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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
  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
 or
 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. Employerincorporation or organization)
    
    Identification No.)645 E. Missouri Ave.
    
    85012Suite 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)
 þ o
  þ o o
 o þ




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##### 



TABLE OF CONTENTS
  
 PageExplanatory Note
    
    2Forward-Looking Statements
    
    3PART I  Financial InformationItem 1. Financial Statements (unaudited)Consolidated Balance Sheets
    
    4Consolidated Statements of Operations
    
    5Consolidated Statement of Stockholders Equity
    
    6Consolidated Statements of Cash Flows
    
    7Notes to Consolidated Financial Statements
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 4. Controls and Procedures
    
    31PART II  Other InformationItem 1. Legal Proceedings
    
    37Item 1A. Risk Factors
    
    37Item 6. Exhibits
    
    37Signature
    
    38EX-31.01EX-31.02EX-32.01
   www.cskauto.com,
 
 Explanatory Note
   2




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Note Concerning Forward-Looking Information
    3




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PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
   August 5,
    
    
    February 4,2007
    
    
    2007ASSETSCash and cash equivalents
    
    $
    19,894
    
    
    $
    20,169Receivables, net of allowances of $566 and $393, respectively
    
    
    42,131
    
    
    
    43,898Inventories
    
    
    526,579
    
    
    
    502,787Deferred income taxes
    
    
    48,078
    
    
    
    46,500Prepaid expenses and other current assets
    
    
    33,487
    
    
    
    31,585Total current assets
    
    
    670,169
    
    
    
    644,939Property and equipment, net
    
    
    170,757
    
    
    
    174,409Intangibles, net
    
    
    65,524
    
    
    
    67,507Goodwill
    
    
    224,937
    
    
    
    224,937Deferred income taxes
    
    
    941
    
    
    
    4,200Other assets, net
    
    
    34,006
    
    
    
    35,770Total assets
    
    $
    1,166,334
    
    
    $
    1,151,762LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    252,025
    
    
    $
    260,146Accrued payroll and related expenses
    
    
    58,329
    
    
    
    60,306Accrued expenses and other current liabilities
    
    
    95,538
    
    
    
    81,569Current maturities of long-term debt
    
    
    60,595
    
    
    
    56,098Current maturities of capital lease obligations
    
    
    7,402
    
    
    
    8,761Total current liabilities
    
    
    473,889
    
    
    
    466,880Long-term debt
    
    
    451,589
    
    
    
    451,367Obligations under capital leases
    
    
    12,466
    
    
    
    15,275Other liabilities
    
    
    48,040
    
    
    
    46,730Total non-current liabilities
    
    
    512,095
    
    
    
    513,372Commitments and contingenciesStockholders 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
    
    
    
    440Additional paid-in capital
    
    
    435,783
    
    
    
    433,912Accumulated deficit
    
    
    (255,873
    )
    
    
    (262,842
    )Total stockholders equity
    
    
    180,350
    
    
    
    171,510Total liabilities and stockholders equity
    
    $
    1,166,334
    
    
    $
    1,151,762
  4




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedAugust 5,
    
    
    July 30,
    
    
    August 5,
    
    
    July 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    480,227
    
    
    $
    488,742
    
    
    $
    953,262
    
    
    $
    952,510Cost of sales
    
    
    249,847
    
    
    
    256,189
    
    
    
    502,284
    
    
    
    504,762Gross profit
    
    
    230,380
    
    
    
    232,553
    
    
    
    450,978
    
    
    
    447,748Other costs and expenses:Operating and administrative
    
    
    204,247
    
    
    
    199,629
    
    
    
    403,481
    
    
    
    381,759Investigation and restatement costs
    
    
    3,771
    
    
    
    11,962
    
    
    
    8,335
    
    
    
    15,632Store closing costs
    
    
    463
    
    
    
    499
    
    
    
    1,169
    
    
    
    681Operating profit
    
    
    21,899
    
    
    
    20,463
    
    
    
    37,993
    
    
    
    49,676Interest expense
    
    
    13,164
    
    
    
    10,999
    
    
    
    26,486
    
    
    
    21,320Loss on debt retirement
    
    
    
    
    
    
    19,336
    
    
    
    
    
    
    
    19,336Income (loss) before income taxes and cumulative effect of
change in accounting principle
    
    
    8,735
    
    
    
    (9,872
    )
    
    
    11,507
    
    
    
    9,020Income tax expense (benefit)
    
    
    3,436
    
    
    
    (4,055
    )
    
    
    4,538
    
    
    
    3,680Income (loss) before cumulative effect of change in
accounting principle
    
    
    5,299
    
    
    
    (5,817
    )
    
    
    6,969
    
    
    
    5,340Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    966Net income (loss)
    
    $
    5,299
    
    
    $
    (5,817
    )
    
    $
    6,969
    
    
    $
    4,374Basic earnings per share:Income (loss) before cumulative effect of change in
accounting principle
    
    $
    0.12
    
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    0.12Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income (loss) per share
    
    $
    0.12
    
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    0.10Shares used in computing basic per share amounts
    
    
    43,955
    
    
    
    43,855
    
    
    
    43,953
    
    
    
    43,849Diluted earnings per share:Income (loss) before cumulative effect of change in
accounting principle
    
    $
    0.12
    
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    0.12Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net income (loss) per share
    
    $
    0.12
    
    
    $
    (0.13
    )
    
    $
    0.16
    
    
    $
    0.10Shares used in computing diluted per share amounts
    
    
    44,844
    
    
    
    43,855
    
    
    
    44,771
    
    
    
    44,126
  5




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
   Common Stock
    
    Additional
    
    Accumulated
    
    TotalShares
    
    Amount
    
    Paid-in Capital
    
    Deficit
    
    EquityBalances at February 4, 2007
    
    
    43,950,751
    
    
    $
    440
    
    
    $
    433,912
    
    
    $
    (262,842
    )
    
    $
    171,510Restricted stock
    
    
    9,288
    
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    (99
    )Exercise of options
    
    
    (330
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense, stock-based awards
    
    
    
    
    
    
    
    
    
    
    1,970
    
    
    
    
    
    
    
    1,970Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,969
    
    
    
    6,969Balances at August 5, 2007
    
    
    43,959,709
    
    
    $
    440
    
    
    $
    435,783
    
    
    $
    (255,873
    )
    
    $
    180,350
  6




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Twenty-Six Weeks EndedAugust 5,
    
    
    July 30,2007
    
    
    2006Cash flows provided by (used in) operating activities:Net income
    
    $
    6,969
    
    
    $
    4,374Adjustments:Depreciation and amortization on property and equipment
    
    
    20,835
    
    
    
    20,273Amortization of other items
    
    
    2,691
    
    
    
    4,301Amortization of debt discount and deferred financing costs
    
    
    2,713
    
    
    
    1,798Stock-based compensation expense
    
    
    616
    
    
    
    2,129Write downs on disposal of property, equipment and other assets
    
    
    2,682
    
    
    
    2,485Loss on debt retirement
    
    
    
    
    
    
    8,496Deferred income taxes
    
    
    4,314
    
    
    
    2,970Changes 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
    )
    
    
    44,633Accrued payroll, accrued expenses, and other current liabilities
    
    
    13,345
    
    
    
    (897
    )Other operating activities
    
    
    (1,444
    )
    
    
    (647
    )Net cash provided by operating activities
    
    
    22,193
    
    
    
    69,137Cash 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
    
    
    
    56,900Payments under senior credit facility  line of credit
    
    
    (122,000
    )
    
    
    (86,900
    )Borrowings under term loan facility
    
    
    
    
    
    
    350,000Payments 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
    
    
    
    
    
    
    428Payments on seller financing arrangements
    
    
    (328
    )
    
    
    (228
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    265Other financing activities
    
    
    (389
    )
    
    
    (123
    )Net cash used in financing activities
    
    
    (3,006
    )
    
    
    (47,083
    )Net increase (decrease) in cash
    
    
    (275
    )
    
    
    3,237Cash and cash equivalents, beginning of period
    
    
    20,169
    
    
    
    17,964Cash and cash equivalents, end of period
    
    $
    19,894
    
    
    $
    21,201
  7




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   Note 1  Basis of Presentation
  Use of Estimates
   Note 2  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
 Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140 Accounting for Derivative
Instruments and Hedging Activities Application of Statement 133
to Beneficial Interests in Securitized Financial Assets Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities  a Replacement of FASB Statement
No. 125
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
 8




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 How Taxes Collected from Customers and Remitted to Governmental Authorities
Should be Presented in the Income Statement (That Is, Gross versus
Net Presentation),
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Note 3  Inventories
  
    
    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.
  August 5,
    
    
    February 4,2007
    
    
    2007FIFO Cost
    
    $
    581,786
    
    
    $
    562,405Administrative and overhead costs
    
    
    30,282
    
    
    
    28,725Vendor allowances
    
    
    (65,589
    )
    
    
    (69,469
    )Shrinkage
    
    
    (19,274
    )
    
    
    (18,116
    )Obsolescence
    
    
    (626
    )
    
    
    (758
    )Net inventory
    
    $
    526,579
    
    
    $
    502,787
 9




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 4  Property and Equipment
  August 5,
    
    
    February 4,2007
    
    
    2007
    
    
    Estimated Useful lifeLand
    
    $
    348
    
    
    $
    348Buildings
    
    
    16,771
    
    
    
    15,251
    
    
    15 - 25 yearsLeasehold improvements
    
    
    162,526
    
    
    
    159,070
    
    
    Shorter of lease term or useful lifeFurniture, fixtures and equipment
    
    
    177,298
    
    
    
    168,845
    
    
    3 - 10 yearsProperty under capital leases
    
    
    84,731
    
    
    
    97,974
    
    
    5 - 15 years or life of leasePurchased software
    
    
    12,345
    
    
    
    10,829
    
    
    5 years454,019
    
    
    
    452,317Less: accumulated depreciation and
amortization
    
    
    (283,262
    )
    
    
    (277,908
    )Property and equipment, net
    
    $
    170,757
    
    
    $
    174,409
   Note 5  Store Closing Costs
  Accounting for
Costs Associated with Exit or Disposal Activities.
   10




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Twenty-Six Weeks EndedAugust 5,
    
    
    July 30,2007
    
    
    2006Balance, beginning of year
    
    $
    4,911
    
    
    $
    7,033Store closing costs:Provision for store closing costs
    
    
    904
    
    
    
    174Other revisions in estimates
    
    
    (372
    )
    
    
    (96
    )Accretion
    
    
    120
    
    
    
    151Operating expenses and other
    
    
    517
    
    
    
    452Total store closing costs
    
    
    1,169
    
    
    
    681Payments: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
  Note 6  Long-Term Debt
 Overview
  August 5,
    
    
    February 4,2007
    
    
    2007Term loan facility
    
    $
    347,382
    
    
    $
    349,125Senior credit facility
    
    
    56,500
    
    
    
    52,00063/4% senior exchangeable notes (1)
    
    
    93,831
    
    
    
    93,061Seller financing arrangements
    
    
    14,471
    
    
    
    13,279Total debt
    
    
    512,184
    
    
    
    507,465Less: Current portion of term loan facility
    
    
    3,461
    
    
    
    3,478Senior credit facility (2)
    
    
    56,500
    
    
    
    52,000Current maturities of seller financing arrangements
    
    
    634
    
    
    
    620Total 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
  11




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Senior Credit Facility  Revolving Line of Credit
     12




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 63/4% Notes
 3 4 3 4 3 4 3 4 3 4
 Terms
    
    63/4% NotesInterest Rate
    
    6.75% per year until December 15, 2010; 6.50% thereafterExchange 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 circumstancesMaturity date
    
    December 15, 2025Guaranteed by
    
    CSK Auto Corporation and all of Autos present and
future domestic subsidiaries, jointly and severally, on
a senior basisDates 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 indentureIssuance costs being amortized over a 5-year
period, corresponding to the first date the
noteholders could require repayment
    
    $3.7 millionAuto will not be able to redeem notes
    
    Prior to December 15, 2010Auto may redeem for cash some or all of the notes
    
    On or after December 15, 2010, upon at least 35 calendar days noticeRedemption 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
 3 4
 
    
    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.
 3 4
 Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock 3 4 3 4 3 4 3 4
 13




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  3 4 3 4 3 4 3 4 3 4
 3 4
 3 4 3 4 3 4 3 4
 Seller Financing Arrangements
 The
Effect of Lessee Involvement in Asset Construction.
 Debt Covenants
    14




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Note 7  Accounting for Share-Based Compensation
 Share-Based Payment Accounting
for Stock Issued to Employees
  2004 Stock and Incentive Plan
   15




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Stock Options
  Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Fair
    
    
    Intrinsic
    
    
    Options
    
    
    Exercisable
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value
    
    
    Value
    
    
    Exercisable
    
    
    Price
    
    
    ValueBalance at February 4, 2007
    
    
    3,280,521
    
    
    $
    14.13Granted at market price
    
    
    300,000
    
    
    $
    18.66
    
    
    $
    4.66Exercised
    
    
    
    
    
    $
    Cancelled
    
    
    (143,032
    )
    
    $
    14.69Balance at August 5, 2007
    
    
    3,437,489
    
    
    $
    14.50
    
    
    
    
    
    
    $
    1,598,000
    
    
    
    2,302,451
    
    
    $
    13.55
    
    
    $
    1,598,000
 Restricted Stock
  Weighted
    
    
    AggregateNumber of
    
    
    Average
    
    
    IntrinsicShares
    
    
    Grant Price
    
    
    ValueNon-vested at February 4, 2007
    
    
    128,309
    
    
    $
    15.86Granted
    
    
    75,000
    
    
    $
    18.66Released
    
    
    (9,288
    )
    
    $
    16.01Cancelled
    
    
    (19,593
    )
    
    $
    15.74Non-vested at August 5, 2007
    
    
    174,428
    
    
    $
    17.06
    
    
    $
    
 Long-Term Incentive Plan
   16




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans
  Note 8  Income Taxes
 Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
      Note 9  Earnings per Share
  17




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Thirteen Weeks Ended
    
    
    Twenty-Six Weeks EndedAugust 5,
    
    
    July 30,
    
    
    August 5,
    
    
    July 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator for basic and diluted earnings per share:Net income (loss)
    
    $
    5,299
    
    
    $
    (5,817
    )
    
    $
    6,969
    
    
    $
    4,374Denominator for basic earnings per share:Weighted average shares outstanding (basic)
    
    
    43,955
    
    
    
    43,855
    
    
    
    43,953
    
    
    
    43,849Denominator for diluted earnings per share:Weighted average shares outstanding (basic)
    
    
    43,955
    
    
    
    43,855
    
    
    
    43,953
    
    
    
    43,849Effect of dilutive securities
    
    
    889
    
    
    
    
    
    
    
    818
    
    
    
    277Weighted average shares outstanding (diluted)
    
    
    44,844
    
    
    
    43,855
    
    
    
    44,771
    
    
    
    44,126Shares excluded as a result of anti-dilution:Stock options
    
    
    872
    
    
    
    2,256
    
    
    
    804
    
    
    
    2,216
 3 4
 Note 10  Legal Matters
 Audit Committee Investigation and Restatement of the Consolidated Financial Statements
     18




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Securities Class Action Litigation
  Shareholder Derivative Litigation
  19




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Regulatory Investigations
  Other Litigation
  Note 11  Subsequent Events
 3 4
  3 4 3 4
   20




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  21




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##### Table of Contents



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.
  General
  
    
    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.
   Recent Developments
 Appointment of New President and Chief Executive Officer; Appointment of New Board Chairman 
 Senior Credit Facility Waiver 3 4
 22




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##### Table of Contents



Term Loan Facility Amendment
 Strategic Review of Business: Store Closures
   Chief Financial Officer
 Combined 2006/2007 Annual Meeting
 Results of Operations
  23




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##### Table of Contents



Thirteen Weeks Ended
    
    Twenty-Six Weeks EndedAugust 5,
    
    July 30,
    
    August 5,
    
    July 30,2007
    
    2006
    
    2007
    
    2006Net 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
     24




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Twenty-Six Weeks Ended August 5, 2007 Compared to Twenty-Six Weeks Ended July 30, 2006
       25




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Liquidity and Capital Resources
 Overview of Liquidity
  3 4 3 4
  Analysis of Cash Flows
  26




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##### Table of Contents



Accounting for Uncertainty in Income
Taxes
 Store Closures
  Accounting for
Costs Associated with Exit or Disposal Activities.
   27




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##### Table of Contents



Twenty-Six Weeks EndedAugust 5,
    
    
    July 30,2007
    
    
    2006Balance, beginning of year
    
    $
    4,911
    
    
    $
    7,033Store closing costs:Provision for store closing costs
    
    
    904
    
    
    
    174Other revisions in estimates
    
    
    (372
    )
    
    
    (96
    )Accretion
    
    
    120
    
    
    
    151Operating expenses and other
    
    
    517
    
    
    
    452Total store closing costs
    
    
    1,169
    
    
    
    681Payments: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
  Inflation
  Debt Covenants
   28




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3 4
 3 4 3 4
 29




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##### Table of Contents



Interest Rates
   Critical Accounting Matters
  Recent Accounting Pronouncements
 Accounting for Income Taxes
 Accounting for Certain Hybrid Financial
Instruments  an amendment of FASB Statements No. 133 and 140 Accounting for Derivative
Instruments and Hedging Activities Application of Statement 133
to Beneficial Interests in Securitized Financial Assets Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities  a Replacement of FASB Statement
No. 125
 Accounting for Servicing of Financial Assets  an
amendment of FASB Statement No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
 How Taxes Collected from Customers and Remitted to Governmental Authorities
Should be Presented in the Income Statement (That Is, Gross versus
Net Presentation)
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
    MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
   Control Environment:
  a) Accounting for Inventory
 31




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##### Table of Contents



b) Accounting for Vendor Allowances
 c) Accounting for Certain Accrued Expenses
 d) Accounting for Store Fixtures and Supplies
 Resources and Policies and Procedures to Ensure Proper and Consistent Application of
GAAP:
 a) Accounting for Leases
 b) Allowance for Sales Returns
 c) Accounting for Certain Accrued Expenses
  32




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##### Table of Contents



PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
 Remediation Initiatives
   Control Environment:
 General
     33




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##### Table of Contents



Accounting for Inventory
 Accounting for Vendor Allowances
 
    
    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
 Accounting for Store Fixtures and Supplies
 Resources and Policies and Procedures to Ensure Proper and Consistent Application of
GAAP:
 General
 34




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##### Table of Contents



Accounting for Leases
 Allowance for Sales Returns
 Interim Measures Pending Completion of Remediation Initiatives
  
    
    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
  35




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Managements conclusions
   CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  36




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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  37




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##### Table of Contents



SIGNATURE
    By:
    /s/ Lawrence N. MondryLawrence N. MondryPresident and Chief Executive OfficerBy:
    /s/ Steven L. KorbySteven L. KorbyInterim Chief Financial Officer 38




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.01
    
    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. 39