##### Table of Contents



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 October 29, 2006
 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.Suite 400,Phoenix, Arizona
    
    85012(Address of principal executive offices)
    
    (Zip Code)
 (602) 265-9200  (Registrants telephone number, including area code)
 N/A  (Former name, former address and former fiscal year,
if changed since last report)
 o þ
  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
    
    
    34Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4.
    
    Controls and Procedures
    
    
    45PART II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    52Item 1A.
    
    Risk Factors
    
    
    52Item 6.
    
    Exhibits
    
    
    52Signature
    
    
    53EX-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
   October 29,
    
    
    January 29,2006
    
    
    2006ASSETSCash and cash equivalents
    
    $
    26,250
    
    
    $
    17,964Receivables, net of allowances of $384 and $435, respectively
    
    
    39,171
    
    
    
    29,861Inventories
    
    
    516,363
    
    
    
    508,507Deferred income taxes
    
    
    41,232
    
    
    
    37,806Prepaid expenses and other current assets
    
    
    17,514
    
    
    
    20,047Total current assets
    
    
    640,530
    
    
    
    614,185Property and equipment, net
    
    
    169,442
    
    
    
    174,112Intangibles, net
    
    
    68,614
    
    
    
    71,807Goodwill
    
    
    224,937
    
    
    
    223,507Deferred income taxes
    
    
    8,041
    
    
    
    20,845Other assets, net
    
    
    36,282
    
    
    
    35,578Total assets
    
    $
    1,147,846
    
    
    $
    1,140,034LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    237,406
    
    
    $
    208,507Accrued payroll and related expenses
    
    
    60,964
    
    
    
    48,483Accrued expenses and other current liabilities
    
    
    84,727
    
    
    
    89,141Current maturities of long-term debt
    
    
    73,054
    
    
    
    42,465Current maturities of capital lease obligations
    
    
    8,885
    
    
    
    9,500Total current liabilities
    
    
    465,036
    
    
    
    398,096Long-term debt
    
    
    451,445
    
    
    
    507,523Obligations under capital leases
    
    
    13,990
    
    
    
    18,106Other liabilities
    
    
    46,801
    
    
    
    60,152Total non-current liabilities
    
    
    512,236
    
    
    
    585,781Commitments and contingenciesStockholders equity:Common stock, $0.01 par value, 90,000,000 shares authorized,
43,889,202 and 43,830,322 shares issued and outstanding at
October 29, 2006 and January 29, 2006, respectively
    
    
    439
    
    
    
    438Deferred compensation
    
    
    
    
    
    
    (1,735
    )Additional paid-in capital
    
    
    431,709
    
    
    
    426,560Accumulated deficit
    
    
    (261,574
    )
    
    
    (269,106
    )Total stockholders equity
    
    
    170,574
    
    
    
    156,157Total liabilities and stockholders equity
    
    $
    1,147,846
    
    
    $
    1,140,034
  4




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
   Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,
    
    
    October 29,
    
    
    October 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Net sales
    
    $
    483,075
    
    
    $
    415,919
    
    
    $
    1,435,585
    
    
    $
    1,247,799Cost of sales
    
    
    256,188
    
    
    
    220,892
    
    
    
    760,950
    
    
    
    655,028Gross profit
    
    
    226,887
    
    
    
    195,027
    
    
    
    674,635
    
    
    
    592,771Other costs and expenses:Operating and administrative
    
    
    201,056
    
    
    
    161,144
    
    
    
    582,815
    
    
    
    480,181Investigation and restatement costs
    
    
    6,736
    
    
    
    
    
    
    
    22,368
    
    
    
    Store closing costs
    
    
    364
    
    
    
    901
    
    
    
    1,045
    
    
    
    1,916Operating profit
    
    
    18,731
    
    
    
    32,982
    
    
    
    68,407
    
    
    
    110,674Interest expense
    
    
    13,308
    
    
    
    7,554
    
    
    
    34,628
    
    
    
    24,719Loss on debt retirement
    
    
    90
    
    
    
    
    
    
    
    19,426
    
    
    
    1,600Income before income taxes and cumulative effect of
change in accounting principle
    
    
    5,333
    
    
    
    25,428
    
    
    
    14,353
    
    
    
    84,355Income tax expense
    
    
    2,175
    
    
    
    9,931
    
    
    
    5,855
    
    
    
    33,040Income before cumulative effect of change in
accounting principle
    
    
    3,158
    
    
    
    15,497
    
    
    
    8,498
    
    
    
    51,315Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    966
    
    
    
    Net income
    
    $
    3,158
    
    
    $
    15,497
    
    
    $
    7,532
    
    
    $
    51,315Basic earnings per share:Income before cumulative effect of change in accounting principle
    
    $
    0.07
    
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    1.15Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    Net income per share
    
    $
    0.07
    
    
    $
    0.35
    
    
    $
    0.17
    
    
    $
    1.15Shares used in computing per share amounts
    
    
    43,867
    
    
    
    43,787
    
    
    
    43,855
    
    
    
    44,683Diluted earnings per share:Income before cumulative effect of change in accounting principle
    
    $
    0.07
    
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    1.14Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    Net income per share
    
    $
    0.07
    
    
    $
    0.35
    
    
    $
    0.17
    
    
    $
    1.14Shares used in computing per share amounts
    
    
    44,050
    
    
    
    44,121
    
    
    
    44,065
    
    
    
    45,049
  5




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
   AdditionalCommon Stock
    
    Paid-in
    
    Deferred
    
    Accumulated
    
    TotalShares
    
    Amount
    
    Capital
    
    Compensation
    
    Deficit
    
    EquityBalances at January 29, 2006
    
    
    43,830,322
    
    
    $
    438
    
    
    $
    426,560
    
    
    $
    (1,735
    )
    
    $
    (269,106
    )
    
    $
    156,157Restricted stock
    
    
    26,669
    
    
    
    
    
    
    
    (205
    )
    
    
    
    
    
    
    
    
    
    
    (205
    )Adoption of SFAS No. 123R (Note 3)
    
    
    
    
    
    
    
    
    
    
    (1,735
    )
    
    
    1,735
    
    
    
    
    
    
    
    Exercise of options
    
    
    32,211
    
    
    
    1
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    434Compensation expense, stock-based awards
    
    
    
    
    
    
    
    
    
    
    1,591
    
    
    
    
    
    
    
    
    
    
    
    1,591Warrants and call options, net of tax
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    390Discount on senior exchangeable notes,
net of tax
    
    
    
    
    
    
    
    
    
    
    4,675
    
    
    
    
    
    
    
    
    
    
    
    4,675Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,532
    
    
    
    7,532Balances at October 29, 2006
    
    
    43,889,202
    
    
    $
    439
    
    
    $
    431,709
    
    
    $
    
    
    
    $
    (261,574
    )
    
    $
    170,574
  6




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CSK AUTO CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,2006
    
    
    2005(Restated)Cash flows provided by (used in) operating activities:Net income
    
    $
    7,532
    
    
    $
    51,315Adjustments:Depreciation and amortization of property and equipment
    
    
    30,154
    
    
    
    24,051Amortization of other items
    
    
    4,869
    
    
    
    2,680Amortization of debt discount and deferred financing costs
    
    
    4,606
    
    
    
    1,504Stock-based compensation expense
    
    
    3,325
    
    
    
    385Tax benefit relating to exercise of stock options
    
    
    
    
    
    
    485Write downs on disposal of property, equipment and other assets
    
    
    2,617
    
    
    
    488Loss on debt retirement
    
    
    8,496
    
    
    
    1,600Deferred income taxes
    
    
    5,230
    
    
    
    30,810Changes in operating assets and liabilities:Receivables
    
    
    (9,310
    )
    
    
    (2,931
    )Inventories
    
    
    (9,726
    )
    
    
    (48,559
    )Prepaid expenses and other current assets
    
    
    2,533
    
    
    
    11,162Accounts payable
    
    
    28,899
    
    
    
    41,307Accrued payroll, accrued expenses and other current liabilities
    
    
    3,289
    
    
    
    17,185Other operating activities
    
    
    (1,329
    )
    
    
    (1,472
    )Net cash provided by operating activities
    
    
    81,185
    
    
    
    130,010Cash flows used in investing activities:Capital expenditures
    
    
    (25,093
    )
    
    
    (24,165
    )Business acqusitions
    
    
    (3,173
    )
    
    
    Other investing activities
    
    
    (1,335
    )
    
    
    (1,062
    )Net cash used in investing activities
    
    
    (29,601
    )
    
    
    (25,227
    )Cash flows provided by (used in) financing activities:Payments under senior credit facility  term loan
    
    
    
    
    
    
    (252,450
    )Borrowings under senior credit facility  line of credit
    
    
    63,100
    
    
    
    144,000Payments under senior credit facility  line of credit
    
    
    (88,100
    )
    
    
    (114,000
    )Borrowings under term loan facility
    
    
    350,000
    
    
    
    Payments of debt issuance costs
    
    
    (12,337
    )
    
    
    (6,280
    )Proceeds from issuance of 3.375% exchangeable notes
    
    
    
    
    
    
    125,000Retirement of of 3.375% exchangeable notes
    
    
    (125,000
    )
    
    
    Retirement of of 7% senior notes
    
    
    (224,960
    )
    
    
    Payments on capital lease obligations
    
    
    (7,703
    )
    
    
    (8,232
    )Proceeds from seller financing arrangements
    
    
    428
    
    
    
    3,720Payments on seller financing arrangements
    
    
    (346
    )
    
    
    (264
    )Proceeds from repayment of stockholder receivable
    
    
    
    
    
    
    10Proceeds from exercise of stock options
    
    
    434
    
    
    
    830Purchase of common stock
    
    
    
    
    
    
    (25,029
    )Net proceeds from termination of common stock
call option and warrants
    
    
    1,555
    
    
    
    Premium on common stock call option
    
    
    
    
    
    
    (26,992
    )Premium from common stock warrants
    
    
    
    
    
    
    17,820Other financing activities
    
    
    (369
    )
    
    
    (224
    )Net cash used in financing activities
    
    
    (43,298
    )
    
    
    (142,091
    )Net increase (decrease) in cash
    
    
    8,286
    
    
    
    (37,308
    )Cash and cash equivalents, beginning of period
    
    
    17,964
    
    
    
    56,229Cash and cash equivalents, end of period
    
    $
    26,250
    
    
    $
    18,921
  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  Audit Committee Investigation and Restatement of Consolidated Financial Statements
 Overview
   8




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 30, 2005
    
    
    October 30, 2005Net income, as previously reported
    
    $
    10,517
    
    
    $
    31,620Increase in net sales
    
    
    7,601
    
    
    
    23,232Increase in cost of sales
    
    
    (7,306
    )
    
    
    (11,725
    )Increase in vendor allowance recognition
    
    
    6,493
    
    
    
    20,076Other adjustments
    
    
    1,386
    
    
    
    1,133Decrease (increase) in interest expense
    
    
    31
    
    
    
    (264
    )Total restatement adjustments
    
    
    8,205
    
    
    
    32,452Increase in income tax provision
    
    
    3,225
    
    
    
    12,757Impact of restatement items, net of taxes
    
    
    4,980
    
    
    
    19,695Net income, as restated
    
    $
    15,497
    
    
    $
    51,315Earnings per share:Basic, as previously reported
    
    $
    0.24
    
    
    $
    0.71Impact of restatement items, net of taxes
    
    
    0.11
    
    
    
    0.44Basic, as restated
    
    $
    0.35
    
    
    $
    1.15Diluted, as previously reported
    
    $
    0.24
    
    
    $
    0.70Impact of restatement items, net of taxes
    
    
    0.11
    
    
    
    0.44Diluted, as restated
    
    $
    0.35
    
    
    $
    1.14
 Net sales restatement adjustments
  9




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 30, 2005
    
    
    October 30, 2005Net sales adjustmentsCore returns from customers
    
    $
    8,793
    
    
    $
    25,885Rebates to customers
    
    
    (1,121
    )
    
    
    (2,469
    )Allowance for sales returns
    
    
    (71
    )
    
    
    (184
    )Increase in net sales
    
    $
    7,601
    
    
    $
    23,232Cost of sales related to net sales adjustmentsCore returns from customers
    
    $
    (8,793
    )
    
    $
    (25,885
    )Rebates to customers
    
    
    1,121
    
    
    
    2,469Allowance for sales returns
    
    
    (54
    )
    
    
    (146
    )Increase in cost of sales related to net sales
adjustments
    
    
    (7,726
    )
    
    
    (23,562
    )Other cost of sales adjustmentsShrink adjustments
    
    
    367
    
    
    
    17In-transit inventory
    
    
    618
    
    
    
    551General ledger adjustments
    
    
    (1,638
    )
    
    
    1,960Warranty cost adjustments
    
    
    1,612
    
    
    
    6,027Overhead cost capitalization
    
    
    (262
    )
    
    
    1,764Other
    
    
    (277
    )
    
    
    1,518Other cost of sales adjustments
    
    
    420
    
    
    
    11,837Increase in cost of sales
    
    $
    (7,306
    )
    
    $
    (11,725
    )
 Inventory and cost of sales restatement adjustments
  10




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Vendor allowance restatement adjustments
  Other restatement adjustments
  11




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 30, 2005
    
    
    October 30, 2005Decrease in operating lease expense
    
    $
    858
    
    
    $
    3,119Increase in depreciation expense
    
    
    (581
    )
    
    
    (1,694
    )Increase in store fixtures and supplies
    
    
    (155
    )
    
    
    (329
    )Increase in employee compensation and benefits
    
    
    (378
    )
    
    
    (713
    )Other
    
    
    1,642
    
    
    
    750Decrease in operating and administrative expense
    
    $
    1,386
    
    
    $
    1,133Increase in
capital lease interest expense
    
    $
    (37
    )
    
    $
    (467
    )Decrease in other interest expense
    
    
    68
    
    
    
    203Decrease (increase) in interest expense
    
    $
    31
    
    
    $
    (264
    )
  
    
    Consolidated Statement of Operations for the thirteen weeks ended October 30, 2005;
    
    Consolidated Statement of Operations for the thirty-nine weeks ended October 30, 2005; and
    
    Consolidated Statement of Cash Flows for the thirty-nine weeks ended October 30, 2005.
 12




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CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 
 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED OCTOBER 30, 2005
 Net Sales,As Previously
    
    Inventory and
    
    Vendor
    
    
    
    
    
    AsReported
    
    Cost of Sales
    
    Allowances
    
    Other
    
    RestatedNet sales
    
    $
    408,318
    
    
    $
    7,601
    
    
    $
    
    
    
    $
    
    
    
    $
    415,919Cost of sales
    
    
    220,079
    
    
    
    7,306
    
    
    
    (6,493
    )
    
    
    
    
    
    
    220,892Gross profit
    
    
    188,239
    
    
    
    295
    
    
    
    6,493
    
    
    
    
    
    
    
    195,027Operating and administrative
    
    
    162,521
    
    
    
    (225
    )*
    
    
    
    
    
    
    (1,152
    )*
    
    
    161,144Store closing costs
    
    
    910
    
    
    
    
    
    
    
    
    
    
    
    (9
    )*
    
    
    901Operating profit
    
    
    24,808
    
    
    
    520
    
    
    
    6,493
    
    
    
    1,161
    
    
    
    32,982Interest expense
    
    
    7,585
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    7,554Loss on debt retirement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    17,223
    
    
    
    520
    
    
    
    6,493
    
    
    
    1,192
    
    
    
    25,428Income tax expense
    
    
    6,706
    
    
    
    204
    
    
    
    2,552
    
    
    
    469
    
    
    
    9,931Net income
    
    $
    10,517
    
    
    $
    316
    
    
    $
    3,941
    
    
    $
    723
    
    
    $
    15,497Basic earnings per share:Net income per share
    
    $
    0.24
    
    
    $
    
    
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.35Shares used in computing
per share amounts
    
    
    43,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,787Diluted earnings per share:Net income per share
    
    $
    0.24
    
    
    $
    
    
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.35Shares used in computing
per share amounts
    
    
    44,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,121
 
    13




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2005
 Net Sales,As Previously
    
    Inventory and
    
    Vendor
    
    
    
    
    
    AsReported
    
    Cost of Sales
    
    Allowances
    
    Other
    
    RestatedNet sales
    
    $
    1,224,567
    
    
    $
    23,232
    
    
    $
    
    
    
    $
    
    
    
    $
    1,247,799Cost of sales
    
    
    663,379
    
    
    
    11,725
    
    
    
    (20,076
    )
    
    
    
    
    
    
    655,028Gross profit
    
    
    561,188
    
    
    
    11,507
    
    
    
    20,076
    
    
    
    
    
    
    
    592,771Operating and administrative
    
    
    481,351
    
    
    
    561
    *
    
    
    
    
    
    
    (1,731
    )*
    
    
    480,181Store closing costs
    
    
    1,879
    
    
    
    
    
    
    
    
    
    
    
    37
    *
    
    
    1,916Operating profit
    
    
    77,958
    
    
    
    10,946
    
    
    
    20,076
    
    
    
    1,694
    
    
    
    110,674Interest expense
    
    
    24,455
    
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    24,719Loss on debt retirement
    
    
    1,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600Income before income taxes
    
    
    51,903
    
    
    
    10,946
    
    
    
    20,076
    
    
    
    1,430
    
    
    
    84,355Income tax expense
    
    
    20,283
    
    
    
    4,302
    
    
    
    7,891
    
    
    
    564
    
    
    
    33,040Net income
    
    $
    31,620
    
    
    $
    6,644
    
    
    $
    12,185
    
    
    $
    866
    
    
    $
    51,315Basic earnings per share:Net income per share
    
    $
    0.71
    
    
    $
    0.15
    
    
    $
    0.27
    
    
    $
    0.02
    
    
    $
    1.15Shares used in computing
per share amounts
    
    
    44,683
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,683Diluted earnings per share:Net income per share
    
    $
    0.70
    
    
    $
    0.15
    
    
    $
    0.27
    
    
    $
    0.02
    
    
    $
    1.14Shares used in computing
per share amounts
    
    
    45,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,049
 
   14




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2005
(Unaudited)
(In thousands)
 Net Sales,As Previously
    
    Inventory and
    
    Vendor
    
    
    
    
    
    AsReported
    
    Cost of Sales
    
    Allowances
    
    Other
    
    RestatedCash flows provided by (used in) operating activities:Net income
    
    $
    31,620
    
    
    $
    6,644
    
    
    $
    12,185
    
    
    $
    866
    
    
    $
    51,315Adjustments:Depreciation and amortization of property and equipment
    
    
    22,357
    
    
    
    
    
    
    
    
    
    
    
    1,694
    
    
    
    24,051Amortization of other items
    
    
    2,680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,680Amortization of deferred financing costs
    
    
    1,497
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    1,504Stock-based compensation expense
    
    
    385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    385Tax benefit relating to exercise of stock options
    
    
    216
    
    
    
    
    
    
    
    
    
    
    
    269
    
    
    
    485Write downs on disposal of property, equipment and other assets
    
    
    488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488Loss on debt retirement
    
    
    1,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,600Deferred income taxes
    
    
    18,053
    
    
    
    4,302
    
    
    
    7,891
    
    
    
    564
    
    
    
    30,810Changes in operating assets and liabilities:Receivables
    
    
    31,155
    
    
    
    2,634
    
    
    
    (35,902
    )
    
    
    (818
    )
    
    
    (2,931
    )Inventories
    
    
    (31,288
    )
    
    
    (20,707
    )
    
    
    3,436
    
    
    
    
    
    
    
    (48,559
    )Prepaid expenses and other current assets
    
    
    4,339
    
    
    
    6,545
    
    
    
    
    
    
    
    278
    
    
    
    11,162Accounts payable
    
    
    25,742
    
    
    
    3,285
    
    
    
    12,390
    
    
    
    (110
    )
    
    
    41,307Accrued payroll, accrued expenses and other current liabilities
    
    
    17,276
    
    
    
    55
    
    
    
    
    
    
    
    (146
    )
    
    
    17,185Other operating activities
    
    
    1,089
    
    
    
    (2,758
    )
    
    
    
    
    
    
    197
    
    
    
    (1,472
    )Net cash provided by operating activities
    
    
    127,209
    
    
    
    
    
    
    
    
    
    
    
    2,801
    
    
    
    130,010Cash flows provided by (used in) investing activities:Capital expenditures
    
    
    (24,322
    )
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    (24,165
    )Other investing activities
    
    
    (1,062
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,062
    )Net cash provided by (used in) investing activities:
    
    
    (25,384
    )
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    (25,227
    )Cash flows provided by (used in) financing activities:Payments under senior credit facility  term loan
    
    
    (252,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252,450
    )Borrowings under senior credit facility  line of credit
    
    
    144,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,000Payments under senior credit facility  line of credit
    
    
    (114,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,000
    )Payments of debt issuance costs
    
    
    (6,280
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,280
    )Proceeds from issuance of 3.375% exchangeable notes
    
    
    125,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000Payments on capital lease obligations
    
    
    (5,227
    )
    
    
    
    
    
    
    
    
    
    
    (3,005
    )
    
    
    (8,232
    )Proceeds from seller financing arrangements
    
    
    3,720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,720Payments on seller financing arrangements
    
    
    (264
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (264
    )Proceeds from repayment of stockholder receivable
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Proceeds from exercise of stock options
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    830Purchase of common stock
    
    
    (25,029
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,029
    )Premium on common stock call option
    
    
    (26,992
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,992
    )Premium from common stock warrants
    
    
    17,820
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,820Other financing activities
    
    
    (224
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (224
    )Net cash used in financing activities:
    
    
    (139,086
    )
    
    
    
    
    
    
    
    
    
    
    (3,005
    )
    
    
    (142,091
    )Net decrease in cash and cash equivalents
    
    
    (37,261
    )
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    (37,308
    )Cash and cash equivalents, beginning of period
    
    
    56,548
    
    
    
    
    
    
    
    
    
    
    
    (319
    )
    
    
    56,229Cash and cash equivalents, end of period
    
    $
    19,287
    
    
    $
    
    
    
    $
    
    
    
    $
    (366
    )
    
    $
    18,921
  15




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 3  Accounting Change for Share-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees
  2004 Stock and Incentive Plan
    Stock Options
   16




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Average
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    AggregateNumber of
    
    
    Grant
    
    
    Fair
    
    
    Intrinsic
    
    
    Options
    
    
    Exercisable
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value
    
    
    Value
    
    
    Exercisable
    
    
    Price
    
    
    ValueBalance at January 29, 2006
    
    
    3,207,409
    
    
    $
    14.31Granted at market price
    
    
    
    
    
    $
    
    
    
    $
    Exercised
    
    
    (32,211
    )
    
    $
    12.10Cancelled
    
    
    (350,852
    )
    
    $
    20.09Balance at October 29, 2006
    
    
    2,824,346
    
    
    $
    13.63
    
    
    
    
    
    
    $
    6,476,000
    
    
    
    2,455,142
    
    
    $
    13.62
    
    
    $
    5,784,000
   Thirteen Weeks
    
    Thirty-Nine WeeksOct. 29,
    
    Oct. 30,
    
    Oct. 29,
    
    Oct. 30,2006
    
    2005
    
    2006
    
    2005Cash received
    
    $
    169
    
    
    $
    102
    
    
    $
    434
    
    
    $
    830Tax benefits
    
    $
    
    
    
    $
    292
    
    
    $
    
    
    
    $
    485
  Restricted Stock
  17




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  AggregateNumber of
    
    
    Weighted Average
    
    
    IntrinsicShares
    
    

Grant Price
    
    
    ValueNon-vested at January 29, 2006
    
    
    137,779
    
    
    $
    14.72Granted
    
    
    
    
    
    $
    Released
    
    
    (41,105
    )
    
    $
    14.72Cancelled
    
    
    (35,998
    )
    
    $
    14.46Balance at October 29, 2006
    
    
    60,676
    
    
    $
    14.89
    
    
    $
    914,000
 Long-Term Incentive Plan
  Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans
   18




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Pro Forma Information
  Thirteen
    
    Thirty-NineWeeks Ended
    
    Weeks EndedOctober 30, 2005
    
    October 30, 2005(Restated)
    
    (Restated)Net income  as reported
    
    $
    15,497
    
    
    $
    51,315Add: Stock-based employee compensation expense
included in reported net income, net of related income
taxes
    
    
    104
    
    
    
    239Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related income taxes
    
    
    (667
    )
    
    
    (1,686
    )Net income  pro forma
    
    $
    14,934
    
    
    $
    49,868Earnings per share  basic:As reported
    
    $
    0.35
    
    
    $
    1.15Pro forma
    
    
    0.34
    
    
    
    1.12Earnings per share  diluted:As reported
    
    $
    0.35
    
    
    $
    1.14Pro forma
    
    
    0.34
    
    
    
    1.11As reported shares:Basic
    
    
    43,787
    
    
    
    44,683Diluted
    
    
    44,121
    
    
    
    45,049Pro forma shares used in calculation:Basic
    
    
    43,787
    
    
    
    44,683Diluted
    
    
    44,148
    
    
    
    45,066
  Thirteen
    
    Thirty-NineWeeks
    
    WeeksEnded
    
    EndedOctober 30,
    
    October 30,2005
    
    2005Dividend yield
    
    
    0%
    
    
    
    0%Risk free interest rate
    
    
    4.14
    %
    
    
    3.86%-4.14%Expected life of options
    
    
    6
    
    
    
    6Expected volatility
    
    
    26.53
    %
    
    
    26.53%-33.36
    %
 Dividend Yield
 Risk-Free Interest Rate
 Expected Life Share Based Payment
 19




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Expected Volatility
 Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards
 Note 4  Recent Accounting Pronouncements
 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
 Accounting for Uncertainty in Income
Taxes Accounting for
Income Taxes.
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 Fair Value Measurements
 Note 5  Business Acquisition
  20




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Business
Combinations
  Cash and cash equivalents
    
    $
    480Receivables
    
    
    2,963Inventories
    
    
    51,363Deferred income taxes
    
    
    3,628Prepaids and other assets
    
    
    2,87261,306Property and equipment
    
    
    20,041Trade name and trademarks
    
    
    49,400Customer relationships
    
    
    370Leasehold interests
    
    
    9,324Goodwill
    
    
    104,541Other long-term assets
    
    
    65Total assets acquired
    
    
    245,047Accounts payable and accrued liabilities
    
    
    36,494Unfavorable leasehold interests
    
    
    7,482Deferred income taxes
    
    
    19,320Other liabilities
    
    
    804Total liabilities assumed
    
    
    64,100Fair value of net assets acquired
    
    $
    180,947
   Note 6  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
thirty-nine weeks ended October 29, 2006 was approximately $7.9 million and $24.9 million,
respectively, and approximately $7.2 million and $22.4 million, respectively, for the
thirteen and thirty-nine weeks ended October 30, 2005. While the shrinkage accrual is based
on recent experience, there is a risk that actual losses may be higher or lower than
expected.
 21




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 
    
    In certain instances, we retain the right to return obsolete and excess merchandise
inventory to our vendors. In situations where we do not have a right to return, we record an
allowance representing an estimated loss for the difference between the cost of any obsolete
or excess inventory and the estimated retail selling price. Inventory levels and margins
earned on all products are monitored monthly. Quarterly, we make an assessment if we expect
to sell any significant amount of inventory below cost and, if so, estimate the amount of
allowance to record.
  October 29,
    
    
    January 29,2006
    
    
    2006FIFO Cost
    
    $
    579,318
    
    
    $
    559,359Administrative and overhead costs
    
    
    28,647
    
    
    
    31,679Vendor allowances
    
    
    (72,210
    )
    
    
    (67,959
    )Shrinkage
    
    
    (18,457
    )
    
    
    (12,488
    )Obsolescence
    
    
    (935
    )
    
    
    (2,084
    )Net inventory
    
    $
    516,363
    
    
    $
    508,507
 Note 7  Property and Equipment
  October 29,
    
    
    January 29,2006
    
    
    2006
    
    
    Estimated Useful lifeLand
    
    $
    348
    
    
    $
    348Buildings
    
    
    14,626
    
    
    
    14,198
    
    
    15 - 25 yearsLeasehold improvements
    
    
    154,942
    
    
    
    146,690
    
    
    Shorter of lease term or useful lifeFurniture, fixtures and equipment
    
    
    169,370
    
    
    
    164,745
    
    
    3 - 10 yearsProperty under capital leases
    
    
    95,815
    
    
    
    94,220
    
    
    5 - 15 years or life of leasePurchased software
    
    
    11,857
    
    
    
    9,141
    
    
    5 years446,958
    
    
    
    429,342Less: accumulated depreciation and
amortization
    
    
    (277,516
    )
    
    
    (255,230
    )Property and equipment, net
    
    $
    169,442
    
    
    $
    174,112
   Note 8  Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets
 22




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     Carrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CarryingValue as of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value as ofJanuary 29, 2006
    
    
    Additions
    
    
    Amortization
    
    
    Adjustments
    
    
    Oct. 29, 2006Amortized intangible assets:Leasehold interests
    
    $
    28,556
    
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    $
    28,512Accumulated amortization
    
    
    (10,111
    )
    
    
    
    
    
    
    (1,457
    )
    
    
    44
    
    
    
    (11,524
    )18,445
    
    
    
    
    
    
    
    (1,457
    )
    
    
    
    
    
    
    16,988License agreement
    
    
    4,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,417Accumulated amortization
    
    
    (631
    )
    
    
    
    
    
    
    (473
    )
    
    
    
    
    
    
    (1,104
    )3,786
    
    
    
    
    
    
    
    (473
    )
    
    
    
    
    
    
    3,313Tradenames and trademarks
    
    
    49,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,400Accumulated amortization
    
    
    (190
    )
    
    
    
    
    
    
    (1,236
    )
    
    
    
    
    
    
    (1,426
    )49,210
    
    
    
    
    
    
    
    (1,236
    )
    
    
    
    
    
    
    47,974Customer relationships
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Accumulated amortization
    
    
    (4
    )
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    (31
    )366
    
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    339Amortized intangibles, net
    
    
    71,807
    
    
    
    
    
    
    
    (3,193
    )
    
    
    
    
    
    
    68,614Unamortized intangible assets:Goodwill
    
    
    223,507
    
    
    
    1,430
    
    
    
    
    
    
    
    
    
    
    
    224,937Total intangible assets, net
    
    $
    295,314
    
    
    $
    1,430
    
    
    $
    (3,193
    )
    
    $
    
    
    
    $
    293,551
  Fiscal 2007
    
    $
    4,204Fiscal 2008
    
    
    4,127Fiscal 2009
    
    
    4,050Fiscal 2010
    
    
    3,993Fiscal 2011
    
    
    3,947$
    20,321
 Note 9  Store Closing Costs
  23




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Accounting for
Costs Associated with Exit or Disposal Activities.
    Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,2006
    
    
    2005(Restated)Balance, beginning of year
    
    $
    7,033
    
    
    $
    7,774Store closing costs:Provision for store closing costs
    
    
    174
    
    
    
    122Other revisions in estimates
    
    
    (110
    )
    
    
    925Accretion
    
    
    226
    
    
    
    314Operating expenses and other
    
    
    755
    
    
    
    555Total store closing costs
    
    
    1,045
    
    
    
    1,916Payments:Rent expense, net of sublease recoveries
    
    
    (1,819
    )
    
    
    (1,697
    )Occupancy and other expenses
    
    
    (707
    )
    
    
    (564
    )Sublease commissions and buyouts
    
    
    (198
    )
    
    
    (381
    )Total payments
    
    
    (2,724
    )
    
    
    (2,642
    )Ending balance
    
    $
    5,354
    
    
    $
    7,048
  24




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 10  Long-Term Debt
 Overview
  October 29,
    
    
    January 29,2006
    
    
    2006Term loan facility
    
    $
    350,000
    
    
    $
    Senior credit facility
    
    
    69,000
    
    
    
    94,0006.75% senior exchangeable notes, carrying balance decreased in fiscal
2006 by $7.3 million discount in accordance with EITF No. 06-6
    
    
    92,667
    
    
    
    100,0007% senior subordinated notes, carrying balance decreased in fiscal 2005
by $6.7 million relating to SFAS No. 133 hedge accounting adjustment
    
    
    40
    
    
    
    218,2793.375% senior exchangeable notes
    
    
    
    
    
    
    125,000Seller financing arrangements
    
    
    12,792
    
    
    
    12,709Total debt
    
    
    524,499
    
    
    
    549,988Less: Current portion of term loan facility
    
    
    3,487
    
    
    
    Senior credit facility (1)
    
    
    69,000
    
    
    
    42,000Current maturities of seller financing arrangements
    
    
    567
    
    
    
    465Total debt (non-current)
    
    $
    451,445
    
    
    $
    507,523
 
 (1)
    
    This portion of the revolving line of credit represents the expected paydown in
the following 12-month period. Fiscal 2006 Refinancing Transactions
 3 8 3 8 3 8 5 8 5 8
 Fiscal 2005 Financing Transactions
 3 8 3 8 5 8 3 8 5 8
 Term Loan Facility
 3 8
 25




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Senior Credit Facility  Revolving Line of Credit
     4 5 8 % Notes Refinanced into 63/4% Notes
 5 8 5 8 5 8 5 8 3 4 1 2
 26




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 3 4 5 8 3 4 Debtors Accounting for a
Modification (or Exchange) of Convertible Debt Instruments 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
 27




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock 3 4 3 4 3 4
 3 4 3 4 3 4 3 4 3 4
 7% Notes
  33/8%
 Notes
 3 8
 Seller Financing Arrangements
 The
Effect of Lessee Involvement in Asset Construction.
 Debt Covenants
  28




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Note 11  Earnings per Share
  Thirteen Weeks Ended
    
    
    Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,
    
    
    October 29,
    
    
    October 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Numerator for basic and diluted earnings per share:Net Income
    
    $
    3,158
    
    
    $
    15,497
    
    
    $
    7,532
    
    
    $
    51,315Denominator for basic earnings per share:Weighted average shares outstanding (basic)
    
    
    43,867
    
    
    
    43,787
    
    
    
    43,855
    
    
    
    44,683Denominator for diluted earnings per share:Weighted average shares outstanding (basic)
    
    
    43,867
    
    
    
    43,787
    
    
    
    43,855
    
    
    
    44,683Effect of dilutive securities
    
    
    183
    
    
    
    334
    
    
    
    210
    
    
    
    366Weighted average shares outstanding (diluted)
    
    
    44,050
    
    
    
    44,121
    
    
    
    44,065
    
    
    
    45,049Shares excluded as a result of anti-dilution:Stock options
    
    
    2,137
    
    
    
    1,066
    
    
    
    2,162
    
    
    
    374
 3 4
 Note 12  Legal Matters
 Audit Committee Investigation and Restatement of the Consolidated Financial Statements
 Overview
   
    
    recording of improper accounting entries as directed by certain personnel;
    
    inappropriate override of, or interference with, existing policies, procedures and internal controls;
 29




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 
    
    withholding of information from, and providing of improper explanations and supporting
documentation to, the Companys Audit Committee and Board of Directors, as well as its
internal auditors and independent registered public accountants; and
    
    discouraging employees from raising accounting related concerns and suppressing
accounting related concerns and suppressing accounting related inquiries that were made.
   Background
     30




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Securities Class Action Litigation
 Communications Workers of America Plan for Employees Pensions and Death Benefits v.
CSK Auto Corporation, et al. (Communications Workers) Wilfred
Fortier v. CSK Auto Corporation, et al. Communications Workers
 Shareholder Derivative Litigation
  31




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  SEC Investigation
  Other Litigation
     32




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##### Table of Contents



CSK AUTO CORPORATION AND SUBSIDIARIES
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Note 13  Subsequent Events
   3 4 3 4 3 4
 33




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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.
  Overview
  
    
    Checker Auto Parts, founded in 1969, with 458 stores in the Southwestern, Rocky Mountain
and Northern Plains states and Hawaii;
    
    Schucks Auto Supply, founded in 1917, with 225 stores in the Pacific Northwest and Alaska;
    
    Kragen Auto Parts, founded in 1947, with 502 stores primarily in California; and
    
    Murrays Discount Auto Stores, founded in 1972, with 122 stores in the Midwest.
   Significant Events
  Audit Committee Investigation and Restatement of the Consolidated Financial Statements
  34




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##### Table of Contents



Fiscal 2005 Financing Transactions
 3 8 3 8 3 8 5 8 5 8 3 8 5 8
 Fiscal 2006 Refinancing
 3 8 5 8 5 8 3 4
  35




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##### Table of Contents



Results of Operations
   Thirteen Weeks Ended
    
    Thirty-Nine Weeks EndedOctober 29,
    
    October 30,
    
    October 29,
    
    October 30,2006
    
    2005
    
    2006
    
    2005(Restated)
    
    
    
    
    
    (Restated)Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    53.0
    %
    
    
    53.1
    %
    
    
    53.0
    %
    
    
    52.5
    %Gross profit
    
    
    47.0
    %
    
    
    46.9
    %
    
    
    47.0
    %
    
    
    47.5
    %Other costs and expenses:Operating and administrative
    
    
    41.6
    %
    
    
    38.7
    %
    
    
    40.6
    %
    
    
    38.5
    %Investigation and restatement costs
    
    
    1.4
    %
    
    
    
    
    
    
    1.5
    %
    
    
    Store closing costs
    
    
    0.1
    %
    
    
    0.2
    %
    
    
    0.1
    %
    
    
    0.1
    %Operating profit
    
    
    3.9
    %
    
    
    8.0
    %
    
    
    4.8
    %
    
    
    8.9
    %Interest expense
    
    
    2.8
    %
    
    
    1.8
    %
    
    
    2.4
    %
    
    
    2.0
    %Loss on debt retirement
    
    
    0.0
    %
    
    
    
    
    
    
    1.4
    %
    
    
    0.1
    %Income before income taxes and cumulative effect of
change in accounting principle
    
    
    1.1
    %
    
    
    6.2
    %
    
    
    1.0
    %
    
    
    6.8
    %Income tax expense
    
    
    0.5
    %
    
    
    2.5
    %
    
    
    0.4
    %
    
    
    2.7
    %Income before cumulative effect of change in
accounting principle
    
    
    0.6
    %
    
    
    3.7
    %
    
    
    0.6
    %
    
    
    4.1
    %Cumulative effect of change in accounting
principle, net of tax
    
    
    
    
    
    
    
    
    
    
    0.1
    %
    
    
    Net income
    
    
    0.6
    %
    
    
    3.7
    %
    
    
    0.5
    %
    
    
    4.1
    %
 Thirteen Weeks Ended October 29, 2006 Compared to Thirteen Weeks Ended October 30, 2005
    36




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Thirty-Nine Weeks Ended October 29, 2006 Compared to Thirty-Nine Weeks Ended October 30, 2005
      37




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##### Table of Contents



Liquidity and Capital Resources
 Overview of Liquidity
  3 4
   38




---



##### Table of Contents



3 4
  Fiscal 2006 Transactions
 Senior Credit Facility
    Term Loan Facility
  39




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##### Table of Contents



Repurchase of 7% Notes and Termination of Interest Rate Swap
  Repayment of 3 3/8 % Notes and Settlement of Equity Contracts
  Restructuring of 4 5/8 % Notes
 Debtors Accounting for a Modification (or Exchange) of
Convertible Debt Instruments
 3 4 3 4
 40




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##### Table of Contents



3 4
 Terms
    
    
    6 3/4% 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
 Fiscal 2005 Transactions
 Issuance of 3 3/8 % Notes
 3 8 3 8 3 8 3 8 3 8 3 8 3 8
 Analysis of Cash Flows
   41




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##### Table of Contents



3 8
   Store Closures
  Accounting for
Costs Associated with Exit or Disposal Activities.
  42




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##### Table of Contents



Thirty-Nine Weeks EndedOctober 29,
    
    
    October 30,2006
    
    
    2005(Restated)Balance, beginning of year
    
    $
    7,033
    
    
    $
    7,774Store closing costs:Provision for store closing costs
    
    
    174
    
    
    
    122Other revisions in estimates
    
    
    (110
    )
    
    
    925Accretion
    
    
    226
    
    
    
    314Operating expenses and other
    
    
    755
    
    
    
    555Total store closing costs
    
    
    1,045
    
    
    
    1,916Payments:Rent expense, net of sublease recoveries
    
    
    (1,819
    )
    
    
    (1,697
    )Occupancy and other expenses
    
    
    (707
    )
    
    
    (564
    )Sublease commissions and buyouts
    
    
    (198
    )
    
    
    (381
    )Total payments
    
    
    (2,724
    )
    
    
    (2,642
    )Ending balance
    
    $
    5,354
    
    
    $
    7,048
  Factors Affecting Liquidity and Capital Resources
 Sales Trends
  Inflation
  Debt Covenants
  43




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3 4
  Interest Rates
  44




---



##### Table of Contents



3 8 5 8 5 8
  Critical Accounting Matters
  Recent Accounting Pronouncements
 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
 Accounting for Uncertainty in Income
Taxes Accounting for
Income Taxes.
 Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 Fair Value Measurements
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  45




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MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
   Control Environment:
  a) Accounting for Inventory
 b) Accounting for Vendor Allowances
 46




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##### Table of Contents



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
  PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
 Remediation Initiatives
  47




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##### Table of Contents



Control Environment:
 General
     Accounting for Inventory
 48




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##### Table of Contents



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 staffs, as well as formalizing the
communication process among the three groups, to better provide for timely
identification of potential issues and accurate accounting treatment. The Company also
plans to implement enhanced processes and procedures so that its merchandising, finance
and legal staffs have adequate information to conduct their review and provide
meaningful input and communication during the contract negotiation process to allow for
accurate accounting treatment for both standard and non-standard contracts.
    
    The Company plans to conduct training for its merchandising, finance and legal
staffs relative to vendor arrangements, including contract provisions and construction,
the impact of amendments and side and ancillary agreements and accounting treatment of
related vendor allowances.
    
    The Company has consolidated the oversight and accounting for all vendor allowance
financial transactions under one senior accounting manager to provide for consistent
application with respect to the accounting for vendor allowances.
 Accounting for Certain Accrued Expenses
 Accounting for Store Fixtures and Supplies
 Resources and, Policies and Procedures to Ensure Proper and Consistent Application of
GAAP:
 General
  49




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##### Table of Contents



Accounting for Leases
 Allowance for Sales Returns
 Interim Measures Pending Completion of Remediation Initiatives
  
    
    The fiscal 2006 quarterly reporting processes was extended, allowing the Company to
conduct additional analyses and procedures and make additional adjustments as necessary
to ensure the accuracy of financial reporting through October 29, 2006.
    
    Where the Company identified the existence of a material weakness, the Company has
performed extensive substantive procedures to ensure that affected amounts are fairly
stated for all periods presented in this Quarterly Report.
    
    The Company retained, on an interim basis, numerous experienced accounting
consultants, other than the Companys independent registered public accounting firm,
with relevant accounting experience, skills and knowledge, working under the
supervision and direction of the Companys management, to assist with the fiscal 2006
quarterly reporting process.
    
    The Company conducted a detailed and extensive review of account reconciliations,
non-routine transactions and agreements, financial statement classifications,
spreadsheets, and journal entries and related substantiation for accuracy and
conformance with GAAP.
 Control deficiencies not constituting material weaknesses
  Managements conclusions
  50




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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  51




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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  52




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##### Table of Contents



SIGNATURE
  CSK Auto CorporationDATED: August 15, 2007By:
    /s/ Steven L. KorbySteven L. KorbyInterim Chief Financial Officer 53




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.01
    
    Restated Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3.01 of our Annual Report on Form
10-K, filed on May 4, 1998 (File No. 001-13927).3.02
    
    Certificate of Correction to the Restated Certificate of
Incorporation of the Company, incorporated herein by reference to
Exhibit 3.02 of our Annual Report on Form 10-K, filed on May 4,
1998 (File No. 001-13927).3.03
    
    Certificate of Amendment to the Restated Certificate of
Incorporation of CSK Auto Corporation, incorporated herein by
reference to Exhibit 3.2.1 of our Quarterly Report on Form 10-Q,
filed on September 18, 2002 (File No. 001-13927).3.04
    
    Second Certificate of Amendment of the Restated Certificate of
Incorporation of CSK Auto Corporation, incorporated herein by
reference to Exhibit 3.04 of our Quarterly Report on Form 10-Q,
filed on December 9, 2005 (File No. 001-13927).3.05
    
    Amended and Restated By-laws of the Company, incorporated herein
by reference to Exhibit 3.03 of our Annual Report on Form 10-K,
filed on April 28, 1999 (File No. 001-13927).3.05.1
    
    First Amendment to Amended and Restated By-laws of the Company,
incorporated herein by reference to Exhibit 3.03.1 of our annual
report on Form 10-K, filed on May 1, 2001. (File No 001-13927).3.05.2
    
    Second Amendment to Amended and Restated By-laws of the Company,
incorporated herein by reference to Exhibit 3.03.2 of our
Quarterly Report on Form 10-Q, filed on June 14, 2004 (File No.
001-13927).31.01*
    
    Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.02*
    
    Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.01*
    
    Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith. 54