agreements. See Note 13 — Subsequent Events for a discussion of our debt covenants subsequent to October 29, 2006.

Note 11 — Earnings per Share

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


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2006		2005		2006		2005
			(Restated)				(Restated)
Numerator for basic and diluted earnings per share:
Net Income	$	3,158	$	15,497	$	7,532	$	51,315

Denominator for basic earnings per share:
Weighted average shares outstanding (basic)		43,867		43,787		43,855		44,683

Denominator for diluted earnings per share:
Weighted average shares outstanding (basic)		43,867		43,787		43,855		44,683
Effect of dilutive securities		183		334		210		366

Weighted average shares outstanding (diluted)		44,050		44,121		44,065		45,049

Shares excluded as a result of anti-dilution:
Stock options		2,137		1,066		2,162		374

Incremental net shares for the exchange feature of the $100.0 million of 4 5/8% (now 6³/4%) Notes will be included in our future diluted earnings per share calculations for those periods in which our average common stock price exceeds $16.50 per share.

Note 12 — Legal Matters

Audit Committee Investigation and Restatement of the Consolidated Financial Statements

Overview

In its 2005 10-K, the Company’s consolidated financial statements for fiscal 2004 and 2003 and quarterly information for the first three quarterly periods in fiscal 2005 and all of fiscal 2004 were restated to correct errors and irregularities of the type identified in its Audit Committee-led investigation and other accounting errors and irregularities identified by the Company in the course of the restatement process (relative to the 2005 10-K), all as more fully described in the “Background” section below.

The Audit Committee concluded that the errors and irregularities were primarily the result of actions directed by certain personnel and an ineffective control environment that, among other things, permitted the following to occur:

	•		recording of improper accounting entries as directed by certain personnel;

	��		inappropriate override of, or interference with, existing policies, procedures and internal controls;

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	•		withholding of information from, and providing of improper explanations and supporting documentation to, the Company’s Audit Committee and Board of Directors, as well as its internal auditors and independent registered public accountants; and

	•		discouraging employees from raising accounting related concerns and suppressing accounting related concerns and suppressing accounting related inquiries that were made.

In September 2006, upon the substantial conclusion of the Audit Committee-led investigation, the Company announced the departures of the Company’s President and Chief Operating Officer, Chief Administrative Officer (who, until October 2005, served as the Company’s Senior Vice President and Chief Financial Officer) and several other individuals (including its Controller) within the Company’s Finance organization.

Management, with the assistance of numerous experienced accounting consultants (other than its firm of independent registered public accountants) that the Company had retained near the onset of the investigation to assist the then new Chief Financial Officer with the restatement efforts, continued to review the Company’s accounting practices and identified additional errors and irregularities that were corrected in the restatements.

Background

In the Company’s Annual Report on Form 10-K for fiscal 2004, filed May 2, 2005 (the “2004 10-K”), management concluded that the Company did not maintain effective internal control over financial reporting as of January 30, 2005 due to the existence of material weaknesses as described in the 2004 10-K. The plan for remediation at that time called for, among other things, the Company to enhance staffing and capabilities in its Finance organization. During fiscal 2005, we made several enhancements to our Finance organization including the October 2005 hiring of a new Senior Vice President and Chief Financial Officer, Mr. James Riley. In the fourth quarter of fiscal 2005, new personnel in our Finance organization raised questions regarding the existence of inventory underlying certain general ledger account balances, and an internal audit of vendor allowances raised additional concerns about the processing and collections of vendor allowances. Management’s review of these matters continued into our fiscal 2005 year-end financial closing. In early March 2006, it became apparent that inventories and vendor allowances were potentially misstated and that the effect was potentially material to the Company’s previously issued consolidated financial statements. The Audit Committee, acting through a Special Investigation Committee appointed by the Audit Committee consisting of the Audit Committee Chairman and the Company’s designated Presiding Director, retained independent legal counsel who, in turn, retained a nationally recognized accounting firm, other than the Company’s independent registered public accountants, to assist it in conducting an independent investigation relative to accounting errors and irregularities, relating primarily to the Company’s historical accounting for its inventories and vendor allowances.

On March 23, 2006, the Audit Committee concluded that, due to accounting errors and irregularities then noted, the Company’s (i) fiscal 2004 consolidated financial statements, as well as its consolidated financial statements for fiscal years 2003, 2002 and 2001, (ii) selected consolidated financial data for each of the five years in the period ended January 30, 2005, (iii) interim financial information for each of its quarters in fiscal 2003 and fiscal 2004 included in its 2004 10-K, and (iv) interim financial statements included in its Form 10-Qs for the first three quarterly periods of fiscal 2005, should no longer be relied upon. On March 27, 2006, the Company announced that it would be postponing the release of its fourth quarter and fiscal 2005 financial results pending the outcome of the Audit Committee-led investigation; that it would be restating historical financial statements; and that the Company’s consolidated financial statements for the prior interim periods and fiscal years indicated above should no longer be relied upon.

The initial and primary focus of the Audit Committee-led investigation was the Company’s accounting for inventory and for vendor allowances associated with its merchandising programs. However, the Audit Committee did not limit the scope of the investigation in any respect, which was subsequently broadened to encompass other potential concerns raised during the course of the investigation. Throughout and upon completion of the investigation, representatives of the Audit Committee and its legal and accounting advisors shared the results of the investigation with the Company’s independent registered public accounting firm and the SEC, which is conducting a formal investigation of these matters. As noted below, the Company continues to share information and believes it is cooperating fully with the SEC in its formal investigation.

During and following the Audit Committee-led investigation, the Company’s Finance personnel (consisting primarily of the Company’s then new Chief Financial Officer, Mr. Riley, and numerous experienced finance/accounting consultants the Company had retained near the onset of the investigation to assist Mr. Riley with the restatement efforts), assisted by the Company’s Internal Audit staff, conducted follow-up procedures to ensure that the information uncovered during the investigation was complete, evaluated the initial accounting for numerous transactions and reviewed the activity in accounts in light of the newly available information to determine the propriety of the initial record-keeping and accounting. In the course of these follow-up procedures, the Company also identified a number of other accounting errors and irregularities that were corrected in our restated consolidated financial statements in our 2005 10-K.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The legal and accounting advisors to the Audit Committee, from March through the end of September 2006, reviewed relevant documentation and interviewed current and former officers and employees of the Company. The investigation and restatement process identified numerous instances of improperly supported journal entries recorded to general ledger accounts, override of Company policies and procedures, absence of appropriately designed policies and procedures, misapplication of GAAP and other ineffective controls. In addition, the investigation identified evidence of both a “tone” among certain senior executives of the Company that discouraged the raising of accounting concerns and other behavior that was deemed to not be acceptable by five of our directors, including the members of the Special Investigation Committee appointed by the Audit Committee, who are not present or former members of our management (the “Disinterested Directors”).

On September 28, 2006, the Company announced the substantial completion of the Audit Committee-led investigation, and that the investigation had identified accounting errors and irregularities that materially and improperly impacted various inventory accounts, vendor allowance receivables, other accrual accounts and related expense accounts. In addition to the personnel changes discussed above, the Company also announced its intent to implement remedial measures in the areas of enhanced accounting policies, internal controls and employee training.

The Audit Committee-led investigation and restatement process resulted in legal, accounting consultant and audit expenses of approximately $25.7 million in fiscal 2006, approximately $6.7 million and $22.4 million of which was incurred in the thirteen and thirty-nine week periods ended October 29, 2006, respectively. Legal, accounting consultant and audit expenses relative to the SEC investigation, completion of the restatement process (relative to the 2005 10-K filed May 1, 2007) and completion of our fiscal 2006 delinquent filings have continued into fiscal 2007; however, we do not expect such expenditures to be of the same magnitude in the aggregate as those incurred in fiscal 2006 relative to the Audit Committee investigation and restatement process.

Securities Class Action Litigation

On June 9 and 20, 2006, two shareholder class actions alleging violations of the federal securities laws were filed in the United States District Court for the District of Arizona against the Company and four of its current and former officers: Maynard Jenkins (who is also a director), James Riley, Martin Fraser and Don Watson (collectively referred to as the “Defendants”). The cases are entitledCommunications Workers of America Plan for Employees Pensions and Death Benefits v. CSK Auto Corporation, et al., No. Civ. 06-1503 PHX DGC(“Communications Workers”)andWilfred Fortier v. CSK Auto Corporation, et al., No. Civ. 06-1580 PHX DGC. The cases were consolidated on September 18, 2006, with theCommunications Workerscase as the lead case. The consolidated actions have been brought on behalf of a putative class of purchasers of CSK Auto Corporation stock between March 20, 2003 and April 13, 2006, inclusive. The consolidated amended complaint, filed on November 30, 2006, alleged that the Defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5, promulgated thereunder, as well as Section 20(a) of the Exchange Act. The consolidated amended complaint alleged that Defendants issued false statements before and during the class period about the Company’s income, earnings and internal controls, allegedly causing the Company’s stock to trade at artificially inflated prices during the class period. It sought recovery of damages in an unspecified amount. The Defendants filed motions to dismiss the consolidated amended complaint, arguing that the plaintiffs failed to adequately plead violations of the federal securities laws. The court issued an order on March 28, 2007 granting the motions to dismiss, but allowing plaintiffs leave to amend the complaint. Plaintiffs filed their Second Amended Complaint on May 25, 2007, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5, promulgated thereunder, and Section 20(a) of the Exchange Act, against the same Defendants, except for James Riley, whom the plaintiffs voluntarily dismissed. The Company filed a motion to dismiss the Second Amended Complaint on July 13, 2007. This litigation is in its early stages, and we cannot predict its outcome; however, it is reasonably possible that the outcome could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Shareholder Derivative Litigation

On July 31, 2006, a shareholder derivative suit was filed in the United States District Court for the District of Arizona against certain of CSK’s current and former officers and all current and certain former directors. The Company is a nominal defendant. On March 2, 2007, plaintiff filed an amended derivative complaint. The amended derivative complaint alleged claims under Section 304 of the Sarbanes-Oxley Act of 2002 and for alleged breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. The amended derivative complaint sought, purportedly on behalf of the Company, damages, restitution, and equitable and injunctive relief. The Company filed a motion to dismiss arguing that plaintiff failed to plead facts establishing that plaintiff was excused from making a demand on the Company’s board of directors to pursue these claims. The individual defendants joined in the Company’s motion. While the motion to dismiss was pending, plaintiff filed a motion for leave to amend her complaint. On June 11, 2007, the court granted plaintiff leave to amend and plaintiff filed her Second Amended Complaint,

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

which alleges the same claims as the prior complaint, but adds various supporting allegations. On June 22, 2007, the Company filed a motion to dismiss the Second Amended Complaint for failure to plead demand futility adequately or, in the alternative, to stay the case until the shareholder class action litigation is resolved. The individual defendants joined in the Company’s motion. On July 20, 2007, plaintiff filed an opposition to the Company’s motion to dismiss the Second Amended Complaint, alleging that the three Audit Committee members and Mr. Jenkins (Chief Executive Officer and Chairman of the Board) are not sufficiently disinterested and independent to properly consider a pre-suit demand on the Board. The Company filed a reply on August 3, 2007 in support of its motion to dismiss the Second Amended Complaint. No hearing date has been scheduled and the Company does not anticipate a ruling until at least August 2007. This litigation is also in its early stages, and we cannot predict its outcome.

SEC Investigation

The SEC is conducting an investigation related to certain historical accounting practices of the Company. On November 27, 2006, the SEC served a subpoena on the Company seeking the production of documents from the period January 1, 1997 to the date of the subpoena related primarily to the types of matters identified in the Audit Committee-led investigation, including internal controls and accounting for inventories and vendor allowances. The Company produced documents in response to the subpoena on a rolling basis. On December 5, 2006, the SEC also served subpoenas on current and former Company officers Maynard Jenkins, Martin Fraser and Don Watson. Additionally, the SEC has served subpoenas for documents and testimony on various current and former CSK employees. The Company’s Audit Committee has shared with the SEC the conclusions of the Audit Committee-led investigation. At this time, we cannot predict when the SEC investigation will be completed or what its outcome will be.

Other Litigation

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 believed that the sales tax associated with the battery cores should have been remitted to the taxing authority rather than refunded to the customers. On February 6, 2006, we received notification from the Board that their position had changed and they were no longer seeking payment of any of the original assessment.

In a separate matter, on October 13, 2006, the Board issued its Notice of Determination for the period January 1, 2001 through January 4, 2004 seeking from us approximately $666,000, including tax, interest and penalties. Less than half of that amount related to sales tax on returned battery cores. During this period, we changed our business practices to not refund to customers the sales tax associated with battery cores returned by them to our stores, which is the position advocated by the Board. The Company expensed and paid in fiscal 2006 approximately $375,000 with respect to other items of the assessment and filed a Petition for Redetermination with respect to the sales tax associated with battery cores. Based on the Board’s determination relative to the previous assessment described above, the Company does not believe it has liability for the portion of the assessment relating to the sales tax associated with returned battery cores.

We were served on October 26, 2004 with a lawsuit that was filed in the Superior Court in San Diego, California. The case was brought by a former sales associate in California who resigned in January 2003, and purports to be a class action on behalf of all current and former California hourly store employees claiming that plaintiff and those similarly situated were not paid for: (i) all time worked (i.e. “off the clock” work), (ii) the minimum reporting time pay when they reported to work a second time in a day, (iii) all overtime due, (iv) all wages due at termination, and (v) amounts due for late or missed meal periods or rest breaks. Plaintiff also alleges that we violated certain record keeping requirements arising out of the foregoing alleged violations. The lawsuit (i) claims these alleged practices are unfair business practices, (ii) requests back pay, restitution, penalties for violations of various Labor Code sections and for failure to pay all wages due on termination, and interest for the last four years, plus attorney fees, and (iii) requests that the Company be enjoined from committing further unfair business practices. The Company believed it had meritorious defenses to all of these claims and defended the claims vigorously. In the second quarter of fiscal 2006, the court refused the plaintiff’s request to certify the class. We subsequently settled the plaintiff’s individual claim for a nominal amount and the suit was dismissed.

We currently and from time to time are involved in other litigation incidental to the conduct of our business, including but not limited to 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 these other legal claims incidental to the conduct of our business, individually or in the aggregate, will result in liabilities material to our consolidated financial position, results of operations or cash flows.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note 13 — Subsequent Events

On April 27, 2007, we entered into an amendment to our $350 million Term Loan Facility entered into in June 2006 that increased the maximum leverage ratio permitted under the Facility in order to minimize the possibility that we would be unable to comply with the Facility’s leverage ratio covenant for the first two quarters of fiscal 2007 and revised the definition of the term “Leverage Ratio” to exclude undrawn letters of credit, which had typically been excluded from this calculation in our prior debt agreements.

At the date of the filing of this Quarterly Report, the Senior Credit Facility requires a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) under certain circumstances. Although the Fixed Charge Coverage Ratio of the Senior Credit Facility was not applicable at that date, under the terms of the waiver we entered into with respect to the Senior Credit Facility during the second quarter of fiscal 2006, Auto is required to maintain a minimum 1:1 Fixed Charge Coverage Ratio until the termination of such waiver and all future waivers. For the four quarters ended February 4, 2007, this Ratio as so defined was 1.47:1. The Term Loan Facility also contains certain financial covenants, one of which is the requirement of a minimum Fixed Charge Coverage Ratio (as separately defined in the Term Loan Facility) of 1.4:1 until December 31, 2008 and 1.45:1 thereafter. For the four quarters ended February 4, 2007, this Ratio was 1.55:1. The Term Loan Facility also requires that a leverage ratio test be met. The maximum leverage ratio permitted was 3.75:1 at the end of fiscal 2006 and is 3.95:1, 3.85:1, 3.75:1 and 3.50:1 for the first, second, third and fourth quarters, respectively, of fiscal 2007. The leverage ratio further declines to 3.25:1 at the end of fiscal 2008 and 3.00:1 at the end of fiscal 2009. Our leverage ratio was 3.31:1 as of February 4, 2007. The leverage ratios for fiscal 2007 reflect the April 27, 2007 second amendment of the Term Loan Facility in which certain fiscal 2007 leverage ratios were modified as set forth above to provide greater flexibility along with the elimination of undrawn letters of credit from the definition of debt. Based on our current financial forecasts for fiscal 2007, we believe we will remain in compliance with the financial covenants of the Senior Credit Facility and Term Loan Facility described above for fiscal 2007 and the foreseeable future. However, a significant decline in our net sales or gross margin or unanticipated significant increases in operating costs or LIBOR-based interest rates could limit the effectiveness of discretionary actions management could take to maintain compliance with financial covenants. Although we do not expect such significant decreases and increases to occur, if they did occur, we would seek to obtain a covenant waiver from our lenders or seek a refinancing, both of which we believe are viable options for the Company. However, there can be no assurances a waiver would be obtained or a refinancing could be achieved.

On August 10, 2007, we entered into a fourth waiver to our Senior Credit Facility that extended the then-current third waiver relating to the delivery thereunder of our delinquent periodic SEC filings and related financial statements until the earliest of (i) September 15, 2007, with respect to the filing of our Quarterly Reports on Form 10-Q for fiscal 2006 and the first quarter of fiscal 2007, and October 15, 2007, with respect to the filing of our Quarterly Report on Form 10-Q for the second quarter of fiscal 2007; (ii) the date on which we have filed with the SEC all of our delinquent SEC filings up to and including our Quarterly Report on Form 10-Q for the second quarter of fiscal 2007; and (iii) the date ten days prior to the first date on which an event of default has occurred under the 6 3/4% Notes and any applicable grace period that must expire prior to acceleration of such Notes has expired. When the Company renegotiated the terms of its 4 5/8% (now 6³/4%) Notes in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee of such Notes our late periodic SEC filings. As we did not so file and deliver all such filings by June 30, 2007, a notice of default may now be given to the Company by the trustee for such Notes or by the holders of 25% of the Notes, which would give the trustee for the 6³/4% Notes or the holders of 25% of such Notes the right to accelerate the payment of such Notes no sooner than 60 days after the giving of such notice of default to the Company. No such notice of default had been given as of the date of the filing of this Quarterly Report. The occurrence of an event of default under the indenture under which the 6³/4% Notes were issued, along with the expiration of the applicable grace period thereunder, would result in an event of default under the Senior Credit Facility, which would in turn result in an event of default under the Term Loan Facility. Although we did not so file and deliver all of our late periodic SEC filings by June 30, 2007, we expect to be able to complete all such filings within the time periods required by the fourth waiver to the Senior Credit Facility. Nevertheless, if we were to fail to complete such filings by such deadlines, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth or referenced under “Note Concerning Forward Looking Information” above.

In the following discussion, we refer to the thirteen week periods ended on October 29, 2006 and October 30, 2005 as the “third quarter” and the thirty-nine week periods ended on October 29, 2006 and October 30, 2005 as the “thirty-nine weeks” of those fiscal years.

Overview

CSK Auto Corporation (“CSK”) is the largest specialty retailer of automotive parts and accessories in the Western United States and one of the largest such retailers of such products in the entire country, based, in each case, on store count. As of October 29, 2006, through our wholly owned subsidiary CSK Auto, Inc., we operated 1,307 stores in 22 states under one fully integrated operating format and the following four brand names (referred to collectively as “CSK Stores”):

	•		Checker Auto Parts, founded in 1969, with 458 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;

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

	•		Kragen Auto Parts, founded in 1947, with 502 stores primarily in California; and

	•		Murray’s Discount Auto Stores, founded in 1972, with 122 stores in the Midwest.

At October 29, 2006, we also operated five value concept retail stores under the Pay N Save brand name in the Phoenix, Arizona metropolitan area, offering primarily tools, hardware, housewares and other household goods, and seasonal items. As a part of our continuing review of store results, we closed three of the five Pay N Save stores during the first quarter of fiscal 2007. The remaining two stores were converted to clearance centers and stocked primarily with product from the former Pay N Save store locations. We concluded that the sales performance of the Pay N Save stores was unsatisfactory and believed that acceptable performance would not be achievable without significant additional investment to increase the store count. The Pay N Save concept provided us with the ability to experiment with new products to determine the level of customer demand before committing to purchase and offer the products in the CSK Stores. This function is now being accommodated with a combination (“combo”) store shopping format in existing stores that are larger than our average store size of 7,500 square feet. A combo store includes approximately 2,500 square feet for our most popular value-concept SKUs that we first tested in the Pay N Save stores. At February 4, 2007, we operated seven combo stores and planned to open two more combo stores in fiscal 2007. We will evaluate the combo stores’ performance before we expand the combo store concept to additional locations.

During the third quarter of fiscal 2006, we opened 16 CSK Stores. We did not relocate or close any stores during the third quarter of fiscal 2006. During the thirty-nine weeks ended October 29, 2006, we opened 42 CSK Stores and one Pay N Save store, and closed 12 stores (including 4 stores closed due to relocation).

Significant Events

Below is a summary of significant events that have occurred during the thirteen and thirty-nine weeks ended October 29, 2006 and through the date of this filing.

Audit Committee Investigation and Restatement of the Consolidated Financial Statements

The Company’s consolidated financial statements for the thirteen and thirty-nine weeks ended October 30, 2005 included in this Quarterly Report were restated to correct errors and irregularities of the type identified in the course of the Audit Committee-led investigation and other accounting errors and irregularities identified by the Company in the course of the restatement process associated with its 2005 10-K. The Audit Committee-led investigation is described in greater detail in Note 12 — Legal Matters to the unaudited consolidated financial statements included in Item 1 of Part I of this Quarterly Report.

Following the completion of the Audit Committee-led investigation, the Board of Directors created a Remediation Committee comprised of certain positions within key functional areas of the Company and co-chaired by the Senior Vice President and General Counsel and the Senior Vice President and Chief Financial Officer to develop a remediation plan to address the types of matters identified during the investigation. The proposed remediation plan that the Remediation Committee is working with reflects the input of the Disinterested Directors. While most aspects of the plan are presently in the development phase, this remediation plan is generally expected to include a comprehensive review, and development or modification as appropriate, of various components of the Company’s compliance program, including ethics and compliance training, hotline awareness and education, corporate governance training, awareness of and education relative to key codes and policies, as well as departmental specific measures. See discussion under “Plan for Remediation of Material Weaknesses” in Item 4, “Controls and Procedures,” below.

For a summary of the impact of the restatement on our consolidated statements of operations and of cash flows for the thirteen and thirty-nine weeks ended October 30, 2005, see Note 2 — Audit Committee Investigation and Restatement of Consolidated Financial Statements to the unaudited consolidated financial statements included in Item 1 of Part I of this Quarterly Report.

Fiscal 2005 Financing Transactions

In fiscal 2005, we completed the following transactions: (1) the issuance of $125.0 million of 3 ³/8% senior exchangeable notes (“3 ³/8% Notes”) and the purchase of a call option and issuance of a warrant for shares of our common stock in connection with the issuance of the 3 ³/8% Notes, (2) the establishment of a $325.0 million senior secured revolving line of credit (“Senior Credit Facility”), and (3) the issuance of $100.0 million of 4⁵/8% senior exchangeable notes (“4⁵/8% Notes”). We paid premiums of $27.0 million for the call option and received premiums of $17.8 million from the sale of the warrants. We used the proceeds from the issuance of the 3 ³/8% Notes, borrowings under the Senior Credit Facility and cash on hand to repay in full $251.2 million of indebtedness outstanding under our previously existing senior credit facility (including accrued and unpaid interest), repurchase approximately $25.0 million of our common stock and pay fees and expenses directly related to the transactions. We used the proceeds from the issuance of the 4⁵/8% Notes, borrowings under the Senior Credit Facility and cash on hand to acquire Murray’s in December 2005 for approximately $180.9 million.

Fiscal 2006 Refinancing

Our inability to timely file our periodic reports with the SEC as a result of the need to restate our financial statements created potential default implications under our debt instruments. As a result, in July 2006, we completed a cash tender offer and consent solicitation for our 7% senior subordinated notes (“7% Notes”), and entered into a $350.0 million term loan facility (the “Term Loan Facility”), which was used to pay the tender offer consideration for the 7% Notes and to repay the 3 ³/8% Notes upon their acceleration. We also obtained the consent of the holders of a majority of the outstanding 4⁵/8% Notes to enter into a supplemental indenture to the indenture under which the 4⁵/8% Notes were originally issued to waive any default arising from our filing delays, exempt the Company from compliance with the SEC filing covenants in the indenture until June 30, 2007, increase the applicable coupon interest rate to 6 ³/4%, and improve the exchange rate of the notes from 49.8473 shares of our common stock per $1,000 principal amount of notes to 60.6061 shares of our common stock per $1,000 principal amount of the notes.

See the “Liquidity and Capital Resources” section below for further description of the transactions described above and our compliance with debt covenants.

Results of Operations

The following discussion summarizes the significant factors affecting operating results for the thirteen and thirty-nine week periods ended October 29, 2006 and October 30, 2005. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in this Quarterly Report as well as our 2006 10-K.

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


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2006			2005			2006			2005
				(Restated)						(Restated)
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		53.0	%		53.1	%		53.0	%		52.5	%

Gross profit		47.0	%		46.9	%		47.0	%		47.5	%
Other costs and expenses:
Operating and administrative		41.6	%		38.7	%		40.6	%		38.5	%
Investigation and restatement costs		1.4	%		—			1.5	%		—
Store closing costs		0.1	%		0.2	%		0.1	%		0.1	%

Operating profit		3.9	%		8.0	%		4.8	%		8.9	%
Interest expense		2.8	%		1.8	%		2.4	%		2.0	%
Loss on debt retirement		0.0	%		—			1.4	%		0.1	%

Income before income taxes and cumulative effect of change in accounting principle		1.1	%		6.2	%		1.0	%		6.8	%
Income tax expense		0.5	%		2.5	%		0.4	%		2.7	%

Income before cumulative effect of change in accounting principle		0.6	%		3.7	%		0.6	%		4.1	%
Cumulative effect of change in accounting principle, net of tax		—			—			0.1	%		—

Net income		0.6	%		3.7	%		0.5	%		4.1	%

Thirteen Weeks Ended October 29, 2006 Compared to Thirteen Weeks Ended October 30, 2005

Retail sales represent sales to the do-it-yourself customer. Commercial sales represent sales to commercial accounts, including such sales from stores without commercial sales centers. We evaluate comparable (or “same store”) sales based on the change in net sales commencing after the time a new store has been open or an acquired store has been owned by the Company and open for 12 months. Therefore, sales for the first 12 months a new store is open or an acquired store is owned are not included in the comparable store calculation. Stores that have been relocated are included in comparable store sales immediately.

Net sales for the third quarter of fiscal 2006 increased 16.1%, or $67.2 million, compared to the third quarter of fiscal 2005. Net sales were $483.1 million in the third quarter of fiscal 2006 compared to $415.9 million in the third quarter of fiscal 2005. The increase in sales was primarily due to sales from the Murray’s stores we acquired in December 2005. Total same store sales declined by 0.7%, with same store retail sales declining 2.8% and same store commercial sales increasing 9.0%. The decline in same store sales was due to a decline in customer count (measured by the number of in-store transactions), which was partially offset by an increase in the average transaction size (measured by dollars spent per sale). We believe our net sales during this period were negatively impacted by persistent high gas prices, particularly in California, where many of our stores are located. The Company also believes that comparable store sales during this period were adversely affected by new store openings—both of the Company’s stores and our competitor’s stores. During this period, sales in our new stores failed to increase at the rate they have historically. Finally, we believe that our financial performance during this period was also negatively impacted by the distraction, uncertainty and diversion of management and other resources associated with the Audit Committee-led investigation, restatement process and related matters, as well as the significant management changes that were effected during this period.

Gross profit consists primarily of net sales less the cost of sales and warehouse and distribution expenses. Gross profit as a percentage of net sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. Gross profit was $226.9 million, or 47.0% of sales, for the third quarter of fiscal 2006, as compared to $195.0 million, or 46.9% of sales, for the third quarter of fiscal 2005. The increase in gross profit dollars is primarily the result of the additional sales from the acquired Murray’s stores. The gross margin percentage was essentially unchanged as we experienced declines in our comparable store retail sales, which carry higher margins than commercial sales. Additionally, sales from the Murray's stores we acquired in December 2005 generated lower margins in fiscal 2006. These factors that reduced our overall gross margin percentages were offset primarily by reduced promotional pricing compared to 2005, which yielded higher margins.

Operating and administrative expenses are comprised of store payroll, store occupancy, advertising expenses, other store expenses and general and administrative expenses, which include salaries and related benefits of corporate employees, administrative office occupancy expenses, data processing, professional expenses and other related expenses. Operating and administrative expenses were $201.1 million, or 41.6% of net sales, in the third quarter of fiscal 2006, compared to $161.1 million, or 38.7% of net sales, in the third quarter of fiscal 2005. Operating and administrative expenses increased $40.0 million, primarily as a result of the impact of the acquisition of the Murray’s stores, including store related expenses, as well as expenses associated with 47 net new stores added from October 30, 2005 through October 29, 2006 from organic growth.

The Audit Committee-led investigation and restatement process relative to our 2005 10-K resulted in legal, accounting consultant and audit expenses of approximately $25.7 million in fiscal 2006, of which approximately $6.7 million was incurred in the third quarter of fiscal 2006 and reflected in operating and administrative expense.

Interest expense for the third quarter of fiscal 2006 was $13.3 million compared to $7.6 million for the third quarter of fiscal 2005. The increase in interest expense was due to the increased debt we assumed in connection with our December 2005 acquisition of Murray’s, as well as the higher rates of interest we incurred following the refinancing completed in the second quarter of fiscal 2006. Our inability to file our financial statements in a timely manner resulted in the refinancing of substantially all of our debt in the second quarter of fiscal 2006.

For the thirteen weeks ended October 29, 2006, we recorded an income tax expense of $2.2 million, compared to $9.9 million of income tax expense for the same period in 2005. Our effective tax rate was slightly higher at 40.8% in the third quarter of 2006 compared to 39.1% for the third quarter of fiscal 2005.

Thirty-Nine Weeks Ended October 29, 2006 Compared to Thirty-Nine Weeks Ended October 30, 2005

Net sales for the thirty-nine weeks ended October 29, 2006 increased 15.0%, or $187.8 million, compared to the same period of fiscal 2005. Net sales were $1,435.6 million for the thirty-nine weeks ended October 29, 2006 compared to $1,247.8 million in the same period of fiscal 2005. The increase in sales was primarily due to sales from the Murray’s stores we acquired in December 2005. Same store sales declined by 1.8% overall with same store retail sales declining 3.6% and same store commercial sales increasing 7.0%. The decline in same store sales was due to a decline in customer count (measured by the number of in-store transactions), which was partially offset by an increase in the average transaction size (measured by dollars spent per sale). We believe our net sales during this period were negatively impacted by persistent high gas prices, particularly in California, where many of our stores are located. The Company also believes that comparable store sales during this period were adversely affected by new store openings—both of the Company’s stores and our competitor’s stores. During this period, sales in our new stores failed to increase at the rate they have historically. Finally, we believe that our financial performance during this period was also negatively impacted by the distraction, uncertainty and diversion of management and other resources associated with the Audit Committee-led investigation, restatement process and related matters, as well as the significant management changes that were effected during this period.

Gross profit was $674.6 million, or 47.0% of sales, for the thirty-nine weeks ended October 29, 2006, compared to $592.8 million, or 47.5% of sales, for the same period in fiscal 2005. The increase in gross profit dollars was primarily the result of the additional sales from the acquired Murray’s stores. The gross margin percentage declined as we experienced declines in our comparable store retail sales, which carry somewhat higher margins than commercial sales. Additionally, sales from the Murray’s Stores we acquired in December 2005 generated lower margins in fiscal 2006. These factors that reduced our overall gross margin percentage were offset primarily by reduced promotional pricing compared to 2005, which yielded higher margins.

Operating and administrative expenses were $582.8 million, or 40.6% of net sales, for the thirty-nine weeks ended October 29, 2006, compared to $480.2 million, or 38.5% of net sales, for the same period in fiscal 2005. Operating and administrative expenses increased $102.6 million primarily as a result of the impact of the acquisition of the Murray’s stores, including store related expenses, as well as expenses associated with 47 net new stores added from October 30, 2005 through October 29, 2006 from organic growth.

The Audit Committee-led investigation and restatement process relative to our 2005 10-K resulted in legal, accounting consultant and audit expenses of approximately $25.7 million in fiscal 2006, of which approximately $22.4 million was incurred in the thirty-nine weeks ended October 29, 2006 and reflected in operating and administrative expense.

Interest expense for the thirty-nine weeks ended October 29, 2006 was $34.6 million compared to $24.7 million for the same period of fiscal 2005. The $9.9 million in additional interest expense is due to our assumption of additional debt in connection with the purchase of Murray’s in December 2005, as well as the higher rates of interest we incurred following the refinancing completed in the second quarter of fiscal 2006. Our inability to file our financial statements in a timely manner resulted in the refinancing of substantially all of our debt in the second quarter of fiscal 2006.

During the thirty-nine weeks ended October 29, 2006, we recorded a $19.4 million loss on debt retirement resulting from the write-off of certain deferred financing fees associated with debt that was extinguished in our 2006 refinancing and a $10.4 million loss on termination of a related interest swap associated with our $225 million of 7% Notes, $224.96 million of which were purchased pursuant to a cash tender offer and consent solicitation in July 2006 and the balance of which were purchased by us later in fiscal 2006. During the second quarter of fiscal 2005, we recorded a $1.6 million loss on debt retirement resulting from the write-off of certain deferred financing fees associated with our former credit facility, which was repaid in full as part of a refinancing completed in August 2005.

Income tax expense for the thirty-nine weeks ended October 29, 2006 was $5.9 million, compared to $33.0 million for the same period in 2005. Our effective tax rate was 40.8% in the thirty-nine weeks ended October 29, 2006 compared to 39.2% for the same period in 2005.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and requires companies to recognize the grant-date fair value of stock options and other equity-based compensation in the income statement. We adopted SFAS No. 123R at the beginning of fiscal 2006 using the modified prospective method. In addition to stock options and restricted stock, the Company granted incentive units in fiscal 2005 under a long-term incentive plan (the “LTIP”) for its senior executive officers, which are classified as liability awards, and as such, the transition rule under SFAS No. 123R requires that for an outstanding instrument that previously was classified as a liability and measured at intrinsic value, an entity should recognize the liability that would have been recorded under the fair value method at the date of adoption, net of any related tax effect, as the cumulative effect of a change in accounting principle. At the beginning of fiscal 2006, we recognized a cumulative effect of a change in accounting principle of approximately $1.0 million, net of $0.6 million tax benefit, associated with the LTIP.

Liquidity and Capital Resources

Overview of Liquidity

Debt is an important part of our overall capitalization. Our outstanding debt balances (excluding capital leases) as of October 29, 2006 and January 29, 2006 were $524.5 million and $550.0 million, respectively. Our primary cash requirements include working capital (primarily inventory), interest on our debt and capital expenditures. At October 29, 2006, we had approximately $133.3 million of remaining borrowing capacity under our Senior Credit Facility in addition to $69.0 million of outstanding borrowings thereunder and $32.2 million of outstanding letters of credit issued thereunder.

At the beginning of fiscal 2006, the Company had a $325 million Senior Credit Facility and had outstanding $225 million of 7% Notes, $125 million of 3 3/8% Notes and $100 million of 4 5/8% Notes. During the second quarter of fiscal 2006, we refinanced, amended or obtained waivers with respect to all of our debt instruments due to our inability to timely file our periodic reports with the SEC and our financial statements with the lenders under our Senior Credit Facility. The delay in the filing of these reports and financial statements due to the need to restate our financial statements created potential default implications under all our debt instruments. As a result, we entered into a waiver with respect to our Senior Credit Facility, entered into a new six year $350 million Term Loan Facility, borrowings under which were used to repurchase virtually all of our 7% Notes and to repay all of our 3 3/8% Notes upon their acceleration, and renegotiated the terms of our 4 5/8% Notes (now 6³/4% Notes).

We are required to make quarterly debt amortization payments of 0.25% of the aggregate principal amount of the loans under our Term Loan Facility beginning December 31, 2006. We paid approximately $0.9 million in debt amortization payments under this Facility in the fourth quarter of fiscal 2006, and expect to pay approximately $3.5 million in fiscal 2007. We are not required to make debt principal payments on our Senior Credit Facility until 2010. Our 6 3/4% Notes (formerly our 4 5/8% Notes) become exchangeable if our common stock price exceeds $21.45 per share for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. Such an exchange would require repayment of the principal amount of the 6 3/4% Notes in cash and any premium in our common stock. If not exchangeable sooner, the earliest date that the noteholders may require us to repurchase the 6 3/4% Notes is December 15, 2010.

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 payment terms for merchandise inventory purchases. We believe these sources should be sufficient to meet our cash needs for the foreseeable future. However, if we become subject to significant judgments, settlements or fines related to the matters discussed in Note 12 — Legal Matters to the unaudited consolidated financial statements included in Item 1 of Part I of this Quarterly Report or any other matters, we could be required to make significant payments that could materially and adversely affect our financial condition, potentially impacting our credit ratings, our ability to access the capital markets and our compliance with our debt covenants.

As discussed in greater detail below under the heading “Factors Affecting Liquidity and Capital Resources — Debt Covenants,” when we renegotiated the terms of our 4 5/8% Notes (now 6 3/4% Notes) in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee under the note indenture our periodic SEC filings. As we did not so file and deliver all of our delinquent periodic SEC filings by June 30, 2007, a notice of default may now be given to the Company by the trustee for the 6 3/4% Notes or by the holders of 25% of the Notes, which would give the trustee for the 6³/4% Notes or the holders of 25% of such Notes the right to accelerate the payment of such Notes no sooner than 60 days after the giving of such notice of default to the Company. No such notice of default had been given as of the date of the filing of this Quarterly Report.

Although we did not file all of our late periodic SEC filings by June 30, 2007, we expect to be able to complete all such filings within the time periods required by the current waiver to the Senior Credit Facility. Although no assurance can be given that such filings will be made by such date, the filing of such reports by that date should permit us to avoid an acceleration of the 6 3/4% Notes and any additional negative consequences of such late filings under the Senior Credit Facility or the Term Loan Facility. Nevertheless, if we were to fail to meet our filing deadline, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor able to refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent as the occurrence of an event of default under the indenture for the 6 3/4% Notes, along with the expiration of the applicable grace period thereunder, would result in an event of default under the Senior Credit Facility, which would in turn result in an event of default under the Term Loan Facility.

Fiscal 2006 Transactions

Senior Credit Facility

In July 2005, Auto entered into a $325 million Senior Credit Facility that is guaranteed by the Company and Auto’s wholly owned subsidiary. Borrowings under the Senior Credit Facility bear interest at a variable interest rate based on one of two indices, either (i) LIBOR plus an applicable margin that varies (1.25% to 1.75%) depending upon Auto’s average daily availability under the agreement measured using certain borrowing base tests, or (ii) the Alternate Base Rate (as defined in the agreement). This facility matures in July 2010.

Availability under the Senior Credit Facility is limited to the lesser of the revolving commitment of $325.0 million and a borrowing base limitation. The borrowing base limitation is based upon a formula involving certain percentages of eligible inventory and eligible accounts receivable owned by Auto. As a result of the limitations imposed by the borrowing base formula, at October 29, 2006, Auto could only borrow up to an additional $133.3 million of the $325.0 million facility in addition to the $69.0 million already borrowed under the revolving credit facility at an average interest rate of 6.947% and the letters of credit of approximately $32.2 million outstanding under this facility. Loans under the Senior Credit Facility are collateralized by a first priority security interest in certain of our assets, primarily inventory and accounts receivable, and a second priority security interest in certain of our other assets. The Senior Credit Facility contains negative covenants and restrictions on actions by Auto and its subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions, investments, loans, advances and acquisitions, payment of dividends, transactions with affiliates, change in business conducted, and certain prepayments and amendments of indebtedness. In addition, since June 2006, Auto has been required to maintain a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the agreement).

In June 2006, as a result of our delay in the filing of our periodic reports with the SEC and our financial statements with the lenders under this facility, we entered into a waiver designed to allow us until June 13, 2007 to file such reports and financial statements. Costs associated with the waiver were approximately $1.6 million, including an extension fee that was paid in December 2006, and were recorded as deferred financing fees. In June 2007, we entered into a waiver to the Senior Credit Facility that extended the then current waiver, but was due to expire no later than August 15, 2007. On August 10, 2007, we entered into an additional waiver to the Senior Credit Facility that further extended the deadline for delivery of our delinquent SEC filings as described below under the heading “Factors Affecting Liquidity and Capital Resources — Debt Covenants.”

Term Loan Facility

In June 2006, Auto entered into a $350 million six year Term Loan Facility so that it could finance the purchase of approximately $225 million in aggregate principal amount of its 7% Notes and the repayment of $125 million of its 3 3/8% Notes. Loans under the Term Loan Facility (the “Term Loans”) bear interest at a base rate or the LIBOR rate, plus a margin that will fluctuate depending upon the rating of the Term Loans. The Term Loans are guaranteed by the Company and Auto’s wholly owned subsidiary. The Term Loans are secured by a second lien security interest in certain of our assets, primarily inventory and receivables, and by a first lien security interest in substantially all of our other assets. The Term Loans shall be repaid in consecutive quarterly installments, commencing December 31, 2006 in an amount equal to 0.25% of the aggregate principal amount of the Term Loans, with the balance due on June 30, 2012. The Term Loan Facility contains, among other things, limitations on liens, indebtedness, mergers, disposition of assets, investments, payments in respect of capital stock, modifications of material indebtedness, changes in fiscal year, transactions with affiliates, lines of business and swap agreements. Auto is also subject to financial covenants under the Term Loan Facility measuring

its performance against standards set for leverage and fixed charge coverage. Costs associated with the Term Loan Facility were approximately $10.7 million, and will be amortized to interest expense over the six year term of the facility beginning June 30, 2006. See “Factors Affecting Liquidity and Capital Resources — Debt Covenants.”

On April 27, 2007, we entered into an amendment to the Term Loan Facility that increased the maximum leverage ratio permitted under the Facility in order to minimize the possibility that we would be unable to comply with the Facility’s leverage ratio covenant for the first two quarters of fiscal 2007 and revised the definition of the term “Leverage Ratio” to exclude undrawn letters of credit, which had typically been excluded from this calculation in our prior debt agreements.

Repurchase of 7% Notes and Termination of Interest Rate Swap

As discussed above, our delay in filing our periodic reports created the need to launch a cash tender offer and consent solicitation in June 2006 for our $225.0 million of 7% Notes. We used proceeds from our Term Loan Facility to pay the tender offer consideration for $224.96 million of the 7% Notes and purchased the balance of the 7% Notes later in fiscal 2006. Unamortized deferred financing fees for the 7% Notes were $4.5 million, and costs associated with the tender offers were approximately $0.6 million, which were recognized as a loss on debt retirement during the second quarter of fiscal 2006. We also terminated our interest rate swap agreement that was intended to hedge the fair value of $100.0 million of the 7% Notes. Consideration of $11.1 million was paid to terminate the swap, representing $10.4 million of a fair value liability and $0.7 million of accrued interest. The $10.4 million was recognized as a loss during the second quarter of fiscal 2006.

Repayment of 33/8% Notes and Settlement of Equity Contracts

Our inability to timely file our periodic SEC reports or to reach agreement with the holders of Auto’s 3 3/8% Notes on the repurchase or restructuring of their notes resulted in our repayment of all $125.0 million of these notes at par in July 2006, when they were accelerated pursuant to the terms of the indenture under which they were issued. Unamortized deferred financing fees for the 3 3/8% Notes were $4.0 million, which was recognized as a loss on debt retirement during the second quarter of fiscal 2006. In September 2006, the equity call option and warrant contracts entered into at the time the 3 3/8% Notes were sold were terminated and settled with the counterparty. We elected a cash settlement and received approximately $3.0 million for the call option and paid $1.4 million proceeds for the warrant contract. These amounts represented the fair value of the contracts at their termination date and were recorded as additional paid-in capital in fiscal 2006.

Restructuring of 45/8% Notes

Although somewhat similar default implications existed under Auto’s 4 5/8% Notes, we were able to obtain the consent of the holders of a majority of the outstanding 4 5/8% Notes to enter into a supplemental indenture to the indenture under which the 4 5/8% Notes were issued. This supplemental indenture provided for the waiver of any default arising from our filing delays until June 30, 2007, increased the applicable coupon interest rate of the notes to 6 3/4%, and improved the exchange rate of the notes per $1,000 principal amount of notes from 49.8473 shares of our common stock to 60.6061 shares of our common stock. Costs associated with the supplemental indenture process were approximately $0.5 million and were charged to operating and administrative expense in the second quarter of fiscal 2006. Under the registration rights agreement, additional interest of 25 basis points began to accrue on the 4 5/8% Notes in March 2006 and increased to 50 basis points in June 2006, but will cease accruing in December 2007. In total, we incurred approximately $1.5 million in additional interest expense in fiscal 2006 related to the increase in the coupon interest rate to 6 3/4% and the additional interest expense under the registration rights agreement. Also, under EITF No. 06-6,Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments, our changes to the 4 5/8% Notes were recorded in fiscal 2006 as a modification, not an extinguishment of the debt. The Company recorded the increase in the fair value of the exchange option feature as a debt discount with a corresponding increase to additional paid-in-capital in stockholders’ equity. The debt discount is being amortized to interest expense to the first date the noteholders could require repayment. The debt discount amount was approximately $7.3 million as of October 29, 2006.

As discussed above, the exemption in the indenture under which the 6 3/4% Notes were issued that we negotiated in June 2006 expired on June 30, 2007. As we did not file all of our delinquent periodic SEC filings by June 30, 2007, a notice of default may now be given to the Company by the trustee for the 6³/4% Notes or by the holders of 25% of the Notes, which would give the trustee for the 6³/4% Notes or the holders of 25% of such Notes the right to accelerate the payment of such Notes sixty days after the giving of such notice of default to the Company. No such notice had been given as of the date of the filing of this Quarterly Report. Although we did not file all of our late periodic SEC filings by June 30, 2007, we expect to be able to complete all such filings within the time periods required by the current waiver to the Senior Credit Facility. If we were to fail to complete such filings by such periods, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money or refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

The following table represents the key terms of the 6³/4% Notes (formerly 4 5/8% Notes):


Terms			6³/4% Notes
Interest Rate			6.75% per year until December 15, 2010; 6.50% thereafter

Exchange Rate			60.6061 shares per $1,000 principal (equivalent to an initial exchange price of approximately $16.50 per share)

Maximum CSK shares exchangeable			6,060,610 common shares, subject to adjustment in certain circumstances

Maturity date			December 15, 2025

Guaranteed by			CSK Auto Corporation and all of Auto’s present and future domestic subsidiaries, jointly and severally, on a senior basis

Dates that the noteholders may require Auto to repurchase some or all for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest			December 15, 2010, December 15, 2015, and December 15, 2020 or following a fundamental change as described in the indenture

Issuance costs being amortized over a 5-year period, corresponding to the first date the noteholders could require repayment			$3.7 million

Auto will not be able to redeem notes			Prior to December 15, 2010

Auto may redeem for cash some or all of the notes			On or after December 15, 2010, upon at least 35 calendar days notice

Redemption price			Equal to 100% of the principal amount plus any accrued and unpaid interest and additional interest, if any, to, but not including, the redemption date

Fiscal 2005 Transactions

Issuance of 33/8% Notes

In July 2005, Auto issued $125.0 million of 3³/8% of senior exchangeable notes in a private offering. We used the proceeds from the issuance of the 3³/8% Notes, borrowings under the Senior Credit Facility and cash on hand to repay in full $251.2 million of indebtedness outstanding under our previously existing senior credit facility (including accrued and unpaid interest), repurchase approximately $25.0 million of our common stock and pay fees and expenses directly related to the transactions. In conjunction with these transactions, we recorded a loss on debt retirement during the second quarter of fiscal 2005 of $1.6 million, resulting from the write-off of certain deferred financing fees associated with our former Senior Credit Facility. At the time of the issuance of the 3³/8% Notes, we also paid $27.0 million to a counterparty to purchase a call option designed to mitigate the potential dilution from the exchange of the 3³/8% Notes. Under the call option, as amended, we had the right to purchase from the counterparty 5,414,063 shares, subject to adjustment, of our common stock at a price of $23.09 per share, which was equal to the initial exchange price of the 3³/8% Notes. At the same time, we also received an aggregate of $17.8 million of proceeds from the same counterparty relating to our sale of warrants to acquire from us, subject to adjustment, up to 5,414,063 shares of our common stock. The warrants were exercisable at a price of $26.29 per share. Both the call option and warrant transactions had five-year terms. The call option and warrant transactions were each to be settled through a net share settlement to the extent that the price of our common stock exceeded the exercise price set forth in the agreements. Our objective with these transactions was to reduce the potential dilution of our common stock upon future exchange of the 3³/8% Notes. As discussed above, the 3³/8% Notes are no longer outstanding and the call option and warrant agreements have been terminated.

Analysis of Cash Flows

Net cash provided by operating activities decreased $48.8 million during the thirty-nine weeks ended October 29, 2006 to $81.2 million compared to $130.0 million of cash provided by operating activities during the comparable period of fiscal 2005. Net income decreased during the thirty-nine weeks ended October 29, 2006 compared to the thirty-nine weeks ended October 30, 2005 by $43.8 million. The decrease in net income was primarily related to approximately $22.4 million of expenses associated with the Audit-Committee led investigation and restatement process relative to our 2005 10-K, $17.8 million of higher loss on debt retirement costs, which includes $10.4 million of cash used to terminate our interest rate swap agreement, a decline in our operating performance primarily due to the decline experienced in our same store sales and higher interest expense. As a result of the decline in same store sales, less than expected results from the Murray’s stores and the Company’s new stores and the decline in our gross margin percentage, the increase in gross profit dollars during the thirty-nine weeks ended October 29, 2006 was less than the increase in our operating and administrative expenses. Gross profit as a percent of sales decreased from 47.5% of net sales for the thirty-nine weeks ended October 29, 2006 to 47.0% of net sales for the corresponding period in 2005, as we experienced declines in our comparable retail sales per store, which carry higher margins than commercial sales. Additionally, sales from the Murray’s stores we acquired in December 2005 generated lower margins in fiscal 2006.

Net cash used in investing activities totaled $29.6 million for the thirty-nine weeks ended October 29, 2006 compared to $25.2 million used during the corresponding period of fiscal 2005. Capital expenditures during the thirty-nine weeks ended October 29, 2006 were $0.9 million higher

than in the thirty-nine weeks ended October 30, 2005 as a result of investments made to support new store openings. During the thirty-nine weeks ended October 29, 2006, we opened 43 stores (including one Pay N Save store), relocated four stores, and closed 12 stores (including the four stores closed upon relocation), resulting in 35 net new stores. New stores are generally financed utilizing operating leases that require capital expenditures for fixtures and store equipment. New or relocated stores require approximately $136,000 per store for leasehold improvements, and each new store, except for relocated stores, requires an estimated investment in working capital, principally for inventories, of approximately $300,000.

In December 2005, we acquired Murray’s for a total acquisition cost of $180.9 million. As of January 29, 2006, we paid approximately $177.6 million, net of $0.5 million cash acquired, and recorded approximately $2.8 million in accrued liabilities, of which $1.6 million was paid during the thirty-nine weeks ended October 29, 2006. In August 2006, we purchased a franchised Murray’s store for approximately $1.8 million. Net of liabilities assumed, the Company paid approximately $1.5 million in cash and recorded $1.4 million in goodwill.

Net cash used in financing activities totaled $43.3 million for the thirty-nine weeks ended October 29, 2006 compared to $142.1 million used in financing activities for the thirty-nine weeks ended October 30, 2005. In the first thirty-nine weeks of fiscal 2006, we paid down $25.0 million under our Senior Credit Facility. The inability to timely file our periodic SEC reports necessitated that we restructure a significant portion of our then outstanding debt in June and July 2006. We completed a tender offer in which we repurchased approximately $225.0 million of our 7% Notes and repaid all $125.0 million of our 3³/8% Notes upon the acceleration of their maturity. We also entered into the $350.0 million Term Loan Facility, which was used to fund such transactions. The most significant financing transactions in the thirty-nine weeks ended October 30, 2005 were: (1) issuance of the 3 3/8% Notes for $125.0 million; (2) repayment in full of $251.2 million of indebtedness outstanding under our previously existing senior credit facility; (3) net borrowings under our Senior Credit Facility of $30.0 million; (4) repurchase of approximately $25.0 million of our common stock; and (5) payment of $27.0 million of cash for our call option transactions and receipt of $17.8 million in connection with our sale of warrants.

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

As of October 29, 2006, there are no material changes to the contractual obligations table disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2005 10-K.

Store Closures

The allowance for store closing costs is included in accrued expenses and other long-term liabilities in our 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.

Activity in the allowance for store closing costs and the related payments for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 are as follows ($ in thousands):


	Thirty-Nine Weeks Ended
	October 29,			October 30,
	2006			2005
				(Restated)
Balance, beginning of year	$	7,033		$	7,774

Store closing costs:
Provision for store closing costs		174			122
Other revisions in estimates		(110	)		925
Accretion		226			314
Operating expenses and other		755			555

Total store closing costs		1,045			1,916

Payments:
Rent expense, net of sublease recoveries		(1,819	)		(1,697	)
Occupancy and other expenses		(707	)		(564	)
Sublease commissions and buyouts		(198	)		(381	)

Total payments		(2,724	)		(2,642	)

Ending balance	$	5,354		$	7,048

Factors Affecting Liquidity and Capital Resources

Sales Trends

Our business is somewhat seasonal in nature, with the highest sales occurring in the months of June through October (overlapping our second and third fiscal quarters). In addition, our business is affected by weather conditions. While unusually severe or inclement weather tends to reduce sales, as our customers are more likely to defer elective maintenance during such periods, extremely hot and cold temperatures tend to enhance sales by causing auto parts to fail and sales of seasonal products to increase. High gasoline prices, such as we experienced during periods of fiscal 2005 and 2006, may also adversely affect our revenues because our customers may defer purchases of certain items as they use a higher percentage of their income to pay for gasoline.

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 and price increases. If we are not able to mitigate the effects of future merchandise cost increases through these or other measures, the fixed cost of our organic growth will adversely affect our profitability. We also experience inflationary increases in rent expense as some of our lease agreements are adjusted based on changes in the consumer price index.

Debt Covenants

A breach of the covenants or restrictions contained in these debt agreements could result in an event of default thereunder. Upon the occurrence and during the continuance of an event of default under either the Senior Credit Facility or the Term Loan Facility, the lenders thereunder could elect to terminate the commitments thereunder (in the case of the Senior Credit Facility only), declare all amounts owing thereunder to be immediately due and payable and exercise the remedies of a secured party against the collateral granted to them to secure such indebtedness. If the lenders under either the Senior Credit Facility or the Term Loan Facility accelerate the payment of the indebtedness due thereunder, we cannot be assured that our assets would be sufficient to repay in full such indebtedness, which is collateralized by substantially all of our assets. At October 29, 2006, we were in compliance with or had obtained waivers with respect to the covenants under all our debt agreements.

As of the date of the filing of this Quarterly Report, the Senior Credit Facility requires a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) under certain circumstances. Although the Fixed Charge Coverage Ratio of the Senior Credit Facility was not applicable at that date, under the terms of the waiver we entered into with respect to the Senior Credit Facility during the second quarter of fiscal 2006, Auto is required to maintain a minimum 1:1 Fixed Charge Coverage Ratio until the termination of such waiver and all future waivers. For the four quarters ended February 4, 2007, this Ratio as so defined was 1.47:1. The Term Loan Facility also contains certain financial covenants, one of which is the requirement of a minimum Fixed Charge Coverage Ratio (as separately defined in the Term Loan Facility) of 1.4:1 until December 31, 2008 and 1.45:1 thereafter. For the four quarters ended February 4, 2007, this Ratio was 1.55:1. The Term Loan Facility, as amended, also requires that a leverage ratio test be met. The maximum leverage ratio permitted was 3.75:1 at the end of fiscal 2006 and is 3.95:1, 3.85:1, 3.75:1 and 3.50:1 for the first, second, third and fourth quarters, respectively, of fiscal 2007. The leverage ratio further declines to 3.25:1 at the end of fiscal 2008 and 3.00:1 at the end of fiscal 2009. Our leverage ratio was 3.31:1 as of February 4, 2007. The leverage ratios for fiscal 2007 reflect the April 27, 2007 second amendment of the Term Loan Facility in which certain fiscal 2007 leverage ratios were modified as set forth above to provide greater flexibility along with the elimination of undrawn letters of credit from the definition of debt. Based on our current financial forecasts for fiscal 2007, we believe we will remain in compliance with the financial covenants of the Senior Credit Facility and Term Loan Facility described above for fiscal 2007 and the foreseeable future. However, a significant decline in our net sales or gross margin or unanticipated significant increases in operating costs or LIBOR-based interest rates could limit the effectiveness of discretionary actions management could take to maintain compliance with financial covenants. Although we do not expect such significant decreases and increases to occur, if they did occur, we would seek to obtain a covenant waiver from our lenders or seek a refinancing, both of which we believe are viable options for the Company. However, there can be no assurances a waiver would be obtained or a refinancing could be achieved.

On August 10, 2007, we entered into a fourth waiver to our Senior Credit Facility that extended the then-current waiver relating to the delivery thereunder of our delinquent periodic SEC filings and related financial statements until the earliest of (i) September 15, 2007, with respect to the filing of our Quarterly Reports on Form 10-Q for fiscal 2006 and the first quarter of fiscal 2007, and October 15, 2007, with respect to the filing of our Quarterly Report on Form 10-Q for the second quarter of fiscal 2007; (ii) the date on which we have filed with the SEC all of our delinquent SEC filings up to and including our Quarterly Report on Form 10-Q for the second quarter of fiscal 2007; and (iii) the date ten days prior to the first date on which an event of default has occurred under the 6 3/4% Notes and any applicable grace period that must expire prior to acceleration of such notes has expired. When we renegotiated the terms of our 4 5/8% (now 6 3/4%) Notes in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee for the 6 3/4% Notes our late periodic SEC filings. As we did not so file and deliver all such filings by June 30, 2007, a notice of default may now be given to the Company by the trustee for such Notes or by the holders of 25% of the Notes, which would give the trustee for the 6³/4% Notes or the holders of 25% of such Notes the right to accelerate the payment of such Notes 60 days after the giving of such notice of default to the Company. No such notice of default had been given as of the date of the filing of this Quarterly Report. The occurrence of an event of default under the indenture under which the 6 3/4% Notes were issued, along with the expiration of the applicable grace period thereunder, would result in an event of default under the Senior Credit Facility, which would in turn result in an event of default under the Term Loan Facility.

Although we did not so file and deliver all of our late periodic SEC filings by June 30, 2007, we expect to be able to complete all such filings within the time periods required by the fourth waiver to the Senior Credit Facility. Nevertheless, if we were to fail to complete such filings by such deadlines, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

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 amounts received or paid on any interest rate swaps are sensitive to changes in interest rates. On April 5, 2004, we entered into an interest rate swap agreement that converted $100.0 million of our 7% Notes (including the interest thereon) to a floating rate, set semiannually in arrears, equal to the six month LIBOR + 283 basis points. In connection with the completion of our tender offer for our 7% Notes in the second quarter of fiscal 2006, we terminated the related

interest rate swap agreement. We also entered into the Term Loan Facility, borrowings under which were used to purchase the 7% Notes in the tender offer and repay the 3³/8% Notes upon the acceleration of their maturity, and amended certain terms of the 4⁵/8% Notes, as described above under “— Liquidity and Capital Resources — Fiscal 2006 Transactions —Restructuring of 4⁵/8% Notes.”

At October 29, 2006, 77% of our outstanding debt was at variable interest rates and 23% of our outstanding debt was at fixed interest rates. With $419.0 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 $4.2 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 Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2006 10-K under the heading “Critical Accounting Matters.”

Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes.FIN 48 will be effective for the Company beginning in the first quarter of fiscal 2007. The Company is currently evaluating FIN 48 and has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position and results of operations.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

See “Factors Affecting Liquidity and Capital Resources” above.

Item 4.Controls and Procedures

An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) and 15d–15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed as of

October 29, 2006, under the supervision and with the participation of our current management, including our current Chief Executive Officer and current interim Chief Financial Officer. Our disclosure controls and procedures have been designed to ensure that information we are required to disclose in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Based on this evaluation, our current Chief Executive Officer and our current interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of October 29, 2006 because of the material weaknesses identified in our evaluation of internal control over financial reporting as disclosed in our 2005 10-K. The Company performed additional analyses and other post-closing procedures to ensure that our consolidated financial statements contained within this Quarterly Report were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING

A “material weakness” is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “control deficiency” exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

Management identified the following material weaknesses in the Company’s internal control over financial reporting as of October 29, 2006:

1)Control Environment:The Company did not maintain an effective control environment based on the criteria established in the COSO framework. The Company failed to design controls to prevent or detect instances of inappropriate override of, or interference with, existing policies, procedures and internal controls. The Company did not establish and maintain a proper tone as to internal control over financial reporting. More specifically, senior management failed to emphasize, through consistent communication and behavior, the importance of internal control over financial reporting and adherence to the Company’s code of business conduct and ethics, which, among other things, resulted in information being withheld from, and improper explanations and inadequate supporting documentation being provided to, the Company’s Audit Committee, its Board of Directors, its internal auditors and independent registered public accountants. In addition, certain members of senior management created an environment that discouraged employees from raising accounting related concerns and suppressed accounting related inquiries that were made.

The material weakness in the Company’s control environment discussed above permitted or contributed to the following additional material weaknesses and the material weakness described at 2) below:

a) Accounting for Inventory— The Company’s lack of effective controls did not prevent or detect the inappropriate override of established procedures regarding the adjustment of inventories for the results of annual physical inventory counts at each of the Company’s distribution centers, warehouses and stores. In addition, the Company’s lack of effective controls did not prevent or detect inappropriate and inaccurate accumulations of inventory balances in in-transit accounts (i.e., store returns to warehouses, distribution centers and return centers; and to vendors), which was known or should have been known to several members of the Finance organization. The lack of effective controls permitted (i) errors in inventory balances to be inappropriately systematically amortized to cost of sales in improper periods; (ii) instances where improper adjustments were made to certain product costs within the perpetual inventory system that, together with improper journal entries to the general ledger, resulted in the overstatement of inventory and cost of sales being recognized in incorrect periods; and (iii) the inappropriate capitalization of inventory overheads (purchasing, warehousing and distribution costs) and vendor allowance receivables. Additionally, Company personnel did not properly oversee the processes for accounting for inventory warranties and did not establish adequate accrued liabilities for warranty returns from customers.

b) Accounting for Vendor Allowances— The Company’s lack of effective controls did not detect or prevent the inappropriate override of established procedures related to: (i) the review and approval process for initial vendor allowance agreements; (ii) the monitoring of modifications to existing vendor allowance agreements; and (iii) the accuracy of recording of various vendor allowance transactions, including applicable cash collections and estimates. Furthermore, as a result of the lack of a sufficient complement of personnel with the requisite level of accounting knowledge, experience and training in GAAP, as discussed in 2) below, the Company did not identify that provisions in certain agreements were required to be accounted for differently. The investigation revealed that improper debits were issued and applied to accounts payable for amounts the Company was not entitled to receive. These amounts were subsequently repaid to those vendors through direct cash payments, the foregoing of future cash discounts, the acceptance of increased prices on future purchases and paybacks through the warranty account. This material weakness resulted in errors in vendor allowance receivables, inventory, accounts payable and costs of sales accounts.

c) Accounting for Certain Accrued Expenses— The Company’s lack of effective controls did not prevent or detect the inappropriate override of established procedures to adjust workers’ compensation liabilities to amounts determined by independent actuaries. Errors in timing of incentive compensation accruals resulted from inadvertent misapplication of GAAP as well as the lack of effective controls which permitted override of established procedures. In addition, the Company identified improper and unsupported journal entries to the general ledger that resulted in the misstatement of certain accrued expense accounts and related operating and administrative expenses. This material weakness resulted in errors in certain accrued expenses and related operating and administrative expenses, including workers’ compensation liabilities and incentive compensation costs.

d) Accounting for Store Fixtures and Supplies— The Company’s lack of effective controls did not prevent or detect the override of established procedures for periodic physical inspections and usability evaluations of store fixtures held for future use in a warehouse. Specifically, the Company did not detect that certain of these assets were impaired or did not exist and that, as a result, their recorded cost was overstated. In addition, the Company’s controls failed to detect an inappropriate accumulation of costs related to store fixtures and supplies in general ledger accounts and the Company’s overstatement of supplies on hand in each store. This material weakness resulted in errors in its store fixtures (fixed assets) and supplies accounts (other current assets) and related operating and administrative expenses.

2)Resources, and Policies and Procedures to Ensure Proper and Consistent Application of GAAP:The Company did not maintain effective controls over the application of GAAP. Specifically the Company failed to have a sufficient complement of personnel with a level of accounting knowledge, experience and training in the application of GAAP commensurate with the Company’s financial reporting requirements. This material weakness in the Company’s resources and policies contributed to the following additional material weaknesses:

a) Accounting for Leases— The Company did not maintain effective controls over the completeness and accuracy of its accounting for lease related fixed assets and debt, related operating and administrative expenses and interest expense, and financial statement disclosures. Specifically, the Company did not detect that a vehicle master leasing arrangement was not properly evaluated under GAAP.

b) Allowance for Sales Returns— The Company did not maintain effective controls over the completeness of its allowance for sales returns and the related net sales, cost of sales, accrued liabilities and other current assets accounts. Specifically, the Company did not detect that it had inappropriately excluded an estimate for certain returns that were incorrectly classified as warranty and core returns in the Company’s methodology for determining an allowance for sales returns.

c) Accounting for Certain Accrued Expenses— The Company did not maintain effective controls over the completeness, valuation and reporting in the proper period of certain of its accrued expense accounts and related operating and administrative expenses. The Company identified numerous instances of errors in accrual accounts, including transactions not accounted for in accordance with GAAP, that were attributable to the Company’s lack of a sufficient complement of experienced personnel and written accounting policies and procedures in certain areas.

Each of the aforementioned material weaknesses resulted in adjustments to the Company’s fiscal 2006 and 2005 annual and interim consolidated financial statements, and the restatement of our fiscal 2004 annual consolidated financial statements and interim consolidated financial statements for each of the first three quarters in fiscal 2005. In addition, each of these above material weaknesses could result in a material misstatement of the Company’s interim or annual consolidated financial statements and disclosures that would not be prevented or detected.

PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES

Remediation Initiatives

The Board of Directors created a Remediation Committee comprised of certain positions within key functional areas of the Company and co-chaired by the Senior Vice President and General Counsel and the Senior Vice President and Chief Financial Officer to develop a remediation plan to address the material weaknesses and other deficiencies noted from the results of the Audit Committee-led investigation and completion of the Company’s evaluation of internal controls over financial reporting. The proposed remediation plan that the Remediation Committee is working with reflects the input of the Disinterested Directors. While most aspects of the plan are presently in the development phase, the remediation plan is generally expected to include a comprehensive review, and development or modification as appropriate, of various components of the Company’s compliance program, including ethics and compliance training, hotline awareness and education, corporate governance training, awareness of and education relative to key codes of business conduct and policies, as well as departmental specific measures.

As previously announced on June 8, 2007, James B. Riley, our Senior Vice President and Chief Financial Officer from October 2005, resigned to accept a position as Chief Financial Officer with a company in Mr. Riley’s home state of Ohio. The Board of Directors appointed Steven L. Korby as its interim Chief Financial Officer effective upon Mr. Riley’s departure and pending identification of a permanent replacement for Mr. Riley. Mr. Korby, a partner with Tatum, LLC, an executive services and consulting firm specializing in financial and information technology leadership, has been serving as a consultant to the Company since July 2006, assisting Mr. Riley in connection with various accounting and finance matters, including preparation of the Company’s fiscal 2005 and 2006 financial statements and the restatements of prior period financial statements. The Company has commenced its search for a permanent Chief Financial Officer to succeed Mr. Riley.

To remediate the material weaknesses described above, the Company has implemented or plans to implement the remedial measures described below. In addition, the Company plans to continue its evaluation of its controls and procedures and may, in the future, implement additional enhancements.

1.Control Environment:The Company’s failure to maintain an adequate control environment and have appropriate staffing resources contributed significantly to each of the material weaknesses described above and the Company’s inability to prevent or detect material errors in its consolidated financial statements and disclosures. The Company has completed or is in the process of completing the following remediation measures:

General— Personnel changes in key positions in management have been made, which has improved the overall tone within the organization and which represented the first and most critical step in establishing an environment conducive to maintaining an adequate control environment.

The Company has reinforced and plans to continue to reinforce on a regular basis with its employees the importance of raising any concerns, whether they are related to financial reporting, compliance with the Company’s ethics policies or otherwise, and using the existing communication tools available to them, including the Company’s hotline. The training planned by the Remediation Committee and the hiring of new personnel in conjunction with the new controls are expected to foster an environment that should facilitate the questioning of accounting procedures and reinforce the ability and expectation of employees to raise issues to the Board of Directors if their questions or concerns are not resolved to their satisfaction.

We plan to provide education and training to our management on an ongoing, periodic basis with respect to, among other things, corporate governance, compliance and SOX. Such education and training are planned to include (i) in-house memoranda and other written materials, as well as presentation and discussion in management meetings, and (ii) modules/tutorials offered within the curriculum provided by a third party ethics and compliance vendor. The Company recently completed its evaluation of third party providers of ethics and compliance training for all of its employees and is in the process of contracting with its selected provider. Such training is planned to be ongoing and include tailored programs focused on the Company’s codes of conduct and ethics as well as, e.g., Sarbanes-Oxley, conflicts of interest, insider trading, corporate governance, financial integrity, and targeted training geared toward certain functional areas on such topics as vendor arrangements, advertising and merchandising and procurement integrity.

Formalized closing procedures are being enhanced to provide for the proper preparation of account reconciliations and their independent review and approval. The Company has extended its SOX 404 sub-certification process used to support the SOX certifications of the Chief Executive Officer and Chief Financial Officer to additional members of management and, depending upon new hires and related organizational changes, may extend to others within the organization to assist in the disclosures to be included in, and the review of, our SEC filings.

The Company also is automating certain procedures so that it will be easier to ascertain if there is unusual activity in its ledgers and is introducing new security to its business systems to place limits on the ability to make journal entries to specific cost centers and accounts to authorized individuals. The journal entry preparation and review and approval process has been enhanced to require imaging of manual journal entries and supporting documentation. Each individual who prepares journal entries will be reminded that they are responsible to ensure that adequate supporting documentation is attached. The inclusion of this supporting documentation is intended to allow the approver to more easily ascertain whether the entries are correct. The Company is also addressing repetitive manual journal entries and plans to automate where appropriate to reduce the volume of manual entries currently required.

Accounting for Inventory— The Company has instituted monitoring processes to ensure compliance with its established policies to assure timely reconciliations of all physical inventories and reflection of the results of the reconciliations in the general ledger, as well as independent supervisory review of the reconciliations. Review and approval processes are in place for distribution centers, warehouses and stores to ensure inventory shrink estimates are calculated in accordance with established procedures. Although new personnel have already been hired with pertinent experience in accounting for inventories, additional hires in the inventory area are

planned due to turnover. We plan to enhance our reconciliation process of the book and perpetual inventory for each reporting period to mitigate the risk of material unsubstantiated balances accumulating in general ledger accounts. Longer term, we expect to make system enhancements so that our book and perpetual systems function as one system that is used to replenish the operations and utilize the same information to account for on hand merchandise inventory and cost of sales. Currently, the Company uses an estimation technique for determining its in-transit inventory rather than halting operations to enable a physical inventory of in-transit merchandise to be conducted. This estimate is reviewed and approved on a quarterly basis. In the future, the Company expects to make modifications to its systems that will allow for a systematic method of determining the in-transit inventory balances. Access to product cost adjustments in our inventory system has now been appropriately restricted. We plan to enhance the approvals required for such adjustments and require a monthly manager level review of all adjustments entered into our system. In connection with the restatement of inventory and cost of sales for warranty, the Company has developed a more rigorous process for the independent review of the methodology and underlying judgments used in developing the estimates that underlie the accrual.

Accounting for Vendor Allowances— The Company’s actions and planned remediation measures intended to address material weaknesses related to its vendor allowance receivable accounts and the related inventory, accounts payable and cost of sales accounts include the following:

	•		The Company has enhanced its review and approval processes to ensure review by appropriate members of management of critical information necessary to assess vendor allowance collections and the proper recognition of vendor allowances in the appropriate periods.

	•		The Company plans to reevaluate and enhance its contract review process, including training of merchandising, finance and legal staffs, as well as formalizing the communication process among the three groups, to better provide for timely identification of potential issues and accurate accounting treatment. The Company also plans to implement enhanced processes and procedures so that its merchandising, finance and legal staffs have adequate information to conduct their review and provide meaningful input and communication during the contract negotiation process to allow for accurate accounting treatment for both standard and non-standard contracts.

	•		The Company plans to conduct training for its merchandising, finance and legal staffs relative to vendor arrangements, including contract provisions and construction, the impact of amendments and side and ancillary agreements and accounting treatment of related vendor allowances.

	•		The Company has consolidated the oversight and accounting for all vendor allowance financial transactions under one senior accounting manager to provide for consistent application with respect to the accounting for vendor allowances.

Accounting for Certain Accrued Expenses— The Company’s planned remediation measures intended to address the material weakness related to the Company’s recording of accrued expenses include the development of a standardized checklist of expected accrual items and the implementation of a process of enhanced review of invoices, disbursements and other items at the end of each quarter to provide for proper recording of accrued expenses and liabilities. In addition, we believe that the formal review procedures for period end closings and account reconciliations and the hiring of new Finance organization management, along with written policies and procedures, should remediate this material weakness. The aforementioned remediation efforts are also designed to eliminate the ability to override policies and procedures and internal controls.

Accounting for Store Fixtures and Supplies— The Company has already closed its fixtures warehouse and moved useable materials where they are under perpetual inventory control. Unusable materials have been scrapped and general ledger balances have been appropriately adjusted. The Company plans to conduct an annual review of the items in its fixtures inventory to ensure they continue to be usable in the Company’s operations. The Company has adjusted its store supplies general ledger balances to appropriate amounts and plans on monitoring these balances on a quarterly basis.

2.Resources and, Policies and Procedures to Ensure Proper and Consistent Application of GAAP:Lack of formalized written procedures contributed to the errors and irregularities in the accounting records, as did the Company’s failure to have a sufficient complement of personnel with a level of accounting knowledge, experience and training in the application of GAAP commensurate with the Company’s financial reporting requirements. The Company has completed or is in the process of completing the following remediation measures:

General— The Company plans to prepare or enhance formal written accounting policies and procedures and establish procedures and processes for their periodic update. In addition, Finance personnel job descriptions are being updated to reflect current duties, and procedures are being written that should provide for the ability to effectively audit compliance. As discussed above, closing procedures are being enhanced to ensure proper preparation, review and approval of account reconciliations.

The Company has hired and plans to hire new Finance organization personnel who will have knowledge, experience and training in the application of GAAP to handle the Company’s operations and related financial reporting requirements. In view of the

resignation of our current Chief Financial Officer (Mr. James Riley, who resigned June 2007) as noted above, we are seeking a permanent CFO to succeed him; in addition, we are seeking a new Controller. These personnel, along with a rigorous monthly financial statement review and comparison of actual results to budget, are intended to assist in substantiating that our financial reporting is in compliance with GAAP and SEC rules and regulations. The Company plans to increase the accounting, internal control, and SEC reporting acumen of its Finance organization personnel through a regular training program, which is planned to include, among other things, in-house training and education on corporate governance and compliance practices as well as modules/tutorials offered within curriculum provided by our third party ethics and compliance training vendor, which we expect to select in the near future.

Beginning in the latter part of fiscal 2004, with the input of Company management and the Chair of the Audit Committee, we restructured our Internal Audit Department (“IAD”) and augmented the IAD staff, and we developed and implemented a risk-based internal audit plan and related audit process/procedures, report structure and related materials to govern the audit process going forward. We are in the process of enlarging our IAD staff and plan to further increase the IAD’s involvement in the financial reporting process, and continue the development and implementation of risk-based master internal audit plans, which will be re-assessed approximately annually and revised/updated based upon changes in risk assessment or changed circumstances (e.g., acquisitions).

Accounting for Leases— The Company’s planned remediation measures to address the material weakness related to the Company’s accounting for leases include additional training and the implementation of a process of enhanced review of lease agreements and other contracts to determine the proper accounting treatment.

Allowance for Sales Returns— We have developed a process to estimate sales returns using historical return information that is all inclusive. We plan to enhance our internal controls over the estimation process for the sales return allowance by establishing a formal quarterly review of this calculation.

Interim Measures Pending Completion of Remediation Initiatives

Management has not yet implemented all of the measures described above or adequately tested those controls already implemented. Nevertheless, management believes those remediation measures already implemented, together with the additional measures undertaken by the Company described below, satisfactorily address the material weaknesses described above as they might affect the consolidated financial statements and information included in this Quarterly Report. These additional measures included the following:

	•		The fiscal 2006 quarterly reporting processes was extended, allowing the Company to conduct additional analyses and procedures and make additional adjustments as necessary to ensure the accuracy of financial reporting through October 29, 2006.

	•		Where the Company identified the existence of a material weakness, the Company has performed extensive substantive procedures to ensure that affected amounts are fairly stated for all periods presented in this Quarterly Report.

	•		The Company retained, on an interim basis, numerous experienced accounting consultants, other than the Company’s independent registered public accounting firm, with relevant accounting experience, skills and knowledge, working under the supervision and direction of the Company’s management, to assist with the fiscal 2006 quarterly reporting process.

	•		The Company conducted a detailed and extensive review of account reconciliations, non-routine transactions and agreements, financial statement classifications, spreadsheets, and journal entries and related substantiation for accuracy and conformance with GAAP.

Control deficiencies not constituting material weaknesses

In addition to the material weaknesses described above, management has identified other deficiencies in internal control over financial reporting that did not constitute material weaknesses as of October 29, 2006. The Company implemented during fiscal 2006 and plans to implement during fiscal 2007 various measures to remediate these control deficiencies and has undertaken other interim measures to address these control deficiencies.

Management’s conclusions

Management believes the remediation measures described above will strengthen the Company’s internal control over financial reporting and remediate the material weaknesses identified above. Although management has not yet implemented all of these measures or tested all those that have been implemented, management has concluded that the interim measures described above provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements included in this Quarterly Report and has discussed its conclusions with the Company’s Audit Committee.

The Company is committed to continuing to improve its internal control processes and will continue to diligently and vigorously review its disclosure controls and procedures and its internal control over financial reporting in order to ensure compliance with the requirements of SOX 404. However, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objectives will be met. As management continues to evaluate and work to improve the Company’s internal control over financial reporting, it may determine to take additional measures to address control deficiencies, and it may determine not to complete certain of the measures described above.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting that occurred during our third quarter of fiscal 2006 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.Legal Proceedings

Please refer to Note 12 — Legal Matters to the unaudited consolidated financial statements included in Item 1 of Part I, above, which is incorporated herein by reference.

Item 1A.Risk Factors

Any material changes from the risk factors disclosed in Item 1A, “Risk Factors” in the 2005 10-K have been incorporated into the risk factors disclosed in Item 1A, “Risk Factors” in the 2006 10-K. There have been no material changes to the risk factors disclosed in the 2006 10-K.

Item 6.Exhibits

The Exhibit Index located at the end of this Form 10-Q is incorporated herein by reference.

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
DATED: August 15, 2007
	By:	/s/ Steven L. Korby
		Steven L. Korby
		Interim Chief Financial Officer

EXHIBIT INDEX


Exhibit
Number		Description
3.01		Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.01 of our Annual Report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).

3.02		Certificate of Correction to the Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.02 of our Annual Report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).

3.03		Certificate of Amendment to the Restated Certificate of Incorporation of CSK Auto Corporation, incorporated herein by reference to Exhibit 3.2.1 of our Quarterly Report on Form 10-Q, filed on September 18, 2002 (File No. 001-13927).

3.04		Second Certificate of Amendment of the Restated Certificate of Incorporation of CSK Auto Corporation, incorporated herein by reference to Exhibit 3.04 of our Quarterly Report on Form 10-Q, filed on December 9, 2005 (File No. 001-13927).

3.05		Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3.03 of our Annual Report on Form 10-K, filed on April 28, 1999 (File No. 001-13927).

3.05.1		First Amendment to Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3.03.1 of our annual report on Form 10-K, filed on May 1, 2001. (File No 001-13927).

3.05.2		Second Amendment to Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3.03.2 of our Quarterly Report on Form 10-Q, filed on June 14, 2004 (File No. 001-13927).

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

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

32.01*		Certification of 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.


*		Filed herewith.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. junior Avg

CSK Auto (CAO) Inactive 10-Q2006 Q3 Quarterly report

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