CSK Auto 10Q 2007 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 August 5, 2007


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

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

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

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

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

Large accelerated 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 October 5, 2007, there were 43,959,709 shares of our common stock outstanding.

TABLE OF CONTENTS

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 August 5, 2007 (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 fiscal 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 May 6, 2007, October 29, 2006, July 30, 2006 and April 30, 2006 and our Annual Reports on Form 10-K for fiscal 2005 (the “2005 10-K”) and for the fiscal year ended February 4, 2007 (“fiscal 2006”). The aforementioned delays were due to the Company’s devotion of substantial internal and external resources towards the completion of its 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. The Company did not amend its prior Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q, including its Quarterly Reports on Form 10-Q for each of the first three quarterly periods in fiscal 2005, for periods affected by the restatement adjustments. 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 this Quarterly Report, 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 Company filed its Annual Report on Form 10-K for fiscal 2006 on July 9, 2007 and amended that filing with a Form 10-K/A filed on August 15, 2007 (as so amended, the “2006 10-K”). The Form 10-K/A amended Note 20 — Quarterly Results (unaudited) in Part II, Item 8, Financial Statements and Supplementary Data, to correct inadvertent errors in the interim results of operations reported for fiscal 2005 and fiscal 2006, which did not affect amounts reported for the annual periods. For additional information regarding the Company, the Audit Committee-led investigation and its results, our business, operations, risks and results, please refer to our 2005 10-K, 2006 10-K and Current Reports on Form 8-K previously filed with the SEC.

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 past 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)


	August 5,			February 4,
	2007			2007
ASSETS
Cash and cash equivalents	$	19,894		$	20,169
Receivables, net of allowances of $566 and $393, respectively		42,131			43,898
Inventories		526,579			502,787
Deferred income taxes		48,078			46,500
Prepaid expenses and other current assets		33,487			31,585

Total current assets		670,169			644,939

Property and equipment, net		170,757			174,409
Intangibles, net		65,524			67,507
Goodwill		224,937			224,937
Deferred income taxes		941			4,200
Other assets, net		34,006			35,770

Total assets	$	1,166,334		$	1,151,762


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	252,025		$	260,146
Accrued payroll and related expenses		58,329			60,306
Accrued expenses and other current liabilities		95,538			81,569
Current maturities of long-term debt		60,595			56,098
Current maturities of capital lease obligations		7,402			8,761

Total current liabilities		473,889			466,880


Long-term debt		451,589			451,367
Obligations under capital leases		12,466			15,275
Other liabilities		48,040			46,730

Total non-current liabilities		512,095			513,372


Commitments and contingencies

Stockholders’ equity:
Common stock, $0.01 par value, 90,000,000 shares authorized, 43,959,709 and 43,950,751 shares issued and outstanding at August 5, 2007 and February 4, 2007, respectively		440			440
Additional paid-in capital		435,783			433,912
Accumulated deficit		(255,873	)		(262,842	)

Total stockholders’ equity		180,350			171,510

Total liabilities and stockholders’ equity	$	1,166,334		$	1,151,762

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					Twenty-Six Weeks Ended
	August 5,		July 30,			August 5,		July 30,
	2007		2006			2007		2006
Net sales	$	480,227	$	488,742		$	953,262	$	952,510
Cost of sales		249,847		256,189			502,284		504,762

Gross profit		230,380		232,553			450,978		447,748
Other costs and expenses:
Operating and administrative		204,247		199,629			403,481		381,759
Investigation and restatement costs		3,771		11,962			8,335		15,632
Store closing costs		463		499			1,169		681

Operating profit		21,899		20,463			37,993		49,676
Interest expense		13,164		10,999			26,486		21,320
Loss on debt retirement		—		19,336			—		19,336

Income (loss) before income taxes and cumulative effect of change in accounting principle		8,735		(9,872	)		11,507		9,020
Income tax expense (benefit)		3,436		(4,055	)		4,538		3,680

Income (loss) before cumulative effect of change in accounting principle		5,299		(5,817	)		6,969		5,340
Cumulative effect of change in accounting principle, net of tax		—		—			—		966

Net income (loss)	$	5,299	$	(5,817	)	$	6,969	$	4,374


Basic earnings per share:
Income (loss) before cumulative effect of change in accounting principle	$	0.12	$	(0.13	)	$	0.16	$	0.12
Cumulative effect of change in accounting principle		—		—			—		0.02

Net income (loss) per share	$	0.12	$	(0.13	)	$	0.16	$	0.10

Shares used in computing basic per share amounts		43,955		43,855			43,953		43,849


Diluted earnings per share:
Income (loss) before cumulative effect of change in accounting principle	$	0.12	$	(0.13	)	$	0.16	$	0.12
Cumulative effect of change in accounting principle		—		—			—		0.02

Net income (loss) per share	$	0.12	$	(0.13	)	$	0.16	$	0.10

Shares used in computing diluted per share amounts		44,844		43,855			44,771		44,126

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)


	Common Stock					Additional			Accumulated			Total
	Shares			Amount		Paid-in Capital			Deficit			Equity

Balances at February 4, 2007		43,950,751		$	440	$	433,912		$	(262,842	)	$	171,510
Restricted stock		9,288			—		(99	)		—			(99	)
Exercise of options		(330	)		—		—			—			—
Compensation expense, stock-based awards		—			—		1,970			—			1,970
Net income		—			—		—			6,969			6,969

Balances at August 5, 2007		43,959,709		$	440	$	435,783		$	(255,873	)	$	180,350

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)


	Twenty-Six Weeks Ended
	August 5,			July 30,
	2007			2006
Cash flows provided by (used in) operating activities:
Net income	$	6,969		$	4,374
Adjustments:
Depreciation and amortization on property and equipment		20,835			20,273
Amortization of other items		2,691			4,301
Amortization of debt discount and deferred financing costs		2,713			1,798
Stock-based compensation expense		616			2,129
Write downs on disposal of property, equipment and other assets		2,682			2,485
Loss on debt retirement		—			8,496
Deferred income taxes		4,314			2,970
Changes in operating assets and liabilities:
Receivables		3,287			(8,855	)
Inventories		(23,792	)		(10,424	)
Prepaid expenses and other current assets		(1,902	)		(1,499	)
Accounts payable		(8,121	)		44,633
Accrued payroll, accrued expenses, and other current liabilities		13,345			(897	)
Other operating activities		(1,444	)		(647	)

Net cash provided by operating activities		22,193			69,137


Cash flows used in investing activities:
Capital expenditures		(18,987	)		(16,326	)
Business acquisition		—			(1,626	)
Other investing activities		(475	)		(865	)

Net cash used in investing activities		(19,462	)		(18,817	)


Cash flows provided by (used in) financing activities:
Borrowings under senior credit facility — line of credit		126,500			56,900
Payments under senior credit facility — line of credit		(122,000	)		(86,900	)
Borrowings under term loan facility		—			350,000
Payments under term loan facility		(1,743	)		—
Payment of debt issuance costs		—			(12,308	)
Retirement of 3.375% exchangeable notes		—			(125,000	)
Retirement of 7% senior notes		—			(224,960	)
Payments on capital lease obligations		(5,046	)		(5,157	)
Proceeds from seller financing arrangements		—			428
Payments on seller financing arrangements		(328	)		(228	)
Proceeds from exercise of stock options		—			265
Other financing activities		(389	)		(123	)

Net cash used in financing activities		(3,006	)		(47,083	)


Net increase (decrease) in cash		(275	)		3,237
Cash and cash equivalents, beginning of period		20,169			17,964

Cash and cash equivalents, end of period	$	19,894		$	21,201

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 August 5, 2007 and for the periods presented in this Quarterly Report, CSK Auto Corporation had no business activity other than its investment in CSK Auto, Inc. (“Auto”), a wholly owned subsidiary. On a consolidated basis, CSK Auto Corporation and its subsidiaries are referred to herein as the “Company,” “we,” “us,” or “our.”

Auto is a specialty retailer of automotive aftermarket parts and accessories. At August 5, 2007, we operated 1,334 stores in 22 states, with our principal concentration of stores in the Western United States, under the following four brand names: Checker Auto Parts, founded in 1969 and operating in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii; Schuck’s Auto Supply, founded in 1917 and operating in the Pacific Northwest and Alaska; 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 August 5, 2007, we also operated two value concept retail stores under the Pay N Save brand name in the Phoenix, Arizona metropolitan area, which were subsequently closed in the third quarter of our fiscal year ending February 3, 2008 (“fiscal 2007”).

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 results of operations for the twenty-six weeks ended August 5, 2007 are not necessarily indicative of the operating results for the full year. 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 as amended by the filing of a Form 10-K/A on August 15, 2007 (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 — Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“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 Statement of Financial Accounting Standards (“SFAS”) No. 109,Accounting for Income Taxes.The Company adopted FIN 48 on February 5, 2007. See Note 8 — Income Taxes for a discussion of the impact of FIN 48.

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. Effective February 5, 2007, the Company adopted SFAS No. 155, which did not affect 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. Effective February 5, 2007, the Company adopted SFAS No. 156, which did not affect its financial condition, results of operations or cash flows.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation),that was effective for fiscal years beginning after December 15, 2006. The Company presents sales net of sales taxes in its consolidated statement of operations and the adoption of this EITF issue did not affect its financial statements.

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 regarding fair value measurements. SFAS No. 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.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159.

Note 3 — 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 twenty-six weeks ended August 5, 2007 was approximately $6.2 million and $13.7 million, respectively, and approximately $8.9 million and $17.1 million for the thirteen and twenty-six weeks ended July 30, 2006, respectively. While the shrinkage accrual is based on recent experience, there is a risk that actual losses may be higher or lower than expected.

	•		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):


	August 5,			February 4,
	2007			2007
FIFO Cost	$	581,786		$	562,405
Administrative and overhead costs		30,282			28,725
Vendor allowances		(65,589	)		(69,469	)
Shrinkage		(19,274	)		(18,116	)
Obsolescence		(626	)		(758	)

Net inventory	$	526,579		$	502,787

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4 — Property and Equipment

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


	August 5,			February 4,
	2007			2007			Estimated Useful life
Land	$	348		$	348
Buildings		16,771			15,251		15 - 25 years
Leasehold improvements		162,526			159,070		Shorter of lease term or useful life
Furniture, fixtures and equipment		177,298			168,845		3 - 10 years
Property under capital leases		84,731			97,974		5 - 15 years or life of lease
Purchased software		12,345			10,829		5 years

		454,019			452,317

Less: accumulated depreciation and amortization		(283,262	)		(277,908	)

Property and equipment, net	$	170,757		$	174,409

Accumulated amortization of property under capital leases totaled $64.6 million and $73.1 million at August 5, 2007 and February 4, 2007, 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 5 — Store Closing Costs

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

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 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.

As of August 5, 2007, we had a total of 175 locations included in the allowance for store closing costs, consisting of 122 store locations and 53 service centers. Of the store locations, 19 locations were vacant and 103 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.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Activity in the allowance for store closing costs and the related payments for the twenty-six weeks ended August 5, 2007 and July 30, 2006 are as follows (in thousands):


	Twenty-Six Weeks Ended
	August 5,			July 30,
	2007			2006
Balance, beginning of year	$	4,911		$	7,033

Store closing costs:
Provision for store closing costs		904			174
Other revisions in estimates		(372	)		(96	)
Accretion		120			151
Operating expenses and other		517			452

Total store closing costs		1,169			681

Payments:
Rent expense, net of sublease recoveries		(1,076	)		(1,226	)
Occupancy and other expenses		(653	)		(355	)
Sublease commissions and buyouts		(407	)		(92	)

Total payments		(2,136	)		(1,673	)

Ending balance	$	3,944		$	6,041

We expect net cash outflows for closed store locations of approximately $1.9 million during the remainder of fiscal 2007. These cash outflows and cash outflows in future years are expected to be funded from normal operating cash flows. We closed 14 stores during the twenty-six weeks ended August 5, 2007 (which included 3 stores closed due to relocation). Included in the 14 stores were 3 Pay N Save stores that had remaining lease terms ranging from approximately one to three years. We anticipate that we will close or relocate approximately 16 stores during the remainder of fiscal 2007. Most of these closures and relocations will occur near the end of the lease terms, resulting in minimal closed store costs. See Note 11 — Subsequent Events.

Note 6 — Long-Term Debt

Overview

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


	August 5,		February 4,
	2007		2007
Term loan facility	$	347,382	$	349,125
Senior credit facility		56,500		52,000
6³/4% senior exchangeable notes⁽¹⁾		93,831		93,061
Seller financing arrangements		14,471		13,279

Total debt		512,184		507,465
Less: Current portion of term loan facility		3,461		3,478
Senior credit facility⁽²⁾		56,500		52,000
Current maturities of seller financing arrangements		634		620

Total debt (non-current)	$	451,589	$	451,367


⁽¹⁾		Carrying balance decreased by discount of $6.2 million and $6.9 million at August 5, 2007 and February 4, 2007, respectively, in accordance with EITF No. 06-6.

⁽²⁾		This portion of the revolving line of credit represents the expected paydown in the following 12-month period.

Term Loan Facility

In the second quarter of fiscal 2006, Auto entered into a $350.0 million term loan facility (“Term Loan Facility”). The loans under the Term Loan Facility (“Term Loans”) bear interest at a base rate or the LIBOR rate, plus a margin that fluctuates depending upon the rating of the Term Loans. At August 5, 2007, loans under the Term Loan Facility bore interest at 8.375%. The Term Loans are

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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, June 30, 2012. Costs associated with the Term Loan Facility were approximately $10.7 million and are being amortized to interest expense following the interest method over the six-year term of the facility. The Term Loan Facility was amended as of October 10, 2007 to alter certain interest calculation and covenant provisions. See Note 11— Subsequent Events.

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. Under the maximum leverage covenant (total debt to EBITDA) contained in the Term Loan Facility, at August 5, 2007, the Company would have only been permitted to have $12.3 million of additional debt outstanding, regardless of which facility such debt was borrowed under. The maximum leverage covenant of the Term Loan Facility was amended in the October 10, 2007 amendment referred to above. See “Debt Covenants” below and Note 11— Subsequent Events.

Senior Credit Facility — Revolving Line of Credit

At August 5, 2007 and February 4, 2007, Auto had a $325.0 million senior secured revolving line of credit (“Senior Credit Facility”). 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). At August 5, 2007, loans under the Senior Credit Facility bore interest at 6.875%. 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 that allowed 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. In the second quarter of fiscal 2007, we entered into an additional waiver that further extended the filing date for such reports. See Note 11— Subsequent Events for a discussion of a subsequent waiver to the Senior Credit Facility. The filing of this Quarterly Report completes the filing of all our late periodic SEC filings covered by these waivers.

Availability under the Senior Credit Facility is limited to the lesser of the revolving commitment of $325.0 million and an amount determined by 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 August 5, 2007, Auto could only borrow up to an additional $170.5 million of the $325.0 million facility in addition to the $56.5 million borrowed under the facility at August 5, 2007 and the $31.2 million of letters of credit outstanding under the facility at that date. In addition, the maximum leverage covenant of the Term Loan Facility described above limits the total amount of indebtedness the Company can have outstanding and, as of August 5, 2007, would have only permitted approximately $12.3 million of additional borrowings, regardless of which facility they were borrowed under. This maximum leverage covenant was amended as of October 10, 2007. See Note 11— Subsequent Events.

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, Auto is, under certain circumstances not applicable during the quarter ended August 5, 2007, 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. However, under the waiver we entered into on June 16, 2006 and under all subsequent waivers, Auto has been required to maintain a minimum 1:1 Fixed Charge Coverage Ratio until the termination of such waivers. The filing of this Quarterly Report will result in the termination of the requirement to maintain a minimum 1:1 Fixed Charge Coverage Ratio imposed by these waivers. See “Debt Covenants” below and Note 11— Subsequent Events.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6³/4% Notes

We have $100.0 million of 6³/4% senior exchangeable notes (“6³/4% Notes”) outstanding. 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 sets forth 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.

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 liability equal to the face amount of the 6³/4% Notes recorded at the time of their issuance) 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 were included in our diluted earnings per share

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

calculations for the thirteen and twenty-six weeks ended August 5, 2007 since our average common stock price exceeded $16.50 per share for these periods.

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.

During the second quarter of fiscal 2006, we entered into a supplemental indenture that increased the exchange rate of the 6³/4% 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 Notes. 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 of the debt discount was $389,000 and $770,000 for the thirteen and twenty-six weeks ended August 5, 2007, respectively.

When we renegotiated the terms of our 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 could have been given to the Company by the trustee for such Notes or by the holders of 25% of the Notes, which would have given 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. 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, could have resulted in an event of default under the Senior Credit Facility, which could in turn have resulted in an event of default under the Term Loan Facility. No such notice of default had been given with respect to the 6³/4% Notes as of the date of the filing of this Quarterly Report, and the filing of this Quarterly Report completes the filing of all of our late periodic SEC filings. See Note 11— Subsequent Events.

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 August 5, 2007 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 not applicable during the quarter ended August 5, 2007, subject to a minimum Fixed Charge Coverage Ratio under a Senior Credit Facility financial maintenance covenant; however, under the waiver we entered into during the second quarter of fiscal 2006 and under all subsequent waivers, a minimum 1:1 Fixed Charge Coverage Ratio is required until the termination of such waivers. For the twelve months ended August 5, 2007, this ratio was 1.39:1. See “Senior Credit Facility — Revolving Line of Credit” above and Note 11 — Subsequent Events for discussions of the subsequent waivers to the Senior Credit Facility.

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 twelve months ended August 5, 2007, this ratio was 1.49:1. The Term Loan Facility also requires that a leverage ratio test be met. As of August 5, 2007, the maximum leverage ratios permitted were 3.85:1, 3.75:1 and 3.50:1 for the second, third and fourth quarters, respectively, of fiscal 2007 and 3.50:1 for the first three quarters of our fiscal year ending February 1, 2009 (“fiscal 2008”). The leverage ratios were scheduled to further decline to 3.25:1 at the end of fiscal 2008 and 3.00:1 at the end of our year ending January 31, 2010. Our leverage ratio was 3.76:1 as of August 5, 2007. The leverage ratios for fiscal 2007 discussed above 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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

provide greater flexibility along with the elimination of undrawn letters of credit from the calculation of the leverage ratio. Following the conclusion of the second quarter of fiscal 2007, the maximum leverage ratios for the first and second quarters of fiscal 2008 were amended and those for the remainder of fiscal 2007 were further amended by a third amendment of the Term Loan Facility executed as of October 10, 2007. See Note 11— Subsequent Events.

Based on our current financial forecasts for fiscal 2007 and 2008, we believe we will remain in compliance with the financial covenants of the Senior Credit Facility and Term Loan Facility 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, LIBOR-based interest rates or unanticipated significant increases in cash requirements 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 or amendment 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 or amendment would be obtained or a refinancing could be achieved.

A breach of the covenants or restrictions contained in our debt agreements could result in an event of default thereunder. Upon the occurrence and during the continuance 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 August 5, 2007, we were in compliance with or had obtained waivers with respect to the covenants under all our debt agreements. See Note 11 — Subsequent Events for a discussion of our debt covenants subsequent to August 5, 2007.

Note 7 — Accounting for Share-Based Compensation

At the beginning of fiscal 2006, the Company adopted 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 fiscal 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 SFAS No. 123R, the Company recognizes compensation expense on a straight-line basis over the vesting period. Total stock-based compensation expense (benefit) included in operating and administrative expenses in the Company’s statement of operations for the thirteen and twenty-six weeks ended August 5, 2007 was $(751,000) and $616,000, respectively, and $453,000 and $538,000 for the thirteen and twenty-six weeks ended July 30, 2006, 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 for the twenty-six weeks ended July 30, 2006.

2004 Stock and Incentive Plan

In June 2004, our shareholders approved the CSK Auto Corporation 2004 Stock and Incentive Plan (the “Plan”), which replaced all of the following previously existing plans: (1) the 1996 Associate Stock Option Plan; (2) the 1996 Executive Stock Option Plan; (3) the 1999 Employee 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 new 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 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, 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, and options have typically been granted 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 August 5, 2007, there were approximately 1.9 million shares available for grant.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

During the thirteen weeks ended August 5, 2007, the Company granted 300,000 stock options to Lawrence N. Mondry, our new President and Chief Executive Officer, that vest equally over a three-year period, pursuant to the employment inducement award exemption to the New York Stock Exchange (the “NYSE”) requirement of shareholder approval of equity compensation plans. Also, in the first and second quarters of fiscal 2007, the Company extended the expiration dates on certain stock options due to expire during a period in which the Company prohibited option exercises due to its delay in filing certain periodic disclosure reports with the SEC. The extension of these expiration dates resulted in approximately $56,000 in operating and administrative expense. A summary of the Company’s stock option activity for the twenty-six weeks ended August 5, 2007 and other information is as follows:


										Options Exercisable
				Weighted		Weighted						Weighted
				Average		Average		Aggregate				Average		Aggregate
	Number of			Exercise		Fair		Intrinsic		Options		Exercisable		Intrinsic
	Shares			Price		Value		Value		Exercisable		Price		Value
Balance at February 4, 2007		3,280,521		$	14.13
Granted at market price		300,000		$	18.66	$	4.66
Exercised		—		$	—
Cancelled		(143,032	)	$	14.69

Balance at August 5, 2007		3,437,489		$	14.50			$	1,598,000		2,302,451	$	13.55	$	1,598,000

Restricted Stock

The Company has a long-term incentive plan in effect 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 circumstances in which vesting is accelerated (e.g., change of control). During the thirteen weeks ended August 5, 2007, the Company granted 75,000 shares of restricted stock to Mr. Mondry, pursuant to the employment inducement award exemption to the NYSE requirement of shareholder approval of equity compensation plans. A summary of the Company’s restricted stock activity for the twenty-six weeks ended August 5, 2007 and other information is as follows:


				Weighted		Aggregate
	Number of			Average		Intrinsic
	Shares			Grant Price		Value
Non-vested at February 4, 2007		128,309		$	15.86
Granted		75,000		$	18.66
Released		(9,288	)	$	16.01
Cancelled		(19,593	)	$	15.74

Non-vested at August 5, 2007		174,428		$	17.06	$	—

Long-Term Incentive Plan

In fiscal 2005, the Compensation Committee of our Board of Directors adopted the CSK Auto Corporation 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 Compensation Committee 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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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). 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 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. For the thirteen and twenty-six weeks ended July 30, 2006, the Company reduced the liability by $197,000 and $795,000, respectively, for the LTIP units as a result of the market price of the Company’s common stock decreasing from its first quarter and year end stock market value, respectively. For the thirteen and twenty-six weeks ended August 5, 2007, the Company reduced the liability by $1,725,000 and $1,353,000, respectively, for the LTIP units as a result of the market price decreasing from its stock market value at the end of the first quarter and year end, respectively. At August 5, 2007, the Company had recorded a liability of approximately $584,000 and had approximately $275,000 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.

Note 8 — Income Taxes

In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company adopted the provisions of FIN 48 on February 5, 2007. The adoption of FIN 48 resulted in no cumulative effect adjustment to retained earnings. As of the date of adoption, February 5, 2007, the Company’s unrecognized tax benefits totaled approximately $5.4 million.

The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods was approximately $3.1 million as of the date of adoption.

The Company’s policy is to recognize potential accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of the date of adoption, the Company has not accrued any interest and penalties since sufficient net operating losses exist to offset any potential liability.

There has not been any change in the total amount of our unrecognized tax benefits since February 5, 2007, and the Company does not anticipate a significant change in the total amount of unrecognized tax benefits during the next twelve months.

The Company and its subsidiaries are subject to the following significant taxing jurisdictions: U.S. federal, Arizona, California, Colorado, Illinois, Michigan and Minnesota. The Company has had net operating losses in various years dating back to the tax year 1993. The statute of limitations for a particular tax year for examination by the Internal Revenue Service is three years subsequent to the last year in which the loss carryover is finally used, and three to four years for the states of Arizona, California, Colorado, Illinois, Michigan and Minnesota. Accordingly, there are multiple years open to examination.

Note 9 — Earnings per Share

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	August 5,		July 30,			August 5,		July 30,
	2007		2006			2007		2006
Numerator for basic and diluted earnings per share:
Net income (loss)	$	5,299	$	(5,817	)	$	6,969	$	4,374

Denominator for basic earnings per share:
Weighted average shares outstanding (basic)		43,955		43,855			43,953		43,849

Denominator for diluted earnings per share:
Weighted average shares outstanding (basic)		43,955		43,855			43,953		43,849
Effect of dilutive securities		889		—			818		277

Weighted average shares outstanding (diluted)		44,844		43,855			44,771		44,126

Shares excluded as a result of anti-dilution:
Stock options		872		2,256			804		2,216

Incremental net shares for the exchange feature of the $100.0 million of 6³/4% Notes were included in our diluted earnings per share calculations for the thirteen weeks and twenty-six weeks ended August 5, 2007 since our average common stock price exceeded $16.50 per share for these periods.

Note 10 — Legal Matters

Audit Committee Investigation and Restatement of the Consolidated Financial Statements

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. 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.

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, the Company announced its intent to implement remedial measures in the areas of enhanced accounting policies, internal controls and employee training. The Company also 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.

The Company filed its 2005 10-K on May 1, 2007. In its 2005 10-K, the Company’s consolidated financial statements for fiscal

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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).

The Audit Committee-led investigation and restatement process resulted in legal, accounting consultant and audit expenses of approximately $25.7 million in fiscal 2006 and approximately $8.3 million in the first half of fiscal 2007. Legal, accounting consultant and audit expenses relative to the SEC investigation, completion of the restatement process and completion of our fiscal 2006 delinquent filings have continued into fiscal 2007; however, we expect such expenditures to be of a significantly lesser magnitude in the aggregate compared to 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 former officers: Maynard Jenkins (who also was a director), James Riley, Martin Fraser and Don Watson. The cases are entitled Communication Workers of America Plan for Employees Pensions and Death Benefits v. CSK Auto Corporation, et al., No. CV-06-1503 PHX DGC (“Communication Workers”) and Wilfred Fortier v. CSK Auto Corporation, et al., No. CV-06-1580 PHX DGC. The cases were consolidated on September 18, 2006 with Communication Workers 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. Plaintiffs filed an Amended Consolidated Complaint on November 30, 2006. Plaintiffs voluntarily dismissed James Riley by not naming him as a defendant in the Amended Consolidated Complaint. The Company and Messrs. Jenkins, Fraser and Watson (collectively referred to as the “Defendants”) filed motions to dismiss the Amended Consolidated Complaint, which the court granted on March 28, 2007. The court allowed plaintiffs leave to amend their complaint, and they filed their Second Amended Consolidated Complaint on May 25, 2007. The Second Amended Consolidated Complaint alleges violations of 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 Second Amended Consolidated Complaint alleges that Defendants issued false statements before and during the putative 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 putative class period. It seeks an unspecified amount of damages. Defendants filed motions to dismiss the Second Amended Consolidated Complaint on July 13, 2007. On September 27, 2007, the court issued an order granting the motion to dismiss of Mr. Fraser with prejudice and denying the motions to dismiss of the Company and Messrs. Jenkins and Watson. The court has not yet scheduled a trial date for the case. This litigation is in its early stages, and we cannot predict its outcome; however, it is reasonably possible that the outcome could have a materially adverse effect on the Company’s 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 former officers and certain current and 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, 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 (our former Chief Executive Officer and Chairman of the Board) were 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. Although a final judgment on this matter has not yet been entered, on August 24, 2007, the Company’s motion to dismiss the suit based on plaintiff’s failure to adequately plead demand futility was granted. We cannot predict at this time whether plaintiff will continue to pursue the litigation in light of the court’s ruling.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Regulatory Investigations

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. On December 5, 2006, the SEC also served document subpoenas on Messrs. Jenkins, Fraser and Watson. Since that time, the SEC has served subpoenas for documents and testimony on, and requested testimony from, current and former employees and other parties it believes may have information relevant to the investigation. The Company’s Audit Committee has shared with the SEC the conclusions of the Audit Committee-led investigation. In addition, the U.S. Attorney’s office in Phoenix has indicated that it is also investigating these matters. At this time, we cannot predict when these investigations will be completed or what their outcomes will be.

Other Litigation

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.

Note 11 — Subsequent Events

On August 10, 2007, we entered into a fourth waiver to our Senior Credit Facility that extended the deadline of the then-current third waiver, dated June 11, 2007, 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 6³/4% Notes and any applicable grace period that must expire prior to acceleration of such notes has expired. As of the date of the filing of this Quarterly Report, we will have filed all previously delinquent periodic SEC filings, and the waiver of the filing deadlines described above will terminate.

On October 10, 2007, the Company entered into an amendment to the Term Loan Facility that increased the maximum leverage ratios permitted under the Term Loan Facility in order to minimize the possibility that we would be unable to comply with the Term Loan Facility’s leverage ratio covenant for the third and fourth quarters of fiscal 2007 and for the first and second quarters of fiscal 2008. The amendment increased the maximum leverage ratios to 4.00:1 for the third and fourth quarters of fiscal 2007 and to 3.85:1 and 3.75:1 for the first and second quarters of fiscal 2008, respectively, while leaving all other ratios unchanged. The amendment also increased the spreads used to calculate the rate at which funds borrowed under the Term Loan Facility accrue interest by either 0.25% or 0.50% in various cases and changed the basis for determining the spread amount from the rating of the Term Loans to the Company’s corporate rating. Based on the Company’s corporate rating at October 10, 2007, the interest rate on funds borrowed under the Term Loan Facility increased by 0.50% as a result of the amendment. An amendment fee of approximately $866,000 was paid in connection with this amendment.

On September 5, 2007, we announced that under the leadership of our new President and Chief Executive Officer, we had commenced a comprehensive strategic review of the Company aimed at improving our profitability and restoring top line growth. As part of the initial strategic planning process, the Company also announced that new store openings in fiscal 2007 will be reduced to approximately 48 from the previously announced 64, that we anticipate closing approximately 40 stores in fiscal 2008 and that the Company was eliminating approximately 160 non-sales positions, primarily in the corporate and field administration areas.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

although a portion of the expected relocation costs may not be incurred until the fourth quarter of fiscal 2007. Additionally, the Company is currently performing an asset impairment review related to the fiscal 2008 store closure plan. We expect to complete that review prior to the end of the third quarter of fiscal 2007 and may record a noncash impairment charge for leasehold assets and store fixtures and/or increase our depreciation rates for those leasehold assets that will be used in operations for a shorter period than initially anticipated. All store locations currently identified for potential closure are leased, and substantially all of these closures are expected to occur near the end of the noncancellable lease terms, resulting in minimal closed store costs. Under SFAS No. 146, the costs of any remaining operating lease commitments will be recognized as expense at the fair value at the date we cease operating the store in fiscal 2008.

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 August 5, 2007 and July 30, 2006 as the “second quarter” and the “thirteen weeks” of those respective fiscal years, and the twenty-six week periods ended on August 5, 2007 and July 30, 2006 as the “first half” and the “twenty-six weeks” of those respective fiscal years.

General

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 August 5, 2007, through our wholly owned subsidiary CSK Auto, Inc., we operated 1,334 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 475 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;

	•		Schuck’s Auto Supply, founded in 1917, with 224 stores in the Pacific Northwest and Alaska;

	•		Kragen Auto Parts, founded in 1947, with 504 stores primarily in California; and

	•		Murray’s Discount Auto Stores, founded in 1972, with 131 stores in the Midwest.

At August 5, 2007, we also operated two value concept retail stores under the Pay N Save brand name in the Phoenix, Arizona metropolitan area. As a part of our continuing review of store results, we closed three of our five Pay N Save stores during the first quarter of fiscal 2007, and the remaining two stores were closed in the third quarter of fiscal 2007. 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.

During the second quarter of fiscal 2007, we opened six CSK stores, relocated three CSK stores and closed nine CSK stores (including the three stores due to relocation), resulting in no net new stores. During the first half of fiscal 2007, we opened 15 CSK stores, relocated 3 CSK stores and closed 14 CSK stores (including the 3 stores due to relocation), resulting in 4 net new stores.

Recent Developments

Appointment of New President and Chief Executive Officer; Appointment of New Board Chairman — On June 8, 2007, we announced the selection of Lawrence N. Mondry as our new President and Chief Executive Officer to succeed our current Chief Executive Officer and Chairman of the Board, Maynard Jenkins, who had previously announced his intent to retire. On August 15, 2007, having completed the filing of our remaining fiscal 2006 SEC 1934 filings, we announced Mr. Jenkins’ retirement and concurrent resignation from the Company’s Board of Directors, and Mr. Mondry’s appointment to the President and Chief Executive Officer positions and election to the Board of Directors. Also on August 15, 2007, we announced that the Board appointed our current lead director, Charles K. Marquis, as our non-executive Chairman of the Board.

Senior Credit Facility Waiver— On August 10, 2007, we entered into a fourth waiver to our Senior Credit Facility that extended the deadline in the then-current third waiver, dated June 11, 2007, 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 6³/4% Notes and any applicable grace period that must expire prior to acceleration of such Notes has expired. With the filing of this Quarterly Report, we will have completed all such filings within the time periods required by the fourth waiver to the Senior Credit Facility.

Term Loan Facility Amendment— On October 10, 2007, the Company entered into an amendment to the Term Loan Facility that increased the maximum leverage ratios permitted under the Term Loan Facility in order to minimize the possibility that we would be unable to comply with the Term Loan Facility’s leverage ratio covenants for the third and fourth quarters of fiscal 2007 and for the first and second quarters of our fiscal year ending February 1, 2009 (“fiscal 2008”). The amendment increased the maximum leverage ratios to 4.00:1 for the third and fourth quarters of fiscal 2007 and to 3.85:1 and 3.75:1 for the first and second quarters of fiscal 2008, respectively, while leaving all other ratios unchanged. The amendment also increased the spreads used to calculate the rate at which funds borrowed under the Term Loan Facility accrue interest by either 0.25% or 0.50% in various cases and changed the basis for determining the spread amount from the rating of the loans under this facility to the Company’s corporate rating. Based on the Company’s corporate rating at October 10, 2007, the interest rate on funds borrowed under the Term Loan Facility increased by 0.50% as a result of the amendment. An amendment fee of approximately $866,000 was paid in connection with this amendment.

Strategic Review of Business: Store Closures— On September 5, 2007, we announced that under the leadership of our new President and Chief Executive Officer, we had commenced a comprehensive strategic review of the Company aimed at improving our profitability and restoring top line growth. As part of the initial strategic planning process, we also announced that new store openings in fiscal 2007 will be reduced to approximately 48 from the previously announced 64, that we anticipate closing approximately 40 stores in fiscal 2008 and that we were eliminating approximately 160 non-sales positions, primarily in the corporate and field administration areas. The store closure and staff reduction initiatives are part of a series of initiatives expected to reduce expenses by approximately $7.6 million before taxes in fiscal 2007 and approximately $34 million before taxes in fiscal 2008. These amounts are net of any severance and relocation cost or other anticipated or known costs required to achieve the savings, except for store closing costs, which are discussed below.

The personnel reductions were completed early in the third quarter of fiscal 2007. The Company estimates that it will incur a total of approximately $2 million in severance and relocation costs related to the personnel reductions in the third quarter of fiscal 2007, although a portion of the expected relocation costs may not be incurred until the fourth quarter of fiscal 2007. Additionally, the Company is currently performing an asset impairment review related to the fiscal 2008 store closure plan. We expect to complete that review prior to the end of the third quarter of fiscal 2007 and may record a noncash impairment charge for leasehold assets and store fixtures and/or increase our depreciation rates for those leasehold assets that will be used in operations for a shorter period than initially anticipated. All store locations currently identified for potential closure are leased, and substantially all of these closures are expected to occur near the end of the noncancellable lease terms, resulting in minimal closed store costs. Under SFAS No. 146, the costs of any remaining operating lease commitments will be recognized as expense at the fair value at the date we cease operating the store in fiscal 2008.

We also announced that in order to focus our attention on improving existing operations and on new store locations with the greatest potential for success, we are currently contemplating only opening approximately 14 new stores in fiscal 2008.

Chief Financial Officer— We also announced on September 5, 2007 that our search for a new Chief Financial Officer is well underway and that we are optimistic we will be in a position to announce the appointment of a new Chief Financial Officer in the near future. We had previously announced on June 8, 2007 that our then Senior Vice President and Chief Financial Officer since October 2005 had accepted another position. Since his departure, Steven L. Korby, a partner with Tatum, LLC, who had been serving as a consultant to the Company since July 2006, has served as our interim Chief Financial Officer.

Combined 2006/2007 Annual Meeting— We were not able to timely hold our 2006 and 2007 annual stockholders’ meetings due to our restatement process relative to our earlier financial statements and our inability to file our 2005 10-K and timely file successive periodic reports with the SEC pending completion of those efforts. On September 5, 2007, we announced that we had scheduled a combined 2006/2007 annual stockholders’ meeting for November 8, 2007.

Results of Operations

The following discussion summarizes the significant factors affecting operating results for the thirteen and twenty-six weeks ended August 5, 2007 and July 30, 2006. 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						Twenty-Six Weeks Ended
	August 5,			July 30,			August 5,			July 30,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		52.0	%		52.4	%		52.7	%		53.0	%

Gross profit		48.0	%		47.6	%		47.3	%		47.0	%
Other costs and expenses:
Operating and administrative		42.5	%		40.8	%		42.3	%		40.1	%
Investigation and restatement costs		0.8	%		2.4	%		0.9	%		1.6	%
Store closing costs		0.1	%		0.1	%		0.1	%		0.1	%

Operating profit		4.6	%		4.3	%		4.0	%		5.2	%
Interest expense		2.7	%		2.3	%		2.8	%		2.2	%
Loss on debt retirement		0.0	%		4.0	%		0.0	%		2.0	%

Income (loss) before income taxes and cumulative effect of change in accounting principle		1.9	%		(2.0	)%		1.2	%		1.0	%
Income tax expense (benefit)		0.7	%		(0.8	)%		0.5	%		0.4	%

Income (loss) before cumulative effect of change in accounting principle		1.2	%		(1.2	)%		0.7	%		0.6	%
Cumulative effect of change in accounting principle, net of tax		0.0	%		0.0	%		0.0	%		0.1	%

Net income (loss)		1.2	%		(1.2	)%		0.7	%		0.5	%

Thirteen Weeks Ended August 5, 2007 Compared to Thirteen Weeks Ended July 30, 2006

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 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 the comparable store sales calculations immediately.

Net sales for the second quarter of fiscal 2007 decreased 1.7%, or $8.5 million, compared to the second quarter of fiscal 2006. Net sales were $480.2 million in the second quarter of fiscal 2007 compared to $488.7 million in the second quarter of fiscal 2006. The decrease in sales was primarily due to decreased same store sales, offset in part by increased sales from 40 net new stores added from July 30, 2006 through August 5, 2007. Total same store sales declined by 4.0%, with same store retail sales declining 5.7% and same store commercial sales increasing 4.4%. Although the percentage of total same store commercial sales increased, the increase was not as high as the increases in previous quarters. The decline in total 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). The Company believes that same store sales during this period were adversely affected by new store openings—both of the Company’s stores and our competitors’ stores. Furthermore, during the second quarter of fiscal 2007, sales in our new stores have failed to increase at the rate they have historically.

Gross profit consists primarily of net sales less the cost of merchandise 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 $230.4 million, or 48.0% of sales, for the second quarter of fiscal 2007, as compared to $232.6 million, or 47.6% of sales, for the second quarter of fiscal 2006. The decrease in gross profit dollars was primarily the result of the decline in sales and increased warehouse and distribution expenses. The increase in the gross margin percentage was primarily due to an increase in the amount of purchasing and handling costs capitalized to inventory in the second quarter of fiscal 2007 compared with the same period in fiscal 2006. This was partially offset by lower vendor allowances, increased warehouse and distribution costs resulting from higher payroll and related costs, and increased commercial sales, as commercial sales carry lower margins than do retail sales.

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

$204.2 million, or 42.5% of net sales, in the second quarter of fiscal 2007, compared to $199.6 million, or 40.8% of net sales, in the second quarter of fiscal 2006. Operating and administrative expenses increased $4.6 million primarily as a result of expenses associated with the 40 net new stores added from July 30, 2006 through August 5, 2007.

The Audit Committee-led investigation and restatement process described in Note 10 — Legal Matters to the unaudited consolidated financial statements included in Item 1 of Part I of this Quarterly Report resulted in legal, accounting consultant and audit expenses of approximately $3.8 million in the second quarter of fiscal 2007 compared to approximately $12.0 million incurred in the second quarter of fiscal 2006. We expect that for fiscal 2007 these expenses will be of a significantly lesser magnitude compared to those incurred in fiscal 2006.

Interest expense for the second quarter of fiscal 2007 was $13.2 million compared to $11.0 million for the second quarter of fiscal 2006. The $2.2 million increase in interest expense was primarily the result of the refinancing that was completed in the second quarter of fiscal 2006, which resulted in increased interest rates on most of our debt. Our second quarter weighted average interest rate increased from 6.89% as of July 30, 2006 to 8.77% as of August 5, 2007.

During the second quarter of fiscal 2006, we recorded a $19.3 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, which included a $10.4 million loss on termination of an interest swap associated with our $225 million of 7% senior subordinated 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.

Income tax expense for the second quarter of fiscal 2007 was $3.4 million compared to an income tax benefit of $4.1 million for the same period in 2006. Our effective tax rate was 39.3% in the second quarter of 2007 compared to 41.1% for the second quarter of 2006.

Twenty-Six Weeks Ended August 5, 2007 Compared to Twenty-Six Weeks Ended July 30, 2006

Net sales for the first half of fiscal 2007 increased 0.1%, or $0.8 million, compared to the first half of fiscal 2006. Net sales were $953.3 million in the first half of fiscal 2007 compared to $952.5 million in the first half of fiscal 2006. The increase in sales was primarily due to the 40 net new stores added from July 30, 2006 through August 5, 2007, offset in part by a decrease in same store sales. Total same store sales declined by 2.2% with same store retail sales declining 4.1% and same store commercial sales increasing 7.2%. Although the percentage of total same store commercial sales increased, the increase was not as high as increases in the past. The decline in total 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). The Company believes that same store sales during this period were adversely affected by new store openings—both of the Company’s stores and our competitor’s stores. Furthermore, during the first half of fiscal 2007, sales in our new stores have failed to increase at the rate they have historically.

Gross profit was $451.0 million, or 47.3% of sales, for the first half of fiscal 2007, as compared to $447.7 million, or 47.0% of sales, for the first half of fiscal 2006. The increase in gross profit dollars was primarily the result of the additional sales from net new stores. The increase in the gross margin percentage for the first half of fiscal 2007 was primarily due to an increase in the amount of purchasing and handling costs capitalized to inventory in the first half of fiscal 2007 compared with the same period in fiscal 2006. This was partially offset by lower vendor allowances, increased warehouse and distribution costs resulting from higher payroll and related costs, and increased commercial sales, which carry lower margins.

Operating and administrative expenses were $403.5 million, or 42.3% of net sales, in the first half of fiscal 2007, compared to $381.8 million, or 40.1% of net sales, in the first half of fiscal 2006. Operating and administrative expenses increased $21.7 million primarily as a result of expenses associated with the additional 40 net new stores added from July 30, 2006 through August 5, 2007.

The Audit Committee-led investigation and restatement process resulted in legal, accounting consultant and audit expenses of approximately $8.3 million in the first half of fiscal 2007 compared to approximately $15.6 million incurred in the first half of fiscal 2006. We expect such expenditures to be of a significantly lesser magnitude in the aggregate for fiscal 2007 compared to the $25.7 million incurred in fiscal 2006 relative to the Audit Committee investigation and restatement process.

Interest expense for the first half of fiscal 2007 was $26.5 million compared to $21.3 million for the first half of fiscal 2006. The $5.2 million increase in interest expense was primarily the result of the refinancing that was completed in the second quarter of fiscal 2006, which resulted in increased interest rates on most of our debt. Our weighted average interest rate for the first half of fiscal 2007 increased from 6.62% as of July 30, 2006 to 8.79% as of August 5, 2007.

During the twenty-six weeks ended July 30, 2006, we recorded a $19.3 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, which included a $10.4 million loss on termination of an interest swap associated with our $225 million of 7% senior subordinated 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.

Income tax expense for the first half of fiscal 2007 was $4.5 million, compared to $3.7 million for the same period in 2006. Our effective tax rate was 39.4% in the first half of 2007 compared to 40.8% for the first half of 2006.

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 2006 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 $966,000, net of a $625,000 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 August 5, 2007 and February 4, 2007 were $512.2 million and $507.5 million, respectively. Our primary cash requirements include working capital (primarily inventory), interest on our debt and capital expenditures. As a result of the borrowing base limitations of our Senior Credit Facility, at August 5, 2007, we had approximately $170.5 million of availability under our Senior Credit Facility (in addition to $56.5 million of outstanding borrowings thereunder and $31.2 million of outstanding letters of credit issued thereunder). However, the maximum leverage covenant under our Term Loan Facility limits the total amount of indebtedness the Company can have outstanding and, as of August 5, 2007, would have only permitted additional borrowings of approximately $12.3 million, regardless of which facility they were borrowed under. As a result, as of October 10, 2007, we entered into the amendment to the Term Loan Facility described above under “Recent Developments — Term Loan Facility Amendment” which increased the maximum leverage ratios permitted under this Facility for the third and fourth quarters of fiscal 2007 and the first two quarters of fiscal 2008. If the increased ratio that will be in effect for the third and fourth quarters of fiscal 2007 had been in effect as of August 5, 2007, we would have been permitted to have additional borrowings as of that date of $33.6 million, rather than the $12.3 million described above.

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 $1.7 million in debt amortization payments under this Facility in the first half of fiscal 2007, and expect to pay approximately $1.7 million during the remainder of fiscal 2007. We are not required to make debt principal payments on our Senior Credit Facility until 2010. Our 6³/4% 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 6³/4% 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 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 10 — 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.

Analysis of Cash Flows

Net cash provided by operating activities was $22.2 million during the first half of fiscal 2007 compared to $69.1 million of cash provided by operating activities during the first half of fiscal 2006, or a decrease of $46.9 million. The decrease in operating cash flow was principally due to an increase in inventories primarily resulting from new store growth, as well as the timing of vendor payments. These factors were partially offset by increases in cash provided by accounts receivable collections related to vendor allowances and increases in accrued

payroll, accrued expenses and other current liabilities.

Net cash used in investing activities totaled $19.5 million for the first half of fiscal 2007 compared to $18.8 million used during the comparable period of fiscal 2006. Capital expenditures in the first half of 2007 increased $2.7 million as a result of investments to support new store openings. At the end of fiscal 2005, we had recorded approximately $2.8 million in accrued liabilities with respect to the December 2005 Murray’s acquisition, of which $1.6 million was paid during the first half of fiscal 2006.

Net cash used in financing activities totaled $3.0 million for the first half of fiscal 2007 compared to $47.1 million during the comparable period of fiscal 2006. In the first half of fiscal 2007, we had net borrowings of $4.5 million under our Senior Credit Facility compared to $30.0 million of net payments in the first half of fiscal 2006. In addition, due to the refinancing that took place in the second quarter of fiscal 2006, we paid approximately $11.9 million of debt issuance costs in the second quarter of fiscal 2006.

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 August 5, 2007, 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 2006 10-K. The contractual obligation table in the 2006 10-K excludes liabilities with respect to unrecognized tax benefits. As discussed in Note 8 — Income Taxes in Item 1 of Part I of this Quarterly Report, we adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”) at the beginning of fiscal 2007. At August 5, 2007, we had approximately $5.4 million of unrecognized tax benefits, none of which we expect to result in cash payments over the next twelve months. Due to the high degree of uncertainty regarding the amount and timing of any cash payments related to these unrecognized tax benefits, management believes it is unlikely that any cash payment would have a material adverse effect on our liquidity in any one future period.

Store Closures

Activity in the allowance for store closing costs and the related payments for the twenty-six weeks ended August 5, 2007 and July 30, 2006 are as follows ($ in thousands):


	Twenty-Six Weeks Ended
	August 5,			July 30,
	2007			2006
Balance, beginning of year	$	4,911		$	7,033

Store closing costs:
Provision for store closing costs		904			174
Other revisions in estimates		(372	)		(96	)
Accretion		120			151
Operating expenses and other		517			452

Total store closing costs		1,169			681

Payments:
Rent expense, net of sublease recoveries		(1,076	)		(1,226	)
Occupancy and other expenses		(653	)		(355	)
Sublease commissions and buyouts		(407	)		(92	)

Total payments		(2,136	)		(1,673	)

Ending balance	$	3,944		$	6,041

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 2006 and 2007, 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

In addition, Auto is, under certain circumstances not applicable during the quarter ended August 5, 2007, 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;

however, under the waiver we entered into 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 subsequent waivers. For the twelve months ended August 5, 2007, this ratio as so defined was 1.39:1.

The Term Loan Facility 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 twelve months ended August 5, 2007, this ratio was 1.49:1. The Term Loan Facility also requires that a leverage ratio test be met. As of August 5, 2007, the maximum leverage ratios permitted were 3.85:1, 3.75:1 and 3.50:1 for the second, third and fourth quarters, respectively, of fiscal 2007 and remained at 3.50:1 for the first three quarters of fiscal 2008. The leverage ratios were scheduled to further decline to 3.25:1 at the end of fiscal 2008 and 3.00:1 at the end of our fiscal year ending January 31, 2010. Our leverage ratio was 3.76:1 as of August 5, 2007. The leverage ratios for fiscal 2007 discussed above 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. Following the conclusion of the second quarter of fiscal 2007, the maximum leverage ratios for the first and second quarters of fiscal 2008 were amended and those for the remainder of fiscal 2007 were further amended by a third amendment of the Term Loan Facility executed as of October 10, 2007 in order to minimize the possibility that we would be unable to comply with the Term Loan Facility’s leverage ratio covenants for those quarters. The amendment increased the maximum leverage ratios to 4.00:1 for the third and fourth quarters of fiscal 2007 and to 3.85:1 and 3.75:1 for the first and second quarters of fiscal 2008, respectively, while leaving all other ratios unchanged. The amendment also increased the spreads used to calculate the rate at which funds borrowed under the Term Loan Facility accrue interest by either 0.25% or 0.50% in various cases and changed the basis for determining the spread amount from the rating of the loans under this facility to the Company’s corporate rating. Based on the Company’s corporate rating at October 10, 2007, the interest rate on funds borrowed under the Term Loan Facility increased by 0.50% as a result of the amendment. An amendment fee of approximately $866,000 was paid in connection with this amendment.

Based on our current financial forecasts for fiscal 2007 and 2008, 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 or amendment 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 or amendment would be obtained or a refinancing could be achieved.

A breach of the covenants or restrictions contained in our debt agreements could result in an event of default thereunder. Upon the occurrence and during the continuance of an event of default under 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 August 5, 2007, we were in compliance with or had obtained waivers with respect to the covenants under all our debt agreements.

On August 10, 2007, we entered into a fourth waiver to our Senior Credit Facility that extended the deadline in the then-current waiver (dated June 11, 2007) 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 6³/4% Notes and any applicable grace period that must expire prior to acceleration of such notes has expired. As of the date of the filing of this Quarterly Report, we will have filed all previously delinquent periodic SEC filings, and the waiver of the filing deadline described above will terminate.

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.

At August 5, 2007, 76% of our outstanding debt was at variable interest rates and 24% of our outstanding debt was at fixed interest rates. With $403.9 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 $4.0 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 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. The Company adopted FIN 48 on February 5, 2007. See Note 8 — Income Taxes to the unaudited consolidated financial statements included in Item 1 of Part I of this Quarterly Report for a discussion of the impact of FIN 48.

In June 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue 06-3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation), that was effective for fiscal years beginning after December 15, 2006. The Company presents sales net of sales taxes in its consolidated statement of operations and the adoption of this EITF did not affect its financial statements.

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 generally accepted accounting principles (“GAAP”) and expands the disclosures regarding 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.

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 August 5, 2007, 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 August 5, 2007 because of the material weaknesses identified in our evaluation of internal control over financial reporting as disclosed in our 2006 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 February 4, 2007:

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. Certain of the material weaknesses also resulted in adjustments to the Company’s fiscal 2007 interim consolidated financial statements. 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 (i.e., the five of our directors, including the members of the Special Investigation Committee, who are not present or former members of our management) (hereinafter, 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.

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. 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. The Company has already engaged an outside vendor, which has commenced training activities for our merchandising, finance and legal staff regarding vendor allowances as well as business ethics and compliance, to be followed by Company-wide ethics and compliance training programs in the near future.

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 staff, 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 staff 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 has conducted training for its merchandising, finance and legal staff 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 closed its fixtures warehouse in fiscal 2006 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 prior Chief Financial Officer (Mr. James Riley, who resigned June 2007), we are seeking a permanent CFO to succeed him. We recently hired a new Senior Vice President of Finance and Controller who commenced work on October 8, 2007. 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.

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 quarterly reporting process was extended, allowing the Company to conduct additional analyses and procedures and make additional adjustments as necessary to ensure the accuracy of financial reporting contained in this Quarterly Report.

	•		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 2007 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 February 4, 2007. The Company implemented during fiscal 2006 and 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

As indicated above, although the Company continues to progress in its remediation efforts, it has not yet completed the evaluation or duration of testing that would allow it to conclude that any of its remediation efforts have eliminated any of the previously identified material weaknesses. There were changes in our internal control over financial reporting that occurred during the second quarter of fiscal 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. Effective July 1, 2007, the Company completed the outsourcing of payroll processing for all employees to Automatic Data Processing, Inc., which replaced certain payroll processing functions previously handled internally. The new processes and internal controls are currently being documented and will be evaluated as part of the Company’s fiscal 2007 assessment of internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.Legal Proceedings

Please refer to Note 10 — 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

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 Quarterly Report 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: October 12, 2007



	By:	/s/ Lawrence N. Mondry
		Lawrence N. Mondry
		President and Chief Executive Officer


	By:	/s/ Steven L. Korby
		Steven L. Korby
		Interim Chief Financial Officer

EXHIBIT INDEX


Exhibit
Number		Description
10.01		Employment Agreement, dated as of June 8, 2007, by and between CSK Auto, Inc. and Lawrence N. Mondry, incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 13, 2007 (File No. 001-13927).†

10.02		Form of Interim Executive Services Agreement between Tatum LLC and CSK Auto, Inc., incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on June 26, 2007 (File No. 001-13927).†

10.03		Form of Indemnification Agreement for Interim Executive among CSK Auto Corporation, CSK Auto, Inc., CSKAUTO.COM, Inc. and Steven L. Korby, incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on June 26, 2007 (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.

99.01		Third Waiver, dated as of June 11, 2007 to the Second Amended and Restated Credit Agreement, dated as of July 25, 2005, among CSK Auto, Inc., the lenders party thereto and JP Morgan Chase Bank, N.A., as Administrative Agent, incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K, filed on June 13, 2007 (File No. 001-13927).


*		Filed herewith.

†		Employment compensation plans or arrangements.

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


		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		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		31

PART II — Other Information

Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 6. Exhibits		37

Signature		38
EX-31.01
EX-31.02
EX-32.01

CSK Auto (CAO) Inactive 10-Q2007 Q3 Quarterly report

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