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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended February 4, 2007.
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 incorporation or organization)		(I.R.S. Employer Identification No.)

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

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered:

Common Stock, $.01 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of July 30, 2006, the aggregate market value of our voting and non-voting common stock held by non-affiliates was approximately $527.9 million. For purposes of the above statement only, all directors and executive officers of the registrant are assumed to be affiliates.

As of June 1, 2007, there were 43,950,751 shares of our common stock outstanding.

TABLE OF CONTENTS


		Page

PART I
Item 1.	Business		7
Item 1A.	Risk Factors		17
Item 1B.	Unresolved Staff Comments		24
Item 2.	Properties		25
Item 3.	Legal Proceedings		26
Item 4.	Submission of Matters to a Vote of Security Holders		28

PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		28
Item 6.	Selected Financial Data		30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		54
Item 8.	Financial Statements and Supplementary Data		56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		106
Item 9A.	Controls and Procedures		106
Item 9B.	Other Information		115

PART III
Item 10.	Directors, Executive Officers and Corporate Governance		115
Item 11.	Executive Compensation		117
Item 12.	Security Ownership of Certain Beneficial Owners and Management		142
Item 13.	Certain Relationships and Related Transactions, and Director Independence		145
Item 14.	Principal Accountant Fees and Services		146

PART IV
Item 15.	Exhibits and Financial Statement Schedules		147
EX-21.1
EX-31.1
EX-31.2
EX-32.1

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

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

Explanatory Note

In its Annual Report on Form 10-K for its fiscal year ended January 29, 2006 (“fiscal 2005”) (the “2005 10-K”), the Company restated its consolidated balance sheet at January 30, 2005 and its consolidated statements of operations, consolidated statements of stockholders’ equity, and consolidated statements of cash flows for its fiscal years ended February 1, 2004 (“fiscal 2003”) and January 30, 2005 (“fiscal 2004”). Certain restatement adjustments also affected periods prior to fiscal 2003, the interim financial information for all of fiscal 2004 previously filed on Form 10-Q, and the interim financial information for the first three quarters of fiscal 2005 previously filed on Form 10-Q. Restated interim information for fiscal 2004 and 2005 was provided in the unaudited selected quarterly financial data in Note 20 — Quarterly Results to the Company’s consolidated financial statements included in

Item 8, “Consolidated Financial Statements and Supplementary Data,” of the 2005 10-K. The Company also restated in its 2005 10-K selected consolidated statement of operations and balance sheet data reflected in Item 6, “Selected Consolidated Financial Data,” for its fiscal years ended February 3, 2002 (“fiscal 2001”) and February 2, 2003 (“fiscal 2002”). The Company did not provide any restated financial information for any annual periods before fiscal 2001. The Company did not amend its prior Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatement adjustments. The financial statements and related financial information contained in such reports are superseded by the information in the 2005 10-K and the financial statements and related financial information contained in such previously filed reports should not be relied upon.

The Company expects that as soon as practical after the filing of this Annual Report, it will file its Quarterly Reports on Form 10-Q for the interim periods of its fiscal year ended February 4, 2007 (“fiscal 2006”), which will include the applicable restated interim information for fiscal 2005, and the first quarter of its fiscal year ending February 3, 2008 (“fiscal 2007”). The Company expects to complete all of these filings by August 15, 2007.

Note Concerning Forward-Looking Information

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

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

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

PART I

Significant Events

The filing of this Annual Report was delayed because substantial internal and external resources were devoted by the Company to the completion of its 2005 10-K and the restatements and other matters described below under the heading “Audit Committee Investigation and Restatement of Consolidated Financial Statements.” Set forth below is a summary of certain significant events that occurred during fiscal 2006 and through the date of this filing.

Audit Committee Investigation and Restatement of Consolidated Financial Statements

Overview

In its 2005 10-K, the Company’s consolidated financial statements for fiscal 2004 and 2003 and quarterly financial information for the first three quarterly periods in fiscal 2005 and all of fiscal 2004 included in Item 8, “Financial Statements and Supplementary Data,” were restated to correct errors and irregularities of the type identified in the course of an Audit Committee-led independent accounting investigation (discussed further below, and referred to herein as the “Audit Committee-led investigation”) and other accounting errors and irregularities identified by the Company in the course of the restatement process, all as more fully described in the “Background” section below.

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


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

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

	•	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 inquiries that were made.

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

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

Background

In the Company’s Annual Report on Form 10-K for fiscal 2004, filed May 2, 2005 (the “2004 10-K”), management concluded that the Company did not maintain effective internal control over financial reporting as of January 30, 2005 due to the existence of material weaknesses as described in the 2004 10-K. The plan for remediation at that time called for, among other things, the Company to enhance staffing and capabilities in its Finance organization. During fiscal 2005, we made several enhancements to our Finance organization including the October 2005 hiring of a new Senior Vice President and Chief Financial Officer. In the fourth quarter of fiscal 2005, new personnel in our Finance organization raised questions regarding the existence of inventory underlying certain general ledger account balances and an internal audit of vendor allowances raised continued concerns about the processing and collections of vendor allowances. Management’s review of these matters continued into our fiscal

2005 year-end financial closing process. In early March 2006, it became apparent that inventories and vendor allowances were potentially misstated and that the effect was potentially material to the Company’s previously issued consolidated financial statements. The Audit Committee, acting through a Special Investigation Committee appointed by the Audit Committee consisting of the Audit Committee Chairman and the Company’s designated Presiding Director, retained independent legal counsel who, in turn, retained a separate nationally recognized accounting firm (other than the Company’s independent registered public accountants), to assist it in conducting an independent investigation relative to accounting errors and irregularities, relating primarily to the Company’s historical accounting for its inventories and vendor allowances.

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

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

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

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

Following the completion of the Audit Committee-led investigation, the Board of Directors created a Remediation Committee comprised of certain positions within key functional areas of the Company and co-chaired by the Senior Vice President and General Counsel and the Senior Vice President and Chief Financial Officer to develop a remediation plan to address the types of matters identified during the investigation. The proposed remediation plan that the Remediation Committee is working with reflects the input of the Disinterested Directors. While most aspects of the plan are presently in the development phase, this remediation plan is generally expected to include a comprehensive review, and development or modification as appropriate, of various components of the Company’s compliance program, including ethics and compliance training, hotline awareness and education, corporate governance training, awareness of and education relative to key codes and policies, as well as departmental specific measures. See discussion under “Management’s Report on Internal Control Over Financial Reporting — Plan for Remediation of Material Weaknesses” in Item 9A, “Controls and Procedures,” below.

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

Management Changes

Following the substantial conclusion of the Audit Committee-led investigation, it was announced on September 28, 2006 that our Chief Operating Officer and President and our Chief Administrative Officer (who until October 2005 had served as our Chief Financial Officer) were no longer employed by the Company. In light of these departures, the Board of Directors believed it was important to identify a successor for our then 64 year old Chief Executive Officer. As a result, it was also announced that the Board had decided to initiate a search for a new Chief Executive Officer and that upon the successful conclusion of that search, our current Chief Executive Officer would retire.

In October 2006, the Company engaged Korn/Ferry International to assist the Board of Directors in a nationwide search effort. On June 8, 2007, the Company announced the selection of Lawrence N. Mondry as its new President and Chief Executive Officer to succeed Mr. Jenkins upon his retirement. Mr. Mondry commenced employment on June 13, 2007 and is expected to assume the President and Chief Executive Officer positions in July 2007. He will also be joining the Company’s Board of Directors upon his assumption of the President and Chief Executive Officer positions.

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

Securities Class Action Litigation, Shareholder Derivative Litigation and SEC Investigation

In June 2006, two shareholder class actions alleging violations of the federal securities laws were filed against the Company and four of its current and former officers. In July 2006, a shareholder derivative suit was filed against certain of our current and former officers, all of our current and certain former directors, and the Company, as nominal defendant. In addition, the SEC has notified us that it is conducting a formal investigation relative to certain matters underlying the restatement of our financial statements. This litigation and the SEC investigation are described in greater detail below in Item 3, “Legal Proceedings.”

Debt Refinancing

In fiscal 2005, we completed the following transactions: (1) the issuance of $125.0 million of 33/8% senior exchangeable notes due 2025 (the “33/8% Notes”) and the purchase of a call option and issuance of a warrant for shares of our common stock in connection with the issuance of the 33/8% Notes; (2) the establishment of a new $325.0 million senior secured asset-based revolving credit facility (the “Senior Credit Facility”), and (3) the issuance of $100.0 million of 45/8% senior exchangeable notes due 2025 (the “45/8% Notes”). We used the proceeds from the issuance of the 33/8% Notes, borrowings under the Senior Credit Facility and cash on hand to repay in full $251.2 million of indebtedness outstanding under our previously existing senior credit facility, repurchase approximately $25.0 million of our common stock and pay fees and expenses directly related to the transactions. We used the proceeds from the issuance of the 45/8% Notes, borrowings under the Senior Credit Facility and cash on hand to acquire all of the outstanding stock of Murray’s Inc. and its subsidiary, Murray’s Discount Auto Stores, Inc. (collectively herein, “Murray’s”) in December 2005 for approximately $180.9 million.

Our inability to timely file our periodic reports with the SEC as a result of the need to restate our financial statements as discussed above created potential default implications under all of our debt instruments. As a result, in July 2006, we completed a cash tender offer and consent solicitation for $224.96 million of our 7% senior subordinated notes (the “7% Notes”) and repaid all of the 33/8% Notes upon the acceleration of their maturity. We used proceeds from a new $350.0 million term loan facility (the “Term Loan Facility”) entered into in June 2006 to pay the tender offer consideration for the 7% Notes and to repay the 33/8% Notes. We also obtained the consent of the holders of a majority of the outstanding 45/8% Notes to enter into a supplemental indenture to the indenture under which the 45/8% Notes were issued to waive any default arising from our filing delays, exempt the Company from compliance with the SEC filing covenants in the indenture until June 30, 2007, increase the applicable coupon interest rate to 63/4%, and improve the exchange rate of the notes from 49.8473 shares of our common stock per $1,000 principal amount of notes to 60.6061 shares of our common stock per $1,000 principal amount of the notes. The SEC filings that were required to be made under the indenture were not made by June 30, 2007 and, as a result, additional default risks exist. See Item 1A, “Risk Factors — Risks Related to Our Financial Condition — Our failure to file our SEC reports by the deadlines contained in our Debt Agreements could have a material adverse effect on our financial condition and our ability to meet our debt obligations.” We also executed a waiver under our existing Senior Credit Facility to allow us until June 13, 2007 to complete certain periodic SEC reports, including our 2005 10-K (that was filed May 1, 2007), which date has since been extended as described below.

On April 27, 2007, we entered into an amendment to the Term Loan Facility that increased the maximum leverage ratio permitted under the facility in order to minimize the possibility that we would be unable to comply with the facility’s leverage ratio covenants for the first two quarters of fiscal 2007 and revised the definition of the term “Leverage Ratio” to exclude undrawn letters of credit, which had typically been excluded from this calculation in our prior debt agreements. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Liquidity and Capital Resources — Debt Covenants.”

On June 11, 2007, we executed a third waiver to our Senior Credit Facility with respect to the stated time periods under the facility to deliver annual and quarterly financial statements for fiscal 2006 and quarterly financial statements for the first quarter of fiscal 2007 and the related periodic SEC reports for these periods, which, subject to the specific terms and conditions of the waiver, is designed to allow us until August 15, 2007 to complete such filings. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Credit Facility” and “— Factors Affecting Liquidity and Capital Resources — Debt Covenants.”


Item 1.	*Business*

General

CSK Auto Corporation is the largest specialty retailer of automotive parts and accessories in the Western United States and one of the largest such retailers of such products in the entire country, based, in each case, on store count. Headquartered in Phoenix, Arizona, CSK became a publicly traded company in March 1998, and has continued to grow through a combination of acquisitions and organic growth. CSK was incorporated under the laws of the State of Delaware in 1993.

We have the number one market position in 22 of the 32 major markets in which we operate, based on store count. As of February 4, 2007, we operated 1,332 stores, including five Pay N Save stores, in 22 states, with our principal concentration of stores in the Western United States. Our stores are known by the following four brand names (referred to collectively as “CSK Stores”):


	•	Checker Auto Parts, founded in 1969, with 467 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;

	•	Schuck’s Auto Supply, founded in 1917, with 228 stores in the Pacific Northwest states and Alaska;

	•	Kragen Auto Parts, founded in 1947, with 506 stores primarily in California; and

	•	Murray’s Discount Auto Stores, founded in 1972, with 126 stores in the Midwest.

In December 2005, we purchased all the outstanding stock of Murray’s Inc. and its subsidiary, Murray’s Discount Auto Stores, Inc. (collectively “Murray’s”). As of the acquisition date, Murray’s operated 110 automotive parts and accessories retail stores in Michigan, Illinois, Ohio and Indiana — states in which the Company previously had no significant market presence. The 110 acquired Murray’s stores, as well as new stores we open in our Midwest markets will retain the Murray’s name. The Murray’s stores complement our existing operations and expand our markets served from 19 to 22 states.

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

We offer a broad selection of national brand name, private-label and generic automotive products for domestic and imported cars and light trucks. Our products include new and remanufactured automotive replacement parts, maintenance items and accessories. Our stores average approximately 7,500 square feet in size and typically offer a store specific mix averaging approximately 16,000 SKUs. We also operate a highly efficient network of strategically located priority parts depots to provide the majority of our stores an additional 65,000 SKUs on a same-day delivery basis. Through our extensive on-line vendor network, we make available up to an additional 250,000 SKUs on a same-day delivery basis to the majority of our stores and up to 1,000,000 additional SKUs on a next-day delivery basis to substantially all of our stores.

We serve both the do-it-yourself (“DIY”) and the commercial installer, also referred to as the do-it-for-me (“DIFM”), markets. The DIY market, which is comprised of consumers who typically repair and maintain vehicles themselves, is the foundation of our business. Sales to the DIY market represented approximately 83% of our net sales for fiscal 2006. The DIFM market is comprised of auto repair professionals, fleet owners, governments and municipalities and is estimated to have accounted for over 67% of the annual sales in the U.S. automotive aftermarket industry in 2006 (excluding the sales of tires and services performed by DIFM professionals), according to statistics published by the Automotive Aftermarket Industry Association (“AAIA”). Sales to the DIFM market represented approximately 17% of our net sales for fiscal 2006. We believe we are well positioned to effectively and profitably further penetrate the highly fragmented DIFM market because of our sales force dedicated to DIFM customers, experienced in-store sales associates, level of customer service, conveniently located stores, efficient depot delivery network, attractive pricing, and ability to provide timely availability of a broad selection of national brand name products.

We operate separate e-commerce sites for our retail and commercial customers. Our retail website, which utilizes the partsamerica.com URL, has become a targeted destination for DIY auto parts consumers. Our customers can find price, availability, images and other rich content on hundreds of thousands of our products on the website. The site is completely integrated with our warehouse, inventory and store systems and was one of the first to offer in-store pickup and returns. Through a business arrangement we have with Advance Auto Parts, we are able to offer the in-store service virtually coast to coast. Our commercial e-commerce site, cskproshop.com, offers DIFM customers the ability to build estimates, perform complex diagnostics, research vehicle problems and order products online. The site is also integrated with our store systems so that an online order will be automatically delivered to the customer. The site also provides our customers the ability to see their monthly statements and digital reproductions of all their signed invoices.

Industry Overview

We compete in the U.S. automotive aftermarket industry, which, according to statistics by the AAIA published in 2006, has estimated annual sales of approximately $118 billion. Estimated sales include replacement parts, accessories, maintenance items, batteries and automotive fluids for cars and light trucks but exclude sales of tires and services performed by DIFM professionals. The industry is comprised of the DIY market and the DIFM market. We believe that the U.S. automotive aftermarket industry is characterized by stable demand and is growing because of increases in:


	•	the number and age of automotive vehicles in use;

	•	the number of miles driven annually per vehicle;

	•	the number of licensed drivers;

	•	the percentage of the total light vehicle fleet represented by light trucks (including SUVs), which generate higher average aftermarket product purchases versus such purchases generated per car; and

	•	the existence of $52 billion per year of unperformed and underperformed maintenance by U.S. vehicle owners, according to the Automotive Aftermarket Suppliers Association.

While consolidation of automotive aftermarket retailers continues to occur, the industry remains highly fragmented. Our primary competitors include national and regional automotive parts chains, wholesalers, jobber stores, independent operators, automobile dealers, and discount stores and mass merchandisers that carry automotive products.

Competitive Strengths and Strategies

We believe that our competitive strengths and strategies include the following:

Leading Market Position in the Western United States. We are the largest specialty retailer of automotive parts and accessories in the Western United States and have the number one market position in 22 of the 32 major markets in which we operate, based on store count. We believe that we have better brand name recognition than many of our competitors due to the long operating history of our stores, our advertising and marketing programs and the breadth of our product selection.

As the largest specialty retailer of automotive parts and accessories in the Western United States, we believe we have certain competitive advantages over smaller retail chains and independent operators. These advantages include: (1) our brand name recognition as a trusted source of automotive parts and accessories, (2) our ability to make available a broad selection of products on a timely basis, (3) marketing and distribution efficiencies due to economies of scale, and (4) our advanced store level information and distribution systems, which are the result of our significant investments in recent years. We also believe that we enjoy a competitive advantage over mass merchandisers due to our convenient locations, our focus on automotive parts and accessories and our knowledgeable sales associates.

Focus on Customer Service. As part of our promise of “G.R.E.A.T.” service, our internally developed customer service initiative, we aim to provide the highest level of customer service in our industry in order to generate repeat business. G.R.E.A.T. service includes:


	•	Greet the customer

	•	Respond to the customer’s needs

	•	Expedite the customer’s transaction

	•	Ask the customer if we can be of further assistance

	•	Thank the customer

Recruiting, training and retaining high quality sales associates are major components of our focus on customer service. Our training programs and incentives encourage our sales associates to develop technical expertise that enables them to effectively advise customers on product selection and use. We have an average of two National Institute for Automotive Service Excellence, or ASE, certified parts professionals per store. To further satisfy our customers’ needs, we also offer free testing of certain parts, a “no hassle” returns policy, electronically maintained warranties and a customer service call center.

Efficient Store-Level Information and Distribution Systems. We have optimized our store-level information systems and warehouse and distribution systems in order to more effectively manage our inventory and increase the availability of products to our customers. We have an advanced electronic product catalog in our stores that enhances our associates’ ability to assist our customers in selecting the right parts for their automotive needs. Our sophisticated inventory management systems provide inventory movement forecasting based on history, trends and seasonality. Our systems have enhanced our ability to predict the size and timing of product requirements by closely monitoring service level goals, vendor lead times and cost of inventory assumptions. Our store level replenishment system generates orders based upon store on-hand and store model stock quantities. Store model stock quantities are determined by an automatic model stock adjustment system that utilizes historical sales patterns, seasonality and store presentation requirements. Our fully integrated warehouse and distribution network and our 32 strategically located priority parts depots, which operate using the latest technology, have allowed us to improve distribution efficiency. Our investment in these new technology systems in our stores and in our distribution network has allowed us to have the right parts in the right places to meet our customers’ needs.

We also maintain a market specific pricing program that seeks to optimize margins while maintaining price competitiveness. Our pricing philosophy is that we should not lose a customer because of price. We closely monitor our competitors’ pricing levels through our store specific pricing program, which analyzes prices at the store level rather than at the market or chain level. This initiative enables us to establish pricing levels at each store based upon that store’s local market competition. Our opening price point products offer excellent value at low prices. In addition, our sales associates are encouraged to offer premium products at higher price points yielding higher margins. These premium products typically provide extra features, improved performance, an enhanced warranty, or are nationally branded items.

Drive Customer Traffic and Increase Sales Base. Our marketing and merchandising strategy is designed to drive customer traffic and build market share. Our strategy is to make available to our customers one of the broadest selections of quality brand name products on a timely basis in order to maximize customer satisfaction and generate loyal repeat customers. We also strive to be the industry leader in introducing new and innovative product offerings, supported by our promotional print advertising programs that include color circulars and newspaper advertisements. We offer our products at competitive prices in conveniently located and attractively designed stores. Our advertising programs are specifically tailored to target our various customer constituencies for maximum appeal and effectiveness.

Store Operations

Our stores are divided into 11 geographic regions: Southwest, Rocky Mountain, Northwest, Northern Plains, Southern California, Coastal California, Los Angeles, Bay Area, Northern California, Chicago and Great Lakes. Regional vice presidents, each of whom oversees five to 12 district managers, administer each region. Each of our district managers has responsibility for between seven and 18 stores.

The table below sets forth, as of February 4, 2007, the geographic distribution of our stores and the trade names under which they operate. As noted above, as of February 4, 2007, we also operated five value concept retail stores under the Pay N Save brand name in the Phoenix, Arizona metropolitan area, three of which have since been closed and two of which have been converted to clearance centers.


							Murray’s
	Checker		Schuck’s		Kragen		Discount		Company
	Auto Parts		Auto Supply		Auto Parts		Auto Parts		Total

California		1		2		487		—		490
Washington		—		147		—		—		147
Arizona		121		—		—		—		121
Colorado		82		—		—		—		82
Minnesota		57		—		—		—		57
Michigan		—		—		—		54		55
Utah		53		—		—		—		53
Oregon		—		45		—		—		45
Illinois		—		—		—		55		54
Nevada		25		—		19		—		44
Idaho		9		24		—		—		33
New Mexico		31		—		—		—		31
Wisconsin		27		—		—		—		27
Texas		17		—		—		—		17
Ohio		—		—		—		14		14
Alaska		—		10		—		—		10
Hawaii		11		—		—		—		11
Montana		10		—		—		—		10
Wyoming		11		—		—		—		11
North Dakota		7		—		—		—		7
South Dakota		5		—		—		—		5
Indiana		—		—		—		3		3

Sub-total		467		228		506		126		1,327
Pay N Save (Arizona)		—		—		—		—		5

Total		467		228		506		126		1,332

Our stores are generally open seven days a week, with hours from 8:00 a.m. to 9:00 p.m. on Monday through Friday, from 8:00 a.m. to 8:00 p.m. on Saturday and from 9:00 a.m. to 7:00 p.m. on Sunday. Some stores are open 24 hours and some stores are open until midnight. The stores employ an average of approximately eight to 10 associates, including a store manager, two assistant store managers and a staff of full-time and part-time associates.

Store Formats

Approximately 62% of our stores are freestanding, with the balance located within strip shopping centers. Stores range in size from approximately 2,700 to 24,000 square feet, average approximately 7,500 square feet in size and offer a store specific mix of approximately 16,000 SKUs.

Other than the 126 Murray’s stores as of February 4, 2007, which approximate 10,000 square feet, we have three principal store formats, which are 6,000, 7,000 and 8,000 square feet in size. The store size for a given new location is selected generally based upon sales volume expectations determined through a detailed market analysis that we conduct as part of our site selection process. The majority of the Murray’s stores we acquired in fiscal 2005 are 10,000 square feet or larger. The following table categorizes our stores by size as of February 4, 2007 and includes five Pay N Save stores:


	Number of
Store Size	Stores

10,000 sq. ft. or greater		190
8,000 — 9,999 sq. ft.		244
6,000 — 7,999 sq. ft.		619
5,000 — 5,999 sq. ft.		202
Less than 5,000 sq. ft.		77

		1,332

When shopping for hard parts, our customers are serviced by knowledgeable parts personnel utilizing our electronic parts catalogs with enhanced product application information and thousands of product images. Accessory and maintenance items are easily accessible to our customers via convenient to shop shelving fixtures that contain such products as oil and air filters, additives, waxes and other items. We provide specifically designed shelving for batteries and, in many stores, oil products.

Our new prototypical store format is referred to as a “pod store.” This concept moves our sales associates from behind the parts counters and gets them involved on the sales floors. Rather than typical parts counters, these new store formats have eight-sided, free-standing pods centrally located in the stores. Our associates assist customers using the electronic product catalogs located on these pods. We believe that having our associates on the sales floor with our customers will enhance the positive shopping experience.

Growth and Expansion Strategy

Our growth and expansion strategy is focused on our existing and adjacent markets and includes:


	•	opening new stores;

	•	relocating under-performing stores with expiring leases to better locations;

	•	expanding selected stores; and

	•	acquiring existing stores in new markets.

Our real estate department utilizes a comprehensive, market-based approach that identifies and analyzes potential store locations based on detailed demographic and competitive studies. These demographic and competitive studies include analysis of population density, growth patterns, age, per capita income, vehicle traffic counts and the number and type of existing automotive-related facilities, such as automotive parts stores and other competitors within a pre-determined radius of the potential new location. These potential new locations are compared to our existing locations to determine opportunities for opening new stores and relocating or expanding existing stores.

The following table sets forth our store development activities during the periods indicated (including the Pay N Save stores in fiscal 2005 and 2006):


	Fiscal Year
	2006			2005			2004

Beginning stores		1,277			1,134			1,114
New stores (excluding relocated stores)		64			36			28
Acquired stores		—			110			—
Relocated stores		8			8			9
Closed stores (including relocated stores)		(17	)		(11	)		(17	)

Ending stores		1,332			1,277			1,134

Total new, acquired and relocated stores		72			154			37

In fiscal 2007, we plan to open 64 new stores (excluding relocated stores), relocate nine stores and close approximately 26 stores (including the relocated stores), resulting in an estimated 47 net new stores.

Store Merchandising

Our store merchandising program, which classifies our product mix into separate categories, is designed to determine the optimal inventory mix at each individual store based on that store’s historical sales. We believe that we can improve store sales, gross profit margin and inventory turnover by tailoring individual store inventory mix based on historical sales patterns for each of the product categories.

Purchasing

Merchandise is selected from over 600 suppliers and purchased for all stores by personnel at our corporate headquarters in Phoenix, Arizona. No one single supplier accounted for as much as 10% of our purchases in fiscal 2006, 2005 or 2004. Our stores offer products with nationally recognized, well-advertised brand names, such as Armor All, Autolite, Castrol, Fel Pro, Fram, Goodyear, Havoline, Mobil, Monroe, Pennzoil, Prestone, Quaker State, RayBestos, Stant, Sylvania, Turtle Wax and Valvoline. In addition to brand name products, our stores carry a wide variety of high quality generic products. Most of our generic products are produced by nationally recognized manufacturers; therefore, we believe that our generic products are of a quality that is comparable to brand name products.

Our inventory management systems include the E-3 Advanced Warehouse Replenishment Buying System, which provides inventory movement forecasting based upon history, trend and seasonality. Combined with service level goals, vendor lead times and cost of inventory assumptions, the E-3 Buying System determines the timing and size of purchase orders. The vast majority of the dollar values of transactions are sent via electronic data interchange, with the remainder being sent by a computerized email or facsimile interface. Our store replenishment system generates orders based upon store on-hand and store model stock. This includes an automatic model stock adjustment system utilizing historical sales, seasonality and store presentation requirements. We also can allocate seasonal and promotional merchandise based upon a store’s history of prior promotional and seasonal sales.

Commercial Sales Program

In addition to our primary focus on serving the DIY consumer, we have significantly increased our marketing directed at the commercial or DIFM customer in the automotive replacement parts market. According to the AAIA, the commercial or DIFM market is estimated to have constituted in excess of 67% of the annual sales in the automotive aftermarket (excluding the sales of tires and services performed by DIFM professionals) in 2006 and, based on 2006 research by Lang Marketing Resources, Inc., in 2005 the DIFM market grew at a faster rate than the DIY market relative to the prior year (2004). Our commercial sales program, which is intended to facilitate greater penetration of the DIFM market, is targeted toward professional mechanics, auto repair shops, auto dealers, fleet owners, mass and general merchandisers with auto repair facilities and other commercial repair outlets located near our stores.

We have made a significant commitment to this portion of our business and upgraded the information systems capabilities available to our commercial sales organization. In addition, we employ one district sales manager for every approximately five stores with a commercial sales center. The district sales manager is responsible for servicing existing and developing new commercial accounts. In addition, at a minimum, each commercial sales center has a dedicated in-store salesperson, driver and delivery vehicle.

We believe we are well positioned to effectively and profitably service commercial customers, who typically require a higher level of customer service and broader product availability. The commercial market has traditionally been serviced primarily by jobbers. However, automotive specialty retailing chains, such as CSK, have continued to increase their share of the commercial market. We believe we have significant competitive advantages in servicing the commercial market because of our user-friendly information systems developed specifically for our DIFM business, as well as our experienced sales associates, conveniently located stores, attractive pricing and ability to consistently deliver a broad product offering with an emphasis on national brand names.

As of February 4, 2007, we operated commercial sales centers in 711 of our stores. Our sales to commercial accounts (including sales by stores without commercial sales centers) were $320.2 million and $296.2 million in fiscal 2006 and 2005, respectively. On a comparable store basis, our commercial sales increased approximately 7.7% in fiscal 2006. We believe there is opportunity for further commercial sales growth in all of our markets.

Advertising

We support our marketing and merchandising strategy primarily through print advertising, in-store promotional displays, targeted direct mail programs and radio, television and outdoor advertising. The print advertising consists of color circulars that are produced by our in-house advertising department. We also advertise on radio, television and billboards primarily to reinforce our image and name recognition. Television advertising is primarily targeted to sports programming and radio advertising is primarily aired during commuting hours. Advertising efforts include Spanish language radio and billboards as well as bilingual print advertising and store signage. In-store signs and displays are used to promote products, identify departments, and to announce store specials. We also sponsor Major League Baseball in major markets throughout our trade area and two National Hot Rod Association (NHRA) Powerade Championship Series^® Funny Cars and have been designated the Official Auto Parts Store of the NHRA. Our web sites include the following:


	•	http://www.cskauto.com;

	•	http://www.cskautoparts.com;

	•	http://www.checkerauto.com;

	•	http://www.schucks.com;

	•	http://www.kragen.com; and

	•	http://www.murraysdiscount.com.

Associates

As of February 4, 2007, we employed approximately 9,843 full-time associates and approximately 5,283 part-time associates. Approximately 85% of our personnel are employed in store level operations, 8% in distribution and 7% in our corporate headquarters.

For at least the past 10 years, we have not experienced any significant labor disruption and we believe that our labor relations are good. Except for a limited number of our stores in the Northern California market, whose associates have been represented by a union for many years, none of our personnel are represented by a labor union.

Competition

We compete in both the DIY and DIFM markets of the automotive aftermarket industry, which is highly fragmented and generally very competitive. We compete primarily with national and regional retail automotive parts chains (such as AutoZone, Inc. and Advance Auto Parts, Inc.), wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations, such as NAPA), automobile dealers, and discount stores and mass merchandisers that carry automotive replacement parts, maintenance items and

accessories (such as Wal-Mart Stores, Inc.). As the largest specialty retailer of automotive parts and accessories in the Western United States based on store count, we believe we have certain competitive advantages over smaller retail chains and independent operators. These advantages include: (1) our brand name recognition as a trusted source of automotive parts and accessories, (2) our ability to make available a broad selection of products on a timely basis, (3) marketing and distribution efficiencies achieved from economies of scale, and (4) our advanced store level information and distribution systems, which are the result of our significant investments in sophisticated and modern technology. We also believe that we enjoy a competitive advantage over mass merchandisers due to our convenient locations, our focus on automotive parts and accessories and our knowledgeable sales associates.

The principal competitive factors that affect our business are store location, customer service, product selection, availability, quality and price. While we believe that we compete effectively in our various markets, certain competitors are larger in terms of number of stores and sales volume, have greater financial and management resources and have been operating longer than we have in certain geographic areas.

Trade Names, Service Marks and Trademarks

We own the trade names and service marks Checker Auto Parts, Schuck’s, Schuck’s Auto Supply, Kragen and Kragen Auto Parts, and have registered Schuck’s and Kragen Auto Parts with the United States Patent and Trademark Office for use in connection with our automotive parts retailing business. We acquired the trade name Murray’s Discount Auto Stores and the registered service mark Murray’s Auto Parts, among other marks, in connection with our December 2005 acquisition of Murray’s. We own the trade name Pay-N-Save and have registered the service mark Pay N $ave with the United States Patent and Trademark Office for use in connection with our general merchandising retailing business. In addition, we own and have registered numerous trademarks with respect to many of our private label products and advertising and marketing strategies. We believe that our various trade names, service marks and trademarks are important to our merchandising strategies. There are no infringing uses known by us that materially affect the use of such items.

Warehouse and Distribution

Our warehouse and distribution system utilizes bar coding, radio frequency scanners and sophisticated conveyor and put-to-light systems. We operate with metric based incentive programs and engineered labor standards at our Phoenix, Arizona and Dixon, California distribution centers. We operate with metric based incentive programs and historical labor standards in all but one of our remaining distribution centers. These programs have contributed to improved labor productivity. Each store is currently serviced by one of our four main distribution centers, with the regional distribution centers handling bulk materials, such as oil and antifreeze. All of our merchandise is shipped from the vendors to our distribution centers, with the exception of batteries and certain other products, which are shipped directly to stores by the vendor. We have recently completed an approximately 80,000 square foot expansion of our Phoenix, Arizona distribution center.

Seasonality

Environmental Matters

We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances, the recycling of batteries and used lubricants, and the ownership and operation of real property. For example, under environmental laws, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of

hazardous substances in soil or groundwater. Such laws often impose joint and several liability and liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. We have recorded no liabilities to provide for the cost of environmental remediation activities, as we do not believe that we have incurred any such liabilities.

At some of our locations acquired in prior years, automobiles are serviced in automotive service facilities that we sublease to third parties. As a result of investigations undertaken in connection with such acquisitions, we are aware that soil or groundwater may be contaminated at some of these properties. In certain of these cases, we obtained indemnities from the former operators of these facilities. Although there can be no assurance, based on current information, we believe that any such contamination will not result in any liabilities that would have a material adverse effect on our financial position, results of operations or cash flows.

As part of our operations, we handle hazardous materials in the ordinary course of business and our customers may bring hazardous materials onto our property in connection with, for example, our oil recycling program. We currently provide a recycling program for batteries in California and for the collection of used lubricants at certain of our stores as a service to our customers pursuant to agreements with third-party vendors. The batteries and used lubricants are collected by our associates, deposited into vendor-supplied containers/pallets and then disposed of by the third-party vendors. In general, our agreements with such vendors contain provisions that are designed to limit our potential liability under applicable environmental regulations for any damage or contamination that may be caused by the batteries and lubricants to off-site properties (including as a result of waste disposal) and to our properties, when caused by the vendor.

Compliance with environmental laws and regulations has not had a material impact on our operations to date, but there can be no assurance that future compliance with such laws and regulations will not have a material adverse effect on our financial position, results of operations or cash flows.

Executive Officers

The following table sets forth the name, age and position of each of our executive officers as of June 1, 2007. Below the table appears a brief account of each executive officer’s business experience, other than Mr. Jenkins, whose background is described in Item 10, “Directors, Executive Officers and Corporate Governance,” below under the caption “Directors.” Our executive officers also have the same titles at our subsidiary, CSK Auto, Inc.

Certain executive officers who were employed by the Company during fiscal 2006 are no longer employed by the Company. In March 2006, Louis Mancini, former CEO of Murray’s and the Company’s former Executive Vice President — Midwest Operations since our acquisition of Murray’s in December 2005, resigned from the Company. Also, as previously announced and as noted above, the Company’s President and Chief Operating Officer’s (Martin Fraser) and Chief Administrative Officer’s (Don Watson) employment with the Company terminated in September 2006. Furthermore, as noted above, James B. Riley, the Company’s former Chief Financial Officer, resigned from the Company effective at the end of June 2007, and Steven L. Korby has been appointed as the Company’s interim Chief Financial Officer pending identification of a permanent replacement for Mr. Riley.


Name	Age		Position

Maynard Jenkins		64	Chairman, Chief Executive Officer and Director
Dale Ward		57	Executive Vice President
Larry Buresh		63	Senior Vice President and Chief Information Officer
Larry Ellis		52	Senior Vice President — Logistics
Randi V. Morrison		42	Senior Vice President, General Counsel and Secretary
James B. Riley		55	Senior Vice President and Chief Financial Officer
John Saar		56	Senior Vice President of Commercial Sales

Dale Ward became our Executive Vice President, with oversight responsibility for Store Operations, Commercial Sales, Human Resources and Merchandising & Marketing in October 2006. Prior to this appointment, Mr. Ward served the Company in numerous roles, including Senior Vice President — Merchandising & Marketing since May 2005, Executive Vice President — Commercial Operations from October 2001 to May 2005 and Senior Vice President — Store Operations from March 1997 to October 2001. Prior to that, Mr. Ward served as Executive

Vice President and Chief Operating Officer of Orchard Supply Hardware since April 1996. Mr. Ward served as President and Chief Executive Officer of F&M Super Drug Stores, Inc., a drugstore chain, from 1994 to 1995. He also served as President and Chief Executive Officer of Ben Franklin Stores, Inc., a variety and craft store chain, from 1988 to 1993 and as Chairman of Ben Franklin Crafts Inc., a craft store chain, from 1991 to 1993.

Larry Buresh became our Senior Vice President and Chief Information Officer in November 1998. Prior to that, Mr. Buresh was Vice President and Chief Information Officer of Chief Auto Parts, Inc. from 1995 to November 1998. From 1994 to 1995, Mr. Buresh was Senior Director of Central Information Services for Sears, Roebuck & Co. From 1986 to 1994, Mr. Buresh was Vice President and Chief Information Officer of Frank’s Nursery & Crafts, Inc. Prior to that, Mr. Buresh was Vice President of Management Information Services for Ben Franklin Stores Company. Mr. Buresh is also a director of Mobile Productivity Incorporated and Association for Retail Technology Standards.

Larry Ellis became our Senior Vice President — Logistics in April 2002. Prior to that, Mr. Ellis served as Vice President — Distribution, Transportation, Priority Parts and Replenishment. Mr. Ellis’ career in Logistics began over thirty years ago with Fleenor’s, Inc., which, through a series of transactions, was subsequently acquired by Northern Automotive Corporation (a predecessor to CSK Auto, Inc.) in 1988. During his career, Mr. Ellis has served in several middle and senior management positions.

Randi V. Morrison became our Senior Vice President, General Counsel & Secretary in October 2006. Ms. Morrison was formerly Vice President, General Counsel & Secretary since August 2005. Prior to that Ms. Morrison was Vice President, Assistant General Counsel & Secretary from February 2004 to August 2005, Assistant General Counsel & Assistant Secretary from April 2001 to February 2004 and Senior Counsel from March 2000 to April 2001. Ms. Morrison joined CSK Auto as Legal Counsel in March 1997.

James B. Riley became our Senior Vice President and Chief Financial Officer in October 2005. Mr. Riley has over 20 years experience serving in a variety of financial executive and management positions. Prior to joining CSK Auto, Mr. Riley served as a senior consultant to Xperianz, a consulting firm working with systems selection and implementation from 2004 to 2005. Prior to that, he served as Senior Vice President and Chief Financial Officer of Chiquita Brands International from 2001 to 2004. As noted above, the Company previously announced Mr. Riley’s resignation effective at the end of June 2007.

John Saar became our Senior Vice President — Commercial Sales in October 2006. Prior to that, Mr. Saar served as a Divisional Vice President since 2001. Mr. Saar has more than 33 years of tenure with the Company and has served in various management and senior management roles with responsibility for real estate, human resources, store operations and other functions.

The term of office of each officer is until election and qualification of a successor or otherwise at the pleasure of the Board of Directors. There is no arrangement or understanding between any of the above-listed officers and any other person pursuant to which any such officer was elected as an officer. None of the above-listed officers has any family relationship with any director or other executive officer.


Item 1A.	*Risk Factors*

Our business, operations and financial condition are subject to various risks. Some of these risks are described below, and you should take such risks into account in evaluating us or any investment decision involving the Company. This section does not describe all risks that may be applicable to us, our industry or our business, and it is intended only as a summary of certain material risk factors.

Risks Related to Our Internal Controls

We have identified material weaknesses in our internal control over financial reporting, which could continue to impact our ability to report our results of operations and financial condition accurately and in a timely manner.

As required by SOX 404, management has conducted an assessment of our internal control over financial reporting, identified material weaknesses in our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of February 4, 2007. For a detailed description of these

material weaknesses, see Item 9A, “Controls and Procedures.” Each of our material weaknesses results in more than a remote likelihood that a material misstatement in our financial statements will not be prevented or detected. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Even with this additional work, given the material weaknesses identified, including the number of continuing manual journal entries, the lack of integrated financial systems, the significant turnover of Finance organization personnel, and use of consultants to augment the Company’s accounting staff, there is a risk of additional errors not being prevented or detected, which could result in additional restatements. In addition, it is possible that other material weaknesses may be identified. All of these factors continue to increase the time and cost involved in preparing our financial statements and to undermine the credibility of such statements.

We have extensive work remaining to remedy the material weaknesses in our internal control over financial reporting.

We are in the process of developing and implementing a full work plan for remedying all of the identified material weaknesses, and this work will continue during fiscal 2007 and after. There can be no assurance as to when the remediation plan will be fully developed and when it will be implemented. Until our remedial efforts are completed, management will continue to devote significant time and attention to these efforts. There will also continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC, that a default under our debt agreements could occur as a result of further delays and that our future financial statements could contain errors that will be undetected.

The continuing existence of material weaknesses in our internal control over financial reporting and the frequency of our restatements of our financial statements may make it more difficult and expensive to refinance our capital structure.

In fiscal 2006, we refinanced $350 million of our fixed rate notes and convertible securities with a floating rate Term Loan Facility that bears interest at a higher rate than the securities it replaced and exposes us to further increases in interest rates due to its floating rate nature. Should we desire to refinance our Term Loan Facility or to otherwise issue securities, the continued existence of our material weaknesses and the fact that we have restated our financial statements twice in the last three years may make it more difficult for us to do so and may increase the cost of doing so. Both the continued increased exposure to floating rate interest rates and the increased costs associated with any refinancing of the Term Credit Facility could have negative impacts on our results of operations and financial condition.

Risks Related to Our Restatement of Financial Statements and Audit Committee-led Investigation

Pending and future governmental inquiries may adversely affect us, the trading prices of our securities and our ability to access the capital markets.

As discussed above, during the course of our Audit Committee-led investigation and following its substantial completion, representatives of the Audit Committee and its advisors met with representatives of the SEC to keep them advised as to the course of the investigation and its findings. The Company continues to share information with the SEC and believes it is cooperating fully with the agency in its formal investigation. In addition, certain of our former and current executive officers, directors and other employees are or may be subject to investigation by the SEC in connection with these matters. Adverse developments in connection with these proceedings, including any expansion of their scope or a referral to and investigation by other governmental agencies, could negatively impact us and divert our resources and the focus of our management team from our ordinary business operations. In addition, we may incur significant expenses associated with responding to these investigations (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors who may be subject to such investigation(s)), and we may be required to pay criminal or civil fines, consent to injunctions on future conduct or suffer other penalties, any of which could have a material adverse effect on us. It is also possible that the existence, findings and outcome of these inquiries may have a negative impact on lawsuits that are pending or may be filed against us, the trading prices of our securities and our ability to access the capital markets. See Item 3, “Legal Proceedings” for a more detailed description of these proceedings.

We have been named as a defendant in a class action and other lawsuits that may adversely affect our financial condition, results of operations and cash flows.

We and certain of our former and current executive officers and directors are defendants in a consolidated securities class action and a derivative lawsuit. Our management’s attention may be diverted from our ordinary business operations by these lawsuits and we may incur significant expenses associated with the defense of these lawsuits (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors who may be parties to such actions). In addition, as a result of these lawsuits, we may be required to pay judgments or settlements that could have a material adverse effect on our results of operations, financial condition, liquidity and our ability to meet our debt obligations. See Item 3, “Legal Proceedings” for a more detailed description of these proceedings.

Continuing negative publicity may adversely affect our business.

As a result of the Audit Committee-led investigation, restatement of our financial statements and related matters as discussed herein, we have been the subject of negative publicity. This negative publicity may have an effect on the terms under which some customers, lenders, landlords and suppliers are willing to continue to do business with us and could affect our financial performance and financial condition. We also believe that certain of our employees perceive themselves to be operating under stressful conditions, which may cause them to terminate their employment or, if they remain, result in reduced morale that could adversely affect our business. Continuing negative publicity also could have a material adverse effect on our business.

Potential indemnification obligations and limitations of our director and officer liability insurance could adversely affect us.

As discussed above and in Item 3, “Legal Proceedings,” several of our current and former directors, officers and employees are or may become the subject of criminal, administrative and civil investigations and lawsuits. Under Delaware law, our charter documents and certain indemnification agreements, we may have an obligation to indemnify our current and former officers and employees and directors in relation to these matters. Some of these indemnification obligations may not be covered by our directors’ and officers’ insurance policies. If the Company incurs significant uninsured indemnity obligations, this could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Risks Related to our Industry and Business

Our industry is highly competitive and we may not have the resources to compete effectively.

The retail sale of automotive parts and accessories is highly competitive. Some of our competitors have more financial resources, are more geographically diverse, or have better name recognition than we do, which might place us at a competitive disadvantage. Because we seek to offer competitive prices, if our competitors reduce their prices, we may reduce our prices to maintain a competitive position, which could cause a material decline in our revenues and earnings and hinder our ability to service our debt.

We compete primarily with the following types of businesses:


	•	national and regional retail automotive parts chains;

	•	wholesalers or jobber stores (some of which are associated with national parts distributors or associations);

	•	automobile dealers; and

	•	mass merchandisers and discounters that carry automotive replacement parts, maintenance items and accessories.

We may not be able to grow our number of stores in a profitable manner or achieve the synergies anticipated when acquisitions are made.

Our store growth is based, in part, on expanding selected stores, relocating existing stores, adding new stores primarily in markets we currently serve, and, from time to time, acquiring stores in our existing and new markets from other automotive parts and accessories retailers.

Our successful future organic growth and growth through acquisitions are dependent upon a number of factors, including our ability to:


	•	locate and obtain acceptable store sites;

	•	negotiate favorable lease terms;

	•	complete the construction of new and relocated stores in a timely manner;

	•	hire, train and retain competent managers and associates;

	•	integrate new and acquired stores into our systems and operations; and

	•	achieve the anticipated synergies and operating results that are often built into the purchase price when existing stores or chains are acquired.

Acquisitions involve a variety of risks. Failure to successfully integrate a large number of acquired stores into our existing business or failure to achieve anticipated synergies and operating results from such acquisitions could adversely affect our financial condition and results of operations, particularly during the periods closely following the acquisition of such stores.

We cannot assure you that we will be able to continue to open new stores as we have in the past or that our opening of new stores in markets we already serve will not adversely affect existing store profitability, nor can we assure you that we will be able to manage our growth effectively.

A decrease in vehicle miles driven, higher gasoline prices and mild summer or winter temperatures may negatively affect our revenues.

The need to purchase or replace auto parts is affected by the number of vehicle miles driven. A substantial decrease in the number of vehicle miles driven could have a negative impact on our revenues. Factors that may cause the number of vehicle miles to decrease include:


	•	weather conditions;

	•	increases in gasoline prices;

	•	changes in the economy; and

	•	changes in travel patterns.

Increases in gasoline prices, as we experienced during periods of fiscal 2005 and 2006, may also adversely affect our revenues because our customers may defer purchases of certain items as they use a higher percentage of their income to pay for gasoline. While we generally experience increased sales when temperatures are extreme, mild summer or winter temperatures may adversely affect our revenues. These factors could result in a decline in the customer traffic at our stores, which could adversely affect our business, financial condition, results of operations and cash flows.

A decrease in the demand for products we offer for sale could adversely affect our financial condition and results of operations.

Overall demand for products we sell depends on many factors and may decline for a number of reasons, including:


	•	Improving or declining economic conditions — During periods of good economic conditions, more of our DIY customers may pay others to repair and maintain their cars instead of working on their own cars or consumers may opt to purchase new vehicles rather than service the vehicles they currently own. During


		periods of declining economic conditions, both DIY and DIFM customers may defer vehicle maintenance or repair.


	•	Declining vehicle ages and numbers and improving parts quality — A decline in the average age of vehicles, in the number of cars on the road or the continued increase in the quality of auto parts could result in a reduction in the demand for our product offerings.

If any of these factors cause overall demand for the products we sell to decline, our business, financial condition, results of operations and cash flows could be adversely affected.

A decrease in the ability and willingness of our suppliers to supply products to us on favorable terms may have a negative impact on our business.

Our business depends on developing and maintaining productive relationships with our vendors and upon their ability and willingness to sell products to us on favorable price and other terms. Many factors outside our control may harm these relationships and the ability or willingness of these vendors to sell these products on such terms. For example, financial difficulties that some of our vendors may face may increase the cost of the products we purchase from them. In addition, our failure to pay promptly or order sufficient quantities of inventory from our vendors may increase the cost of products we purchase from them or may lead to their refusal to sell products to us at all. The trend towards consolidation among automotive parts suppliers may disrupt our relationship with some vendors. Any disruption in our vendor relationships or in our vendor operations could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We receive various payments, allowances, and discounts from our vendors based on, among other things, the volume of our purchases or the services that we provide to them. These vendor discounts and allowances reduce our costs of sales. Monies received from the vendors include rebates, allowances, and promotional funds. Typically, these funds are dependent on purchase volumes and advertising plans. The amounts to be received are subject to changes in market conditions, vendor marketing strategies, and changes in the profitability or sell-through of the related merchandise. Any material change in, or failure to obtain vendor allowances and discounts, such as might result from our failure to sell a sufficient quantity of the vendor’s products, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our operations are concentrated in the Western United States, and therefore our business is subject to fluctuations when adverse conditions occur in that region.

The overwhelming majority of our stores are located in the Western United States. As a result of this geographic concentration, we are subject to regional risks such as the economy, weather conditions, power outages, cost of electricity, earthquakes and other natural disasters. In recent years, certain areas in which we operate have experienced economic recessions and extreme weather conditions. Although temperature extremes tend to enhance sales by causing a higher incidence of parts failure and increasing sales of seasonal products, unusually severe weather can reduce sales by causing deferral of elective maintenance. Because our business is seasonal, inclement weather occurring during traditionally peak selling months may harm our business. Several of our competitors operate stores across the United States and, therefore, may not be as sensitive to such regional risks.

War or acts of terrorism or the threat of either may have a negative impact on our financial condition, results of operations and cash flows.

War or acts of terrorism or the threat of either may have a negative impact on our results of operations by making it more difficult to obtain merchandise available for sale in our stores. In fiscal 2006, we imported approximately 4% of our merchandise directly from other countries, primarily China. If imported goods become difficult or impossible to bring into the United States and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected. In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution centers and stores. War or acts of terrorism or the threat of either may negatively affect the economy and may also cause the number of vehicle miles to decrease, the price of gasoline to increase and elective maintenance to be deferred.

Because we are involved in litigation from time to time, and are subject to numerous governmental laws and regulations, we could incur substantial judgments, fines, legal fees and other costs.

We currently and from time to time face complaints or litigation incidental to the conduct of our business, including asbestos and similar product liability claims, slips and falls, and other general liability claims, discrimination and employment claims, vendor disputes, and miscellaneous environmental and real estate claims. In some cases, the damages claimed against us are substantial. We accrue reserves using our best estimate of the probable and reasonably estimable contingent liabilities. Although we maintain liability insurance for some litigation claims, if one or more of the claims greatly exceed our coverage limits or our insurance policies do not cover a claim, it could have a material adverse effect on our business and operating results. We are also currently subject to securities class action and derivative lawsuits that are not incidental to our business and are described in greater detail below. See Item 3, “Legal Proceedings” in this Annual Report.

In addition, we are subject to numerous federal, state, and local governmental laws and regulations relating to, among other things, taxation, employment, environmental protection, and building and zoning requirements. If we fail to comply with existing or future laws or regulations, we may be subject to governmental or judicial fines or sanctions.

We are subject to environmental laws and the cost of compliance with these laws could negatively impact our financial condition, results of operations and cash flows.

We are subject to various federal, state, and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage, and disposal of hazardous substances, the recycling of batteries and used lubricants, and the ownership and operation of real property. As a result of investigations undertaken in connection with certain of our store acquisitions, we are aware that soil or groundwater may be contaminated at some of our properties. There can be no assurance that any such contamination will not have a material adverse effect on us. In addition, as part of our operations, we handle hazardous materials and our customers may also bring hazardous materials onto our properties in connection with, for example, our oil recycling program. There can be no assurance that compliance with environmental laws and regulations will not have a material adverse effect on us in the future. See “Environmental Matters” in Item 1, “Business” in this Annual Report.

Risks Related to Our Financial Condition

We are highly leveraged and, in fiscal 2006, we had higher annual interest costs than we had in fiscal 2005. As of February 4, 2007, we had an aggregate of approximately $500 million of outstanding indebtedness primarily for borrowed money under our Senior Credit Facility, our Term Loan Facility and the indenture under which $100.0 million of our 63/4% senior exchangeable notes due 2025 (formerly the 45/8% Notes) (the “63/4% Notes”) were issued, (collectively the “Debt Agreements”). Our substantial debt could adversely affect our business, financial condition and results of operations in many ways, including those set forth below.

Our failure to file our SEC reports by the deadlines contained in our Debt Agreements could have a material adverse effect on our financial condition and our ability to meet our debt obligations.

In June 2006, in connection with our inability to timely file our periodic reports with the SEC as a result of the need to restate our financial statements, we entered into a waiver with respect to our Senior Credit Facility, a supplemental indenture to the indenture under which our 63/4% Notes were issued and a new Term Loan Facility, all of which contain deadlines by which we must file our currently delinquent fiscal 2006 SEC periodic reports. The earliest of these deadlines is the one in the indenture under which the 63/4 Notes were issued, which requires such filings to be made by June 30, 2007. We did not file all of our delinquent periodic SEC filings by June 30, 2007, and if a notice of default is given to the Company by the trustee for the 63/4% Notes or by the holders of 25% of the Notes at the earliest possible date, a default will occur under the indenture that would entitle the holders of the 63/4% Notes to accelerate the payment of these Notes no sooner than August 31, 2007. We expect to be able to complete all of our late periodic SEC filings by August 15, 2007, the latest date these filings can be made under the terms of the Senior Credit Facility. Although no assurance can be given that such filings will be made by such date, as described below

in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Factors Affecting Liquidity and Capital Resources — Debt Covenants,” the filing of such reports by that date should permit us to avoid an acceleration of the 63/4% Notes and any additional negative consequences of such late filings under the Senior Credit Facility or the Term Loan Facility. If we were to fail to meet the August 15, 2007 filing deadline, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

Our substantial debt and increased interest payment obligations could adversely affect our financial health, undermine our ability to grow and operate profitably and prevent us from fulfilling our obligations under the Debt Agreements.

The degree to which we are leveraged and the increased interest rates at which we had to refinance most of our indebtedness in fiscal 2006 could subject us to the following risks:


	•	it may be more difficult meeting our payment and other obligations;

	•	our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired in the future;

	•	a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available for other purposes;

	•	the majority of our indebtedness, including our Senior Credit Facility and Term Loan Facility, carries variable rates of interest, and our interest expense could increase if interest rates in general increase;

	•	we are substantially more leveraged than some of our competitors, which might place us at a competitive disadvantage to those competitors who have lower debt service obligations and significantly greater operating and financial flexibility than we do;

	•	we may not be able to adjust rapidly to changing market conditions;

	•	we may be more vulnerable in the event of a downturn in general economic conditions or in our business; and

	•	our failure to comply with the financial and other restrictive covenants governing our other Debt Agreements, which, among other things, require us to maintain certain financial ratios and limit our ability to incur additional debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or our prospects. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Factors Affecting Liquidity and Capital Resources — Debt Covenants.”

Any of the above-listed factors could have an adverse effect on our business, financial condition, results of operations, and the price of our common stock.

Our Debt Agreements restrict or prohibit our ability to engage in or enter into some operating and financing arrangements, which may limit our ability to operate our business.

The operating and financial restrictions and covenants in certain of our Debt Agreements impose significant operating and financial restrictions on us and require us to meet certain financial tests. These restrictions may also have a negative impact on our business, results of operations and financial condition by significantly limiting or prohibiting us from engaging in certain transactions, including:


	•	incurring or guaranteeing additional indebtedness;

	•	making investments;


	•	creating liens on our assets;

	•	transferring or selling assets currently held by us;

	•	paying dividends;

	•	engaging in mergers, consolidations, or acquisitions; or

	•	engaging in other business activities.

These restrictions could place us at a disadvantage relative to competitors not subject to such limitations.

In addition, a breach of the covenants, ratios, or restrictions contained in our Debt Agreements could result in an event of default thereunder. Upon the occurrence of such an event of default, the lenders under all of our Debt Agreements, or, in the case of the 63/4% Notes, the holders of such Notes, could elect to declare all amounts outstanding under the agreements, together with accrued interest, to be immediately due and payable. If our lenders or the holders of the 63/4% Notes accelerate the payment of any of our indebtedness, we cannot assure you that our assets securing such debt would be sufficient to repay in full that indebtedness and our other indebtedness.

The market price for our common stock may be volatile.

In past periods, there has been volatility in the market price for our common stock. In addition, the market price of our common stock could fluctuate substantially in the future in response to a number of factors, including but not limited to the following:


	•	actual or anticipated fluctuations in our operating results;

	•	actual or anticipated changes in our growth rates or our competitors’ growth rates;

	•	changes in stock market analyst recommendations regarding our common stock, the common stock of companies that investors deems comparable to us or our industry generally;

	•	uncertainties created by our inability to timely file our periodic reports with the SEC;

	•	operating and stock price performance of other companies that investors deem comparable to us;

	•	changes in governmental regulations;

	•	geopolitical conditions, such as acts or threats of terrorism or military conflicts; and

	•	concentration of the ownership of our common stock and possible speculation as to our future as a stand-alone organization.

General market fluctuations, industry factors and general economic and political conditions or events, economic slowdowns, interest rate changes, credit loss trends or currency fluctuations could also cause the market price of our common stock to decrease regardless of our operating performance. In recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. These broad market fluctuations may materially adversely affect our stock price regardless of our operating results.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

The following table sets forth certain information concerning our principal leased facilities as of February 4, 2007:

Number of

Square

Stores

Facility

Location

Area Served

Footage

Served

Distribution Centers:

Distribution center(1)

Dixon, CA

California, Nevada, Washington, Oregon, Idaho, Alaska, Hawaii

325,500

545

Distribution center(2)

Phoenix, AZ

Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, South Dakota, Texas, Utah, Wyoming

353,504

565

Office, warehouse and distribution center

Mendota Heights, MN

Michigan, Minnesota, North Dakota, South Dakota, Wisconsin

124,783

Office, warehouse and distribution center(3)

Belleville, MI

Illinois, Indiana, Michigan, Ohio

352,009

130

Warehouse(4)

Phoenix, AZ

Arizona

69,388

Corporate Facilities:

Corporate office

Phoenix, AZ

All

127,810

—

Corporate warehouse and mail center

Phoenix, AZ

Arizona, Colorado, Washington

52,087

—

Regional Distribution Centers:

Regional distribution center(5)

Auburn, WA

Washington, Oregon, Idaho, Alaska

160,087

200

Regional distribution center

Aurora, CO

Colorado, Wyoming, South Dakota

34,800

Regional distribution center

Clearfield, UT

Colorado, Utah, Idaho, Wyoming, Montana, Oregon

60,000

Regional distribution center

Commerce, CA

California

75,000

206

Return Centers:

Returns center

Phoenix, AZ

Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, South Dakota, Texas, Utah, Wyoming

69,796

565

Returns center

West Sacramento, CA

California, Nevada, Washington, Oregon, Idaho, Alaska, Hawaii

65,400

545


(1)		Subject to time period and other restrictions, we have the ability to expand the Dixon distribution center by 161,000 square feet should the need arise.

(2)		We recently completed an approximately 80,000 square foot expansion of our Phoenix, Arizona distribution center (included in the square footage noted above).

(3)		The distribution center in Belleville is approximately 285,000 square feet and currently services 126 stores. This distribution facility has the capacity to service approximately 400 stores.


(4)		The lease on this warehouse was terminated in November 2006.

(5)		The lease on this regional distribution center expires in December 2007. This facility will relocate in January 2008 to a new 81,761 square foot facility also located in Auburn, WA.

As of February 4, 2007, all but one of our operating stores was leased. The expiration dates (including renewal options) of the store leases are summarized as follows:


	Number of
Years	Stores

2007 — 2008		45
2009 — 2010		65
2011 — 2012		44
2013 — 2020		431
2021 — 2030		609
2031 — thereafter		137

		1,331

Additional information regarding our facilities appears in Item 1, “Business,” under the captions “Store Operations,” “Store Formats,” and “Warehouse and Distribution.”


Item 3.	*Legal Proceedings*

Securities Class Action Litigation

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

Shareholder Derivative Litigation

On July 31, 2006, a shareholder derivative suit was filed in the United States District Court for the District of Arizona against certain of the Company’s current and former officers and all current and certain former directors. The Company is a nominal defendant. On March 2, 2007, plaintiff filed an amended derivative complaint. The

amended derivative complaint alleged claims under Section 304 of the Sarbanes-Oxley Act of 2002 and for alleged breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. The amended derivative complaint sought, purportedly on behalf of the Company, damages, restitution, and equitable and injunctive relief. The Company filed a motion to dismiss arguing that plaintiff failed to plead facts establishing that plaintiff was excused from making a demand on the Company’s board of directors to pursue these claims. The individual defendants joined in the Company’s motion. While the motion to dismiss was pending, plaintiff filed a motion for leave to amend her complaint. On June 11, 2007, the court granted plaintiff leave to amend and plaintiff filed her Second Amended Complaint, which alleges the same claims as the prior complaint, but adds various supporting allegations. On June 22, 2007, the Company filed a motion to dismiss the Second Amended Complaint for failure to plead demand futility adequately or, in the alternative, to stay the case until the shareholder class action litigation is resolved. The individual defendants joined in the Company’s motion. No hearing date has been scheduled and the Company does not anticipate a ruling until at least August 2007. This litigation is also in its early stages, and we cannot predict its outcome.

SEC Investigation

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

Other Litigation

During the third quarter of fiscal 2003, we received notification from the State of California Board of Equalization (the “Board”) of an assessment for approximately $1.2 million for sales tax and approximately $0.6 million for related interest based on the Board’s audit findings for the tax periods of October 1997 through September 2000. During this time period, we refunded the sales tax associated with battery cores to customers who returned battery cores to our stores. The Board believed that the sales tax associated with the battery cores should have been remitted to the taxing authority rather than refunded to the customers. On February 6, 2006, we received notification from the Board that their position had changed and they were no longer seeking payment of any of the original assessment.

In a separate matter, on October 13, 2006, the Board issued its Notice of Determination for the period January 1, 2001 through January 4, 2004 seeking from us $666,386, including tax, interest and penalties. Less than half of that amount related to sales tax on returned cores. During this period, we had changed our business practices to not refund to customers the sales tax associated with battery cores returned by them to our stores, which is the position advocated by the Board. The Company paid and expensed approximately $375,000 in fiscal 2006 with respect to other items of the assessment and filed a Petition for Redetermination with respect to the sales tax associated with battery cores. Based on the Board’s determination relative to the previous assessment described above, the Company does not believe it has liability for the portion of the assessment relating to the sales tax associated with returned battery cores.

these alleged practices are unfair business practices, (ii) requests back pay, restitution, penalties for violations of various Labor Code sections and for failure to pay all wages due on termination, and interest for the last four years, plus attorney fees, and (iii) requests that the Company be enjoined from committing further unfair business practices. The Company believed it had meritorious defenses to all of these claims and defended the claims vigorously. In the second quarter of fiscal 2006, the court refused the plaintiff’s request to certify the class. We subsequently settled the plaintiff’s individual claim for a nominal amount and the suit was dismissed.

We currently and from time to time are involved in other litigation incidental to the conduct of our business, including but not limited to asbestos and similar product liability claims, slip and fall and other general liability claims, discrimination and employment claims, vendor disputes, and miscellaneous environmental and real estate claims. The damages claimed in some of this litigation are substantial. Based on internal review, we accrue reserves using our best estimate of the probable and reasonably estimable contingent liabilities. We do not currently believe that any of these other legal claims incidental to the conduct of our business, individually or in the aggregate, will result in liabilities material to our consolidated financial position, results of operations or cash flows.


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

None.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Market Price

Our common stock has been listed on the New York Stock Exchange under the symbol CAO since March 12, 1998. As of June 1, 2007, there were 43,950,751 shares of our common stock outstanding and there were 49 record holders of our common stock.

The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the New York Stock Exchange.


	Price Range of
	Common Stock
	High		Low

Fiscal 2006:
First Quarter	$	16.84	$	12.23
Second Quarter		13.29		10.71
Third Quarter		15.90		10.62
Fourth Quarter		17.27		15.17
Fiscal 2005:
First Quarter	$	17.65	$	15.26
Second Quarter		18.85		15.31
Third Quarter		19.20		13.96
Fourth Quarter		15.95		14.11

Performance Graph

The following graph reflects the cumulative stockholder return (change in stock price plus reinvested dividends) of a $100 investment in our common stock for the five-year period from February 3, 2002 through February 4, 2007, in comparison with the Standard & Poor’s 500 Composite Stock Index, the Standard & Poor’s SmallCap Specialty Stores Index and the Standard & Poor’s MidCap Specialty Stores Index. The comparisons are not intended to forecast or be indicative of possible future performance of our common stock. The performance graph shall not be deemed to be incorporated by reference into our SEC filings and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Exchange Act.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among CSK Auto, Inc., The S & P 500 Index,
The S & P SmallCap Specialty Stores And The S & P MidCap Specialty Stores


*		$100 invested on 2/3/02 in stock or on 1/31/02 in index-including reinvestment of dividends. Indexes calculated on month-end basis.

Source: Research Data Group, Inc.


	2/3/02		2/2/03		2/1/04		1/30/05		1/29/06		2/4/07
CSK Auto, Inc.	$	100.00	$	108.04	$	212.07	$	167.17	$	172.83	$	178.91
S & P 500	$	100.00	$	76.98	$	103.60	$	110.05	$	121.47	$	139.11
S & P SmallCap Specialty Stores	$	100.00	$	103.24	$	183.21	$	195.24	$	211.22	$	219.45
S & P MidCap Specialty Stores	$	100.00	$	81.13	$	131.82	$	165.96	$	181.41	$	192.75

Dividends

We have not paid any dividends on our common stock during the fiscal years shown above. We currently do not intend to pay any dividends on our common stock.

CSK Auto Corporation is a holding company with no business operations of its own. It therefore depends upon payments, dividends and distributions from Auto, its wholly owned subsidiary, for funds to pay dividends to our stockholders. Auto currently intends to retain its earnings to fund its working capital, debt repayment and capital expenditure needs and for other general corporate purposes. Auto has no current intention of paying dividends or making other distributions to us in excess of amounts necessary to pay our operating expenses and taxes. The Senior Credit Facility, Term Loan Facility and the indenture under which the 63/4% Notes were issued contain restrictions

on Auto’s ability to pay dividends or make payments or other distributions to us. See Note 8 — Long-Term Debt to the consolidated financial statements included in Item 8 of this Annual Report.


Item 6.	*Selected Financial Data*

The following table sets forth our selected consolidated statement of operations, balance sheet and operating data. The selected statement of operations and balance sheet data are derived from our consolidated financial statements. You should read the data presented below together with our consolidated financial statements and related notes included in Item 8, “Financial Statements and Supplementary Data,” and the information in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below.


	Fiscal Year(1)
	2006			2005			2004			2003			2002
	(In thousands, except per share amounts and selected store data)

Statement of Operations Data
Net sales	$	1,907,776		$	1,651,285		$	1,604,991		$	1,606,731		$	1,532,176
Cost of sales(2)		1,011,712			864,674			839,564			904,090			890,339

Gross profit		896,064			786,611			765,427			702,641			641,837
Operating and administrative(2)		788,400			653,471			629,309			624,557			591,090
Investigation and restatement costs(3)		25,739			—			—			—			—
Store closing costs(4)		1,487			2,903			2,229			12,522			5,026

Operating profit		80,438			130,237			133,889			65,562			45,721
Interest expense		48,767			33,599			33,851			52,754			63,666
Loss on debt retirement(5)		19,450			1,600			1,026			49,494			6,008

Income (loss) before income taxes and cumulative effect of change in accounting principle		12,221			95,038			99,012			(36,686	)		(23,953	)
Income tax expense (benefit)		4,991			37,248			39,450			(14,738	)		(10,460	)

Income (loss) before cumulative effect of change in accounting principle		7,230			57,790			59,562			(21,948	)		(13,493	)
Cumulative effect of change in accounting principle, net of tax(6)		966			—			—			—			—

Net income (loss)	$	6,264		$	57,790		$	59,562		$	(21,948	)	$	(13,493	)

Basic earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle	$	0.16		$	1.30		$	1.30		$	(0.48	)	$	(0.33	)
Cumulative effect of change in accounting principle(6)		0.02			—			—			—			—

Net income (loss) per share	$	0.14		$	1.30		$	1.30		$	(0.48	)	$	(0.33	)

Diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle	$	0.16		$	1.29		$	1.29		$	(0.48	)	$	(0.33	)
Cumulative effect of change in accounting principle(6)		0.02			—			—			—			—

Net income (loss) per share	$	0.14		$	1.29		$	1.29		$	(0.48	)	$	(0.33	)

Shares used in computing basic per share amounts		43,877			44,465			45,713			45,658			40,635

Shares used in computing diluted per share amounts		44,129			44,812			46,002			45,658			40,752

Other Data
Commercial sales(7)	$	320,188		$	296,159		$	270,812		$	271,397		$	272,208

Selected Store Data
Number of stores (end of period)		1,332			1,277			1,134			1,114			1,109
Percentage increase (decrease) in comparable store net sales(8)		(1	)%		—	%		(1	)%		6	%		7	%
Balance Sheet Data (end of period)
Cash and cash equivalents	$	20,169		$	17,964		$	56,229		$	36,982		$	15,273
Total assets		1,151,762			1,140,034			957,151			969,588			941,691
Total debt (including current maturities)		531,501			577,594			508,877			534,654			536,332
Stockholders’ equity		171,510			156,157			120,139			81,497			84,759


(1)		Our fiscal year consists of 52 or 53 weeks, ends on the Sunday nearest to January 31 and is named for the calendar year just ended. All fiscal years presented had 52 weeks except fiscal 2006, which contained 53 weeks.

(2)		In March 2003, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached consensus on certain matters discussed in EITF No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. EITF No. 02-16 states that allowances provided by vendors are presumed to be a reduction in the costs of purchasing inventories (to be recognized in inventory and cost of sales), except for that portion that is a reimbursement for costs incurred to sell the vendors’ products. In order to qualify as a reimbursement, the costs must be specific, identifiable and incremental, to be recognized as a reduction to operating and administrative expenses. Under previous accounting guidance, we accounted for all non-performance based vendor allowances as a reduction of inventory cost and allocated performance-based vendor allowances as a reduction of advertising expense or cost of goods sold, as appropriate, in the period the expense was incurred. During the first quarter of fiscal 2003, we adopted the provisions of EITF No. 02-16 and implemented a policy of recognizing all cooperative advertising arrangements and other vendor allowances as reductions of product costs, unless we are specifically required to substantiate costs incurred to the vendor and do so in the normal course of business. For fiscal 2002, vendor allowances totaling approximately $19.2 million were classified as a reduction to advertising expense (in operating and administrative expense) rather than as a reduction to cost of sales as currently required by EITF No. 02-16.

(3)		As further discussed in Note 16 to our consolidated financial statements, we restated our consolidated financial information for certain annual periods prior to fiscal 2005. The Audit Committee-led investigation and restatement process took us more than one year to complete, and we incurred approximately $25.7 million in legal, accounting consultant and audit fees in fiscal 2006 related to these matters.

(4)		Amounts relate to costs incurred in connection with the closure of existing stores. During fiscal 2003, we incurred $12.2 million associated with the reversal of the reserve established under EITF 94-3 and the establishment of a new closed store reserve on the basis of our change in exit strategy in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. See discussion under Store Closures in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(5)		In fiscal 2006, we purchased all of our 7% senior subordinated notes, repaid our 33/8% exchangeable notes and made a payment on termination of an interest rate swap related to our 7% senior subordinated notes, which resulted in an aggregate loss on debt retirement of $19.5 million. The $1.6 million loss on debt retirement in fiscal 2005 resulted from the write-off of certain deferred financing fees associated with our former credit facility, which was repaid. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” During fiscal 2004, we recorded a loss on debt retirement of $1.0 million as a result of the redemption of the $15.0 million remaining balance of our 12% senior notes. During fiscal 2003, we recorded a loss on debt retirement of $49.5 million primarily due to the early redemption of 94% of our 12% senior notes. During fiscal 2002, we sold shares of our common stock in an underwritten public offering and used proceeds from the sale of those shares to retire approximately $71.7 million of our 11% senior subordinated notes, resulting in a loss on debt retirement of $6.0 million.

(6)		In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and requires companies to recognize the grant-date fair value of stock options and other equity-based compensation in the income statement. The Company adopted SFAS No. 123R during fiscal 2006 using the modified prospective method. In addition to stock options and restricted stock, the Company granted incentive units in fiscal 2005 under a long-term incentive plan (the “LTIP”) for its senior executive officers, which are classified as liability awards, and as such, the transition rule under SFAS 123R requires that for an outstanding instrument that previously was classified as a liability and measured at intrinsic value, an entity should recognize the liability that would have been recorded under the fair value method at the date of adoption, net of any related tax effect, as the cumulative effect of a change in accounting principle. As of January 30, 2006, we recognized a cumulative effect of a change in accounting principle of approximately $1.0 million, net of $0.6 million tax benefit, associated with the LTIP.

(7)		Represents sales to commercial accounts, including sales from stores without commercial sales centers.


(8)		Comparable store net sales data is calculated based on the change in net sales commencing after the time a new store has been open 12 months or an acquired store has been owned by the Company and open for 12 months. Therefore, sales for the first 12 months a new store is open or an acquired store has been owned and open are not included in the comparable store calculation. Relocations are included in comparable store net sales from the date of opening.


Item 7.	*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 “Selected Financial Data,” 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 under “Note Concerning Forward Looking Information” and “Risk Factors” elsewhere in this report.

General

CSK Auto Corporation (“CSK”) is the largest specialty retailer of automotive parts and accessories in the Western United States and one of the largest such retailers of such products in the entire country, based, in each case, on store count. Headquartered in Phoenix, Arizona, CSK became a publicly traded company in March 1998, and has continued to grow through a combination of acquisitions and organic growth.

In December 2005, we purchased all of the outstanding stock of Murray’s Inc. and its subsidiary, Murray’s Discount Auto Stores, Inc. (collectively herein, “Murray’s”). As of the acquisition date, Murray’s operated 110 automotive parts and accessories retail stores in Michigan, Illinois, Ohio and Indiana — states in which the Company previously had no significant market presence. The 110 Murray’s stores, as well as new stores we open in our Midwest markets, will retain the Murray’s name. The Murray’s stores complement our existing operations and expand our markets served from 19 to 22 states.

We compete in the U.S. automotive aftermarket industry and sell replacement parts (excluding tires), accessories, maintenance items, batteries and automotive fluids for cars and light trucks. Our customers include people who work on their own vehicles, the Do-it-Yourself (“DIY”) market, and commercial installers who work on other people’s vehicles, the Do-it-For-Me (“DIFM”) market. We believe that the U.S. automotive aftermarket industry is characterized by stable demand and is growing modestly because of increases in, among other things, the age of vehicles in use and the number of miles driven annually per vehicle.

Our fiscal year ends on the Sunday nearest to January 31 and is named for the calendar year just ended. Occasionally this results in a fiscal year that is 53 weeks long. When we refer to a particular fiscal year we mean the following:


	•	Fiscal 2006 means the 53 weeks ended February 4, 2007;

	•	Fiscal 2005 means the 52 weeks ended January 29, 2006; and

	•	Fiscal 2004 means the 52 weeks ended January 30, 2005.


	•	Checker Auto Parts, founded in 1969, with 467 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;

	•	Schuck’s Auto Supply, founded in 1917, with 228 stores in the Pacific Northwest and Alaska;

	•	Kragen Auto Parts, founded in 1947, with 506 stores primarily in California; and

	•	Murray’s Discount Auto Stores, founded in 1972, with 126 stores in the Midwest.

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

During fiscal 2006, we opened 63 CSK Stores and one Pay N Save store, relocated eight stores and closed 17 stores (including the eight stores closed upon relocation), resulting in 55 net new stores.

Significant Events

Below is a summary of significant events that occurred during fiscal 2006 and through the date of this filing.

Audit Committee Investigation and Restatement of the Consolidated Financial Statements

Overview

In its 2005 10-K, the Company’s consolidated financial statements for fiscal 2004 and 2003 and quarterly financial information for the first three quarterly periods in fiscal 2005 and all of fiscal 2004 included in Item 8, “Financial Statements and Supplementary Data,” were restated to correct errors and irregularities of the type identified in the Audit Committee-led investigation and other accounting errors and irregularities identified by the Company in the course of the restatement process, all as more fully described in the “Background” section below.


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

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

	•	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 inquiries that were made.

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

Background

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

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

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

the raising of accounting concerns and other behavior that was deemed to not be acceptable by our Disinterested Directors.

Following the completion of the Audit Committee-led investigation, the Board of Directors created a Remediation Committee comprised of certain positions within key functional areas of the Company and co-chaired by the Senior Vice President and General Counsel and the Senior Vice President and Chief Financial Officer to develop a remediation plan to address the types of matters identified during the investigation. The proposed remediation plan the Remediation Committee is working with reflects the input of the Disinterested Directors. While most aspects of the plan are presently in the development phase, this remediation plan is generally expected to include a comprehensive review, and development or modification as appropriate, of various components of the Company’s compliance program, including ethics and compliance training, hotline awareness and education, corporate governance training, awareness of and education relative to key codes and policies, as well as departmental specific measures. See discussion under “Management’s Report on Internal Control Over Financial Reporting — Plan for Remediation of Material Weaknesses” in Item 9A, “Controls and Procedures,” below.

Debt Refinancing

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

In fiscal 2006, our inability to timely file our periodic reports with the SEC as a result of the need to restate our financial statements created potential default implications under all our debt instruments. As a result, in July 2006, we repurchased $224.96 million of our 7% Notes through a cash tender offer and consent solicitation and repaid all of the 33/8% Notes upon the acceleration of their maturity. We used proceeds under the new $350.0 million Term Loan Facility entered into in June 2006 to pay the tender offer consideration for the 7% Notes and to repay the 33/8% Notes. We also obtained the consent of the holders of a majority of the outstanding 45/8% Notes to enter into a supplemental indenture to the indenture under which the 45/8% Notes were originally issued to waive any default arising from our filing delays and to take certain other actions more fully described herein under the heading “Liquidity and Capital Resources — Restructuring of 45/8% Notes.”

See the “Liquidity and Capital Resources” and “Factors Affecting Liquidity and Capital Resources — Debt Covenants” sections below for further description of the transactions described above and our compliance with debt covenants.

Review of Operations

The following discussion summarizes the significant factors affecting operating results for fiscal 2006, 2005 and 2004. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements. References to years relate to fiscal years rather than calendar years unless otherwise designated. Results for the past three years expressed as a percentage of net sales for the periods indicated were as follows:


	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005

Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		53.0	%		52.4	%		52.3	%

Gross profit		47.0	%		47.6	%		47.7	%
Other costs and expenses:
Operating and administrative		41.3	%		39.6	%		39.2	%
Investigation and restatement costs		1.3	%		0.0	%		0.0	%
Store closing costs		0.1	%		0.2	%		0.1	%

Operating profit		4.3	%		7.9	%		8.3	%
Interest expense		2.6	%		2.0	%		2.1	%
Loss on debt retirement		1.0	%		0.1	%		0.1	%

Income before income taxes and cumulative effect of change in accounting principle		0.7	%		5.8	%		6.2	%
Income tax expense		0.3	%		2.3	%		2.5	%

Income before cumulative effect of change in accounting principle		0.4	%		3.5	%		3.7	%
Cumulative effect of change in accounting principle, net of tax		0.1	%		0.0	%		0.0	%

Net income		0.3	%		3.5	%		3.7	%

Fiscal 2006 Compared with Fiscal 2005; Fiscal 2005 Compared with Fiscal 2004

Net Sales (Fiscal 2004-2006; Preliminary Fiscal 2007 to Date)

Net sales and sales data for these years were as follows (sales $ in thousands):


	Net Sales and Sales Data
	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005

Retail sales	$	1,587,588		$	1,355,126		$	1,328,312
Commercial sales		320,188			296,159			270,812
Other sales		—			—			5,867

Total net sales	$	1,907,776		$	1,651,285		$	1,604,991

Sales growth — retail sales		17.2	%		2.0	%		0.0	%
Sales growth — commercial sales		8.1	%		9.4	%		0.0	%
Sales growth — comparable retail stores		(3.4	)%		(1.6	)%		(1.2	)%
Sales growth — comparable commercial stores		7.7	%		8.1	%		1.8	%
Number of stores open (at end of fiscal year)		1,332			1,277			1,134

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

Net sales for fiscal 2006 increased 15.5% to $1,907.8 million from $1,651.3 million for fiscal 2005 due primarily to the full year results of the Murray’s stores acquired in December 2005, the increase of 55 net new stores and one additional week in the 2006 fiscal year. Retail sales increased 17.2% in fiscal 2006 as compared to fiscal 2005, while our commercial sales increased 8.1% in fiscal 2006 as compared to fiscal 2005. Our comparable store sales declined 1.5% in fiscal 2006 compared to 2005, consisting of a 7.7% increase in same store commercial sales offset by a decrease of 3.4% in same store retail sales. Retail and commercial sales were impacted by a decline in customer count of 5.4% (measured by the number of in-store transactions in stores that have been opened more than one year); however, that decline was offset by an increase in our average transaction size of 4.2% (measured by dollars spent per sale transaction) over fiscal 2005. The additional week in the fourth quarter of fiscal 2006 yielded additional sales of approximately $34.3 million.

Sales from the acquired Murray’s stores contributed to our overall increase in net sales for fiscal 2006 relative to fiscal 2005 but, as these stores were not acquired until December 19, 2005, they had no impact on our comparable sales results until December 19, 2006 (i.e., the one year anniversary of our acquisition). The Company had anticipated that Murray’s existing store base would experience an increase in net sales during fiscal 2006; in fact, net sales declined. In addition, 14 new Murray’s stores were opened during fiscal 2006 and these stores fell short of targeted sales. The Company believes the Murray’s sales were adversely impacted by, among other things, difficult economic conditions in our Midwest markets as well as by a significant influx of competitive new stores in the Chicago market area.

Retail sales were flat in fiscal 2005 as compared to fiscal 2004, while our commercial sales increased 9.4% in fiscal 2005 as compared to fiscal 2004. Net sales for fiscal 2005 increased 2.9% to $1,651.3 million from $1,605.0 million for fiscal 2004 due primarily to 29 net new stores, which excludes the four Pay N Save stores, as well as the results of the Murray’s stores acquired in December 2005. Our comparable store sales were essentially flat year over year, consisting of an 8.1% increase in same store commercial sales offset by a decrease of 1.6% in same store retail sales. Retail and commercial sales were impacted by a decline in customer count of 6.9% (measured by the number of in-store transactions); however, that decline was offset by an increase in our average transaction size of 7.4% (measured by dollars spent per sale transaction) over fiscal 2004.

Based on our preliminary sales information for fiscal 2007, the softness in sales we experienced in fiscal 2006 has continued thus far in fiscal 2007. With the exception of the month of March, during which the Company experienced positive net retail and commercial same store sales, for each of the other weeks in fiscal 2007 through the end of June, the Company experienced a decline in total net same store sales, including declines in same store retail sales that were not offset by positive same store commercial sales. For the first quarter of fiscal 2007 (i.e., the thirteen weeks ended May 6, 2007), preliminary net sales increased approximately 1.7% to approximately $472.0 million from approximately $463.8 million in the first quarter of fiscal 2006 (i.e., the thirteen weeks ended April 30, 2006). Based on preliminary net sales for the first quarter of fiscal 2007, same store sales for the first quarter of fiscal 2007 decreased 0.3% compared to the first quarter of fiscal 2006, consisting of an increase of 10.3% in commercial sales and a decrease of 2.5% in retail sales. If current sales trends persist for the balance of the second quarter, second quarter sales results will be worse than those for the first quarter.

We believe our net sales in fiscal 2005, 2006 and thus far in fiscal 2007 were negatively impacted by persistent high gas prices, particularly in California, where many of our stores are located. Fiscal 2005 net sales were also negatively impacted by milder summer temperatures in many of our key markets as compared with fiscal 2004. The Company also believes that comparable store sales in these periods were adversely affected by new store openings — both of CSK Stores and competitors’ stores. During these periods, sales in the Company’s new stores have failed to increase at the rate they have historically. Finally, we believe that our financial performance since early fiscal 2006 has also been negatively impacted by the distraction, uncertainty and diversion of management and other resources associated with the Audit Committee-led investigation, restatement process and related matters, and the significant management changes that were effected during this period. In response to the continuing customer count decline and

decreased comp store retail sales, the Company has been engaged in an ongoing effort to: (1) analyze our operating and administrative expenses to further reduce our cost structure; (2) review and refine our core product categories, such as batteries, brakes, shocks, starters and alternators, to ensure that we are meeting our customers’ expectations; (3) add new product offerings as we deem appropriate to give our customers additional reasons to shop our stores; and (4) review our marketing programs, sales promotions, event marketing and sports sponsorships to build customer awareness and help drive store traffic. In addition, with the hiring of our new Chief Executive Officer, the Board of Directors has recently initiated a strategic assessment of the Company and our industry to assist the Board and management in determining the optimal tactics and strategies to pursue.

Gross Profit

Gross profit consists primarily of net sales less the cost of sales and warehouse and distribution expenses. Gross profit as a percentage of net sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs.

Gross profit was $896.1 million, or 47.0% of net sales, for fiscal 2006 as compared to $786.6 million, or 47.6% of net sales, for fiscal 2005. During fiscal 2006, our gross profit dollars increased due to increased sales (primarily due to the full year impact of the acquisition of Murray’s). The gross profit percentage fell 60 basis points as we experienced declines in our comparable retail sales per store, which carry higher margins than the shift to commercial sales. The stores acquired from Murray’s have historically had a lower margin as their sales had a smaller percentage of “hard parts,” which carry higher margins, thereby further reducing the composite margin.

Gross profit was $786.6 million, or 47.6% of net sales, for fiscal 2005 as compared to $765.4 million, or 47.7% of net sales, for fiscal 2004. During fiscal 2005, our gross profit dollars increased due to increased sales, lower product acquisition costs and slightly lower distribution costs, but were partially offset by higher shrink results in fiscal 2005 compared to fiscal 2004. Net vendor allowances were comparable in both years.

Operating and Administrative Expenses

Operating and administrative expenses are comprised of store payroll, store occupancy, advertising expenses, other store expenses and general and administrative expenses, which include salaries and related benefits of corporate employees, administrative office occupancy expenses, data processing, professional expenses and other related expenses.

Operating and administrative expenses increased to $788.4 million, or 41.3% of net sales for fiscal 2006, compared to $653.5 million, or 39.6% of net sales, in fiscal 2005. Operating expenses increased primarily as a result of an additional 55 net new stores at higher rents (including one Pay N Save store), the full year impact of the acquisition of the Murray’s stores in December 2005, and slight increases in payroll and employee benefit related costs. The roll out of commercial sales centers opening primarily in the Great Lakes and Chicago regions added costs as they ramped up during the year. The 53rd week included in fiscal 2006 was an additional contributor to the increased costs.

Operating and administrative expenses increased to $653.5 million, or 39.6% of net sales for fiscal 2005, compared to $629.3 million, or 39.2% of net sales, in fiscal 2004. Operating expenses increased primarily as a result of an additional 33 net new stores (including four Pay N Save stores), the acquisition of the Murray’s stores in December 2005, and slight increases in payroll and employee benefit related costs.

Investigation and Restatement Costs

Store Closing Costs

Store closing costs include amounts for new store closures, revisions in estimates for stores currently in the closed store reserve, operating and other expenses and accretion expense.

Store closing costs in fiscal 2006 were $1.5 million compared to $2.9 million for fiscal 2005. Costs decreased primarily due to a $1.5 million increase in costs in fiscal 2005 from revisions in the closed store estimates that did not recur in fiscal 2006.

Store closing costs in fiscal 2005 were $2.9 million compared to $2.2 million for fiscal 2004. Costs increased primarily due to upward revision in the closed store estimates as a result of certain subleased stores becoming vacant.

Interest Expense

Interest expense for fiscal 2006 increased to $48.8 million from $33.6 million for fiscal 2005 primarily as a result of the higher rates paid by us following our refinancing activities in fiscal 2006. Our inability to file our financial statements in a timely manner resulted in the refinancing of substantially all of our debt at significantly higher interest rates.

Interest expense for fiscal 2005 decreased to $33.6 million from $33.9 million for fiscal 2004 primarily as a result of lower outstanding balances, partially offset by higher variable interest rates.

Loss on Debt Retirement

During the second quarter of fiscal 2006, we recorded a $19.5 million loss on debt retirement resulting from the write-off of certain deferred financing fees associated with debt that was extinguished in our refinancing and a $10.4 million loss on termination of a related interest swap associated with our $225 million of 7% Notes, $224.96 million of which were purchased pursuant to a cash tender offer and consent solicitation in July 2006 and the balance of which were purchased by us later in fiscal 2006.

During the second quarter of fiscal 2005, we recorded a $1.6 million loss on debt retirement resulting from the write-off of certain deferred financing fees associated with our former credit facility, which was repaid in full as part of a refinancing completed in August 2005.

During fiscal 2004, we redeemed the remaining approximately $15.0 million of our 12% senior notes due 2006. In conjunction with this transaction, we incurred a loss on debt retirement of $1.0 million that included early redemption premiums, the write-off of certain financing fees and other direct costs.

Income Tax Expense

Income tax expense (excluding the tax benefit allocated to the change in accounting principle) for fiscal 2006 was $5.0 million, compared to $37.2 million for fiscal 2005. This decrease was a reflection of significantly lower pre-tax income in fiscal 2006. Our effective tax rate was 40.8% in fiscal 2006 compared to 39.2% for fiscal 2005.

Income tax expense for fiscal 2005 was $37.2 million, compared to $39.5 million for fiscal 2004. Our effective tax rate was relatively consistent at 39.2% in fiscal 2005 compared to 39.8% for fiscal 2004.

Cumulative Effect of Change in Accounting Principle

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, Share-Based Payment. SFAS No. 123R sets accounting requirements for “share-based” compensation to employees and requires companies to recognize the grant-date fair value of stock options and other equity-based compensation in the income statement. The Company adopted SFAS No. 123R at the beginning of fiscal 2006 using the modified prospective method. In addition to stock options and restricted stock, the Company granted incentive units in fiscal 2005 under a long-term incentive plan (the “LTIP”) for its senior executive officers, which are classified as liability awards, and as such, the transition rule under SFAS 123R requires that for an outstanding instrument that previously was classified as a liability and measured at intrinsic

value, an entity should recognize the liability that would have been recorded under the fair value method at the date of adoption, net of any related tax effect, as the cumulative effect of a change in accounting principle. As of January 30, 2006, we recognized a cumulative effect of a change in accounting principle of approximately $1.0 million, net of $0.6 million tax, associated with the LTIP.

Liquidity and Capital Resources

Debt is an important part of our overall capitalization. Our outstanding debt balances (excluding capital leases) at the end of fiscal 2006 and 2005 were $507.5 million and $550.0 million, respectively. Our primary cash requirements include working capital (principally inventory), interest on our debt and capital expenditures. At February 4, 2007, we had approximately $140.0 million of remaining borrowing capacity under our Senior Credit Facility in addition to $52.0 million of outstanding borrowings thereunder and $34.1 million of outstanding letters of credit issued thereunder.

Under our current debt structure, we are required to make quarterly debt amortization payments of 0.25% of the aggregate principal amount of the loans under our Term Loan Facility beginning December 31, 2006. We paid approximately $0.9 million in debt amortization payments under this facility in fiscal 2006, and expect to pay approximately $3.5 million in fiscal 2007. We are not required to make debt principal payments on our Senior Credit Facility until 2010. Our 63/4% Notes become exchangeable if our common stock price exceeds $21.45 per share for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. Such an exchange would require repayment of the principal amount of the 63/4% Notes in cash and any premium in our common stock. If not exchangeable sooner, the earliest date that the noteholders may require us to repurchase the 63/4% Notes is December 15, 2010.

We intend to fund our cash requirements with cash flows from operating activities, borrowings under our Senior Credit Facility and short-term trade credit relating to payment terms for merchandise inventory purchases. We believe these sources should be sufficient to meet our cash needs for the foreseeable future. However, if we become subject to significant judgments, settlements or fines related to the matters discussed in Item 3, “Legal Proceedings” or any other matters, we could be required to make significant payments that could materially and adversely affect our financial condition, potentially impacting our credit ratings, our ability to access the capital markets and our compliance with our debt covenants.

At the beginning of fiscal 2006, the Company had a $325 million Senior Credit Facility and had outstanding $225 million of 7% Notes, $125 million of 33/8% Notes and $100 million of 45/8% Notes. During the second quarter of fiscal 2006, we refinanced, amended or obtained waivers with respect to all of our debt instruments due to our inability to timely file our periodic reports with the SEC and our financial statements with the lenders under our Senior Credit Facility. The delay in the filing of these reports and financial statements due to the need to restate our financial statements created potential default implications under all our debt instruments. As a result, we entered into a waiver with respect to our Senior Credit Facility, entered into a new six year $350 million Term Loan Facility, borrowings under which were used to repurchase virtually all of our 7% Notes and to repay all of our 33/8% Notes upon their acceleration, and renegotiated the terms of our 45/8% Notes.

As discussed in greater detail below under the heading “Factors Affecting Liquidity and Capital Resources — Debt Covenants,” when we renegotiated the terms of our 45/8% Notes (now 63/4% Notes) in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee under the note indenture our periodic SEC filings. If we have not so filed and delivered all of our delinquent periodic SEC filings by June 30, 2007, and a notice of default is given to the Company by the trustee for the 63/4% Notes or by the holders of 25% of the Notes at the earliest possible date, a default will occur under the indenture that would entitle the holders of the 63/4% Notes to accelerate the payment of these Notes no sooner than August 31, 2007. We did not file all of our late periodic SEC filings by June 30, 2007; we do, however, expect to be able to complete all such filings by August 15, 2007, the latest date these filings can be made under the terms of the Senior Credit Facility. Although no assurance can be given that such filings will be made by such date, as described below under the heading “Factors Affecting Liquidity and Capital Resources — Debt Covenants,” the filing of such reports by that date should permit us to avoid an acceleration of the 63/4% Notes and any additional negative consequences of such late filings under the Senior Credit Facility or the Term Loan Facility. Nevertheless, if we were to fail to meet

our filing deadline, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor able to refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent as the occurrence of an event of default under the indenture for the 63/4% Notes, along with the expiration of the applicable grace period thereunder, would result in an event of default under the Senior Credit Facility, which would in turn result in an event of default under the Term Loan Facility.

Senior Credit Facility

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

Availability under the Senior Credit Facility is limited to the lesser of the revolving commitment of $325.0 million and a borrowing base limitation. The borrowing base limitation is based upon a formula involving certain percentages of eligible inventory and eligible accounts receivable owned by Auto. As a result of the limitations imposed by the borrowing base formula, Auto could only borrow up to an additional $140.0 million of the $325.0 million facility, as of February 4, 2007 in addition to the $52.0 million already borrowed under the revolving credit facility at an average interest rate of 6.875% and the letters of credit of approximately $34.1 million outstanding under this facility as of February 4, 2007. Loans under the Senior Credit Facility are collateralized by a first priority security interest in certain of our assets, primarily inventory and accounts receivable, and a second priority security interest in certain of our other assets. The Senior Credit Facility contains negative covenants and restrictions on actions by Auto and its subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions, investments, loans, advances and acquisitions, payment of dividends, transactions with affiliates, change in business conducted, and certain prepayments and amendments of indebtedness. In addition, since June 2006, Auto has been required to maintain a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the agreement).

In June 2006, as a result of our delay in the filing of our periodic reports with the SEC and our financial statements with the lenders under this facility, we entered into a waiver designed to allow us until June 13, 2007 to file such reports and financial statements. Costs associated with the waiver were approximately $1.6 million, including an extension fee that was paid in December 2006, and were recorded as deferred financing fees. In June 2007, we entered into an additional waiver to the Senior Credit Facility that extended the then current waiver relating to the delivery thereunder of our delinquent periodic SEC filings until the earliest of (i) August 15, 2007, (ii) the filing with the SEC of all such delinquent SEC filings up to and including our Form 10-Q for the first quarter of fiscal 2007, and (iii) the first date on which an event of default has occurred under the 63/4% Notes and any applicable grace period that must expire prior to acceleration of such notes has expired.

Term Loan Facility

In June 2006, Auto entered into a $350 million six year Term Loan Facility so that it could finance the purchase of approximately $225 million in aggregate principal amount of its 7% Notes and the repayment of $125 million of its 33/8% Notes. Loans under the Term Loan Facility (the “Term Loans”) bear interest at a base rate or the LIBOR rate, plus a margin that will fluctuate depending upon the rating of the Term Loans. The Term Loans are guaranteed by the Company and Auto’s wholly owned subsidiary. The Term Loans are secured by a second lien security interest in certain of our assets, primarily inventory and receivables, and by a first lien security interest in substantially all of our other assets. The Term Loans shall be repaid in consecutive quarterly installments, commencing December 31, 2006 in an amount equal to 0.25% of the aggregate principal amount of the Term Loans, with the balance due on June 30, 2012. The Term Loan Facility contains, among other things, limitations on liens, indebtedness, mergers, disposition of assets, investments, payments in respect of capital stock, modifications of material indebtedness, changes in fiscal year, transactions with affiliates, lines of business and swap agreements. Auto is also subject to financial covenants under the Term Loan Facility measuring its performance against standards set for leverage and fixed charge coverage. Costs associated with the Term Loan Facility were approximately $10.7 million, and will be

amortized to interest expense over the six year term of the facility beginning June 30, 2006. See “Factors Affecting Liquidity and Capital Resources — Debt Covenants.”

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

Repurchase of 7% Notes and Termination of Interest Rate Swap

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

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

Our inability to timely file our periodic SEC reports or to reach agreement with the holders of Auto’s 33/8% Notes on the repurchase or restructuring of their notes resulted in our repayment of all $125.0 million of these notes at par in July 2006, when they were accelerated pursuant to the terms of the indenture under which they were issued. Unamortized deferred financing fees for the 33/8% Notes were $4.0 million, which was recognized as a loss on debt retirement during the second quarter of fiscal 2006. In September 2006, the equity call option and warrant contracts entered into at the time the 33/8% Notes were sold were terminated and settled with the counterparty. We elected a cash settlement and received approximately $3.0 million for the call option and paid $1.4 million proceeds for the warrant contract. These amounts represented the fair value of the contracts at their termination date and were recorded as additional paid-in capital in fiscal 2006.

Restructuring of 45/8% Notes

Although somewhat similar default implications existed under Auto’s 45/8% Notes, we were able to obtain the consent of the holders of a majority of the outstanding 45/8% Notes to enter into a supplemental indenture to the indenture under which the 45/8% Notes were issued. This supplemental indenture provided for the waiver of any default arising from our filing delays until June 30, 2007, increased the applicable coupon interest rate of the notes to 63/4%, and improved the exchange rate of the notes per $1,000 principal amount of notes from 49.8473 shares of our common stock to 60.6061 shares of our common stock. Costs associated with the supplemental indenture process were approximately $0.5 million and were charged to operating and administrative expense in the second quarter of fiscal 2006. Under the registration rights agreement, additional interest of 25 basis points began to accrue on the 45/8% Notes in March 2006 and increased to 50 basis points in June 2006, but will cease accruing in December 2007. In total, we incurred approximately $1.5 million in additional interest expense in fiscal 2006 related to the increase in the coupon interest rate to 63/4% and the additional interest expense under the registration rights agreement. Also, under EITF No. 06-6, Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments, our changes to the 45/8% Notes were recorded in fiscal 2006 as a modification, not an extinguishment of the debt. The Company recorded the increase in the fair value of the exchange option feature as a debt discount with a corresponding increase to additional paid-in-capital in stockholders’ equity. The debt discount is being amortized to interest expense to the first date the noteholders could require repayment. The debt discount amount was approximately $6.9 million as of February 4, 2007.

As discussed above, the exemption in the indenture under which the 63/4% Notes were issued that we negotiated in June 2006 will expire on June 30, 2007. If we have not filed all of our periodic SEC filings that are delinquent by

June 30, 2007, a default will occur under that indenture that would entitle the holders of the 63/4% Notes or the trustee under the indenture for such notes to give notice of such default and to accelerate the payment of their notes no sooner than August 31, 2007. We did not file all of our late periodic SEC filings by June 30, 2007; nevertheless, we expect to be able to complete all such filings prior to August 15, 2007, and prior to the holders or the trustee of the 63/4% Notes having the right to accelerate their notes at the end of the 60 day cure period following the giving of notice of a default. If we were to fail to complete such filings by August 15, 2007, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money or refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

Fiscal 2005 Transactions

In fiscal 2005, we completed the following transactions: (1) the issuance of the 33/8% Notes and the purchase of a call option and sale of a warrant for shares of our common stock; (2) the establishment of the Senior Credit Facility (discussed above); and (3) the issuance of the 45/8% Notes.

Issuance of 33/8% Notes

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

The following table represents the key terms of the formerly outstanding 33/8% Notes:


Terms			33/8% Notes
Interest Rate			3.375% per year until August 15, 2010; 3.125% thereafter
Exchange Rate			43.3125 shares per $1,000 principal (equivalent to an initial exchange price of approximately $23.09 per share)
Maximum CSK shares exchangeable			5,414,063 common shares, subject to adjustment in certain circumstances
Maturity date			August 15, 2025
Guaranteed by			CSK Auto Corporation and all of Auto’s present and future domestic subsidiaries, jointly and severally, on a senior basis
Dates that the noteholders may require Auto to repurchase some or all for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest			August 15, 2010, August 15, 2015, and August 15, 2020 or following a fundamental change as described in the indenture
Issuance costs being amortized over a 5-year period, corresponding to the first date the noteholders could require repayment			$4.8 million
Auto will not be able to redeem notes			Prior to August 15, 2010
Auto may redeem for cash some or all of the notes			On or after August 15, 2010, upon at least 35 calendar days notice
Redemption price			Equal to 100% of the principal amount plus any accrued and unpaid interest and additional interest, if any, to, but not including, the redemption date

Issuance of 45/8% Notes (Now 63/4% Notes)

In December 2005, Auto issued $100.0 million of 45/8% senior exchangeable notes in a private offering. We used the proceeds from the issuance of the 45/8% Notes and borrowings under the Senior Credit Facility to purchase all of the outstanding stock of Murray’s for approximately $180.9 million, which included certain acquisition costs.

The 45/8% Notes are exchangeable into cash and shares of our common stock. Upon exchange of the 45/8% Notes, we will deliver cash equal to the lesser of the aggregate principal amount of notes to be exchanged and our total exchange obligation and in the event our total exchange obligation exceeds the aggregate principal amount of notes to be exchanged, shares of our common stock in respect of that excess.

Certain terms of the 45/8% Notes (now 63/4% Notes) were modified in fiscal 2006 as discussed above. The following table represents the key terms of these Notes following their modification:


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

Prior to their stated maturity, these Notes are exchangeable by the holder only under the following circumstances:


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

	•	If these 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 these Notes were issued.

We entered into a registration rights agreement with respect to these Notes and the underlying shares of our common stock into which these Notes are potentially exchangeable and under its terms are required to pay additional interest of up to 50 basis points until December 2007 on the 45/8% Notes if we fail to meet certain filing and effectiveness deadlines with respect to the registration of these Notes and the underlying shares of our common stock. Such additional interest is currently being paid at the 50 basis point level.

If the 45/8% Notes become exchangeable, the corresponding debt will be reclassified from long-term to current for as long as the notes remain exchangeable.

Analysis of Cash Flows

Operating Activities

Net cash provided by operating activities decreased $52.7 million in fiscal 2006 to $109.6 million compared to $162.3 million of cash provided by operating activities in fiscal 2005. This decrease was primarily related to the Audit Committee-led investigation and restatement related professional fees of approximately $25.7 million, the reduction in operating profit before investigation costs due to the reduced operating performance and cash required to terminate our interest rate swap.

Net cash provided by operating activities increased $58.8 million in fiscal 2005 to $162.3 million compared to $103.5 million of cash provided by operating activities in fiscal 2004. This increase was primarily related to the net reduction in cash required to support working capital as a result of: (1) a $10.3 million increase from lower accounts receivable balances due to improved collections of vendor allowances; (2) a $26.0 million net increase in inventory and accounts payable, due to the increase in the number of net new stores as well as an expanded product selection in support of our commercial sales program together with the increase in accounts payable; and (3) a $14.2 million increase in accrued payroll, accrued expenses and other liabilities due to changes to schedule interest payments, timing of advertising events, and increases in accrued payroll tax.

Investing Activities

Net cash used in investing activities totaled $43.6 million for fiscal 2006, compared to $215.9 million used during fiscal 2005, which included the acquisition of Murray’s. In fiscal 2006, we paid the remaining costs associated with the Murray’s acquisition of approximately $2.8 million, as well as approximately $1.5 million in cash (plus assumed liabilities) for the acquisition of a Murray’s franchised store. Capital expenditures during fiscal 2006 were slightly higher as a result of investments made to support new store openings. In fiscal 2006, we opened or relocated 72 stores and closed 17 stores (including eight relocated stores), which resulted in 55 net new stores. New stores are generally financed utilizing operating leases that require capital expenditures for fixtures and store equipment. New or relocated stores require approximately $136,000 per store for leasehold improvements, and each new store, except for relocated stores, requires an estimated investment in working capital, principally for inventories, of approximately $300,000.

In December 2005, we acquired Murray’s, and as of January 29, 2006, we paid approximately $177.6 million, net of $0.5 million cash acquired, towards this acquisition (approximately $2.8 million was recorded in accrued liabilities at January 29, 2006, for a total acquisition cost of $180.9 million). Capital expenditures were higher during fiscal 2005 compared to fiscal 2004 as a result of investments made to support new store openings.

Financing Activities

Net cash used in financing activities totaled $63.8 million for fiscal 2006 compared to net cash provided of $15.3 million in fiscal 2005. In fiscal 2006, we paid down $42 million under our Senior Credit Facility and $10.3 million for capital leases. In fiscal 2006, the inability to file our periodic SEC reports necessitated that we restructure a significant portion of our then outstanding debt in June and July of 2006. We completed a tender offer in which we repurchased approximately $225 million of our 7% Notes and repaid all $125 million of our 33/8% Notes upon the acceleration of their maturity. We also entered into the $350 million Term Loan Facility, which was used to fund such transactions. The following table summarizes the changes to our debt:


	As of							As of
	January 29,							February 4,
	2006		Borrowings		Payments			2007

Total debt excluding capitalized leases	$	549,988	$	435,636	$	(478,159	)	$	507,465

Net cash provided by financing activities totaled $15.3 million for fiscal 2005 compared to $56.0 million used in financing activities in fiscal 2004. The most significant financing transactions in fiscal 2005 were: (1) issuance of the 33/8% Notes and the 45/8% Notes; (2) repayment in full of $251.2 million of indebtedness outstanding under our previously existing senior credit facility; (3) net borrowings under our Senior Credit Facility of $94.0 million; (4) repurchase of approximately $25.0 million of our common stock; and (5) $27.0 million of cash paid for our call option transactions and $17.8 million received in connection with our sale of warrants. In fiscal 2004, we used cash

provided by operating activities after investing activities to reduce debt, repurchase approximately $23.7 million of our common stock and increase our cash balances.

Off-Balance Sheet Arrangements and Contractual Obligations

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

We have seller financing arrangements related to debt established for stores in which we were the seller-lessee and did not recover substantially all construction costs. In those situations, we recorded our total cost in property plant and equipment and amounts funded by the lessor as a debt obligation on our balance sheet. Rental payments made to the lessor are charged in part to interest expense and reduce the corresponding debt based on amortization schedules.

Our contractual obligations under our capital and operating leases as of February 4, 2007 were as follows ($ in thousands):


	Payments Due by Period
			Within		1-3		3-5		After 5
Contractual Obligation	Total		1 Year		Years		Years		Years

Long-term debt	$	507,465	$	56,098	$	8,055	$	101,749	$	341,563
Interest on long-term debt		216,065		42,014		83,696		71,011		19,344
Capital lease obligations		27,500		10,330		12,657		4,067		446
Operating lease obligations(1)		811,969		146,818		234,775		167,585		262,791
Other(2)		58,648		18,735		37,470		870		1,573

Total contractual obligations	$	1,621,647	$	273,995	$	376,653	$	345,282	$	625,717


(1)		Operating lease obligations are not reduced to reflect sublease income.

(2)		Includes a service contract and other obligations.

Store Closures

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

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

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

As of February 4, 2007, we had a total of 175 locations included in the allowance for store closing costs, consisting of 122 store locations and 53 service centers. Of the store locations, 15 locations were vacant and 107 locations were subleased. Of the service centers, 3 were vacant and 50 were subleased. Future rent expense will be incurred through the expiration of the non-cancelable leases.

Activity in the allowance for store closing costs and the related payments for fiscal 2006 is as follows ($ in thousands):


	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005

Balance, beginning of year	$	7,033		$	7,774		$	12,001

Store closing costs:
Provision for store closing costs		258			246			285
Other revisions in estimates		112			1,505			604
Accretion		306			420			552
Operating expenses and other		811			732			788

Total store closing costs		1,487			2,903			2,229

Purchase accounting adjustments — Murray’s Discount Auto Stores		—			324			—

Payments:
Rent expense, net of sublease recoveries		(2,279	)		(2,227	)		(2,895	)
Occupancy and other expenses		(915	)		(740	)		(787	)
Sublease commissions and buyouts		(415	)		(1,001	)		(2,774	)

Total payments		(3,609	)		(3,968	)		(6,456	)

Balance, end of year	$	4,911		$	7,033		$	7,774

During fiscal 2006, we recorded the following: (1) $0.3 million in charges associated with fiscal 2006 store closures; (2) $0.3 million associated with accretion expense relating to the discounting of closed store liabilities; and (3) $0.8 million associated with other operating expenses such as utilities, repairs and maintenance costs that are expensed as incurred.

During fiscal 2005, we recorded the following: (1) $0.2 million in charges associated with fiscal 2005 store closures; (2) $1.5 million in charges resulting from revisions in estimates, primarily related to stores that were subleased and became vacant as well as rent increases in master lease agreements; (3) $0.4 million associated with accretion expense relating to the discounting of closed store liabilities; and (4) $0.7 million associated with other operating expenses such as utilities, repairs and maintenance costs that are expensed as incurred.

We expect net cash outflows for closed store locations of approximately $4.0 million during fiscal 2007. We plan to fund these cash outflows and future cash outflows from normal operating cash flows. We anticipate that we will close or relocate approximately 26 stores in fiscal 2007. We anticipate that the majority of these closures will occur near the end of the lease terms, resulting in minimal closed store costs.

Factors Affecting Liquidity and Capital Resources

Sales Trends

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

Inflation

We do not believe our operations have been materially affected by inflation. We believe that we will be able to mitigate the effects of future merchandise cost increases principally through economies of scale resulting from increased volumes of purchases, selective forward buying, the use of alternative suppliers and price increases. If we are not able to mitigate the effects of future merchandise cost increases through these or other measures, the fixed cost of our organic growth will adversely affect our profitability. We also experience inflationary increases in rent expense as some of our lease agreements are adjusted based on changes in the consumer price index.

Debt Covenants

Certain of our debt agreements at February 4, 2007 contained negative covenants and restrictions on actions by us and our subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions, investments, loans, advances and acquisitions, payment of dividends, transactions with affiliates, change in business conducted, and certain prepayments and amendments of indebtedness. In addition, our Senior Credit Facility and our Term Loan Facility contain certain financial covenants as discussed below.

A breach of the covenants or restrictions contained in these debt agreements could result in an event of default thereunder. Upon the occurrence and during the continuance of an event of default under either the Senior Credit Facility or the Term Loan Facility, the lenders thereunder could elect to terminate the commitments thereunder (in the case of the Senior Credit Facility only), declare all amounts owing thereunder to be immediately due and payable and exercise the remedies of a secured party against the collateral granted to them to secure such indebtedness. If the lenders under either the Senior Credit Facility or the Term Loan Facility accelerate the payment of the indebtedness due thereunder, we cannot be assured that our assets would be sufficient to repay in full such indebtedness, which is collateralized by substantially all of our assets. At February 4, 2007, we were in compliance with or had obtained waivers with respect to the covenants under all our debt agreements.

The Senior Credit Facility requires a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) under certain circumstances. For the four quarters ended February 4, 2007, this Ratio as so defined was 1.47:1. The Term Loan Facility also contains certain financial covenants, one of which is the requirement of a minimum Fixed Charge Coverage Ratio (as separately defined in the Term Loan Facility) of 1.4:1 until December 31, 2008 and 1.45:1 thereafter. For the four quarters ended February 4, 2007, this Ratio was 1.55:1. The Term Loan Facility, as amended, also requires that a leverage ratio test be met. The maximum leverage ratio permitted was 3.75:1 at the end of fiscal 2006 and is 3.95:1, 3.85:1, 3.75:1 and 3.50:1 for the first, second, third and fourth quarters, respectively, of fiscal 2007. The leverage ratio further declines to 3.25:1 at the end of fiscal 2008 and 3.00:1 at the end of fiscal 2009. Our leverage ratio was 3.31:1 as of February 4, 2007. The leverage ratios for fiscal 2007 reflect the April 27, 2007 second amendment of the Term Loan Facility in which certain fiscal 2007 leverage ratios were modified as set forth above to provide greater flexibility along with the elimination of undrawn letters of credit from the definition of debt. Based on our current financial forecasts for fiscal 2007, we believe we will remain in compliance with the financial covenants of the Senior Credit Facility and Term Loan Facility described above for fiscal 2007 and the foreseeable future. However, a significant decline in our net sales or gross margin or unanticipated significant increases in operating costs or LIBOR-based interest rates could limit the effectiveness of discretionary actions management could take to maintain compliance with financial covenants. Although we don’t expect such significant decreases and increases to occur, if they did occur, we would seek to obtain a covenant

waiver from our lenders or seek a refinancing, both of which we believe are viable options for the Company. However, there can be no assurances a waiver would be obtained or a refinancing could be achieved.

On June 11, 2007, we entered into a third waiver to our Senior Credit Facility that extended the then current waiver relating to the delivery thereunder of our delinquent periodic SEC filings and related financial statements until the earliest of (i) August 15, 2007, (ii) the filing with the SEC of all such delinquent SEC filings up to and including our Form 10-Q for the first quarter of fiscal 2007, and (iii) the first date on which an event of default has occurred under the 63/4% Notes and any applicable grace period that must expire prior to acceleration of such Notes has expired. When we renegotiated the terms of our 45/8% (now 63/4%) Notes in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee for the 63/4% Notes our periodic SEC filings. If we have not so filed and delivered all of our periodic SEC filings that are delinquent by June 30, 2007, and a notice of default is given to the Company by the trustee for such Notes or by the holders of 25% of the Notes at the earliest possible date, a default will occur under the indenture under which the 63/4% Notes were issued that would entitle the holders of the 63/4% Notes to accelerate the payment of their Notes no sooner than August 31, 2007. The occurrence of an event of default under the indenture under which the 63/4% Notes were issued, along with the expiration of the applicable grace period thereunder, would result in an event of default under the Senior Credit Facility, which would in turn result in an event of default under the Term Loan Facility.

We did not file all of our late periodic SEC filings by June 30, 2007; we do, however, expect to be able to complete all such filings by August 15, 2007, which is within the 60 day period following such a default during which we can cure such a default and prevent the holders of the 63/4% Notes from having the right to accelerate their Notes. Filing by August 15, 2007, should permit us to avoid the acceleration of the 63/4% Notes and any related negative consequences under the Senior Credit Facility and the Term Loan Facility. Nevertheless, if we were to fail to complete such filings by August 15, 2007, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

Credit Ratings

As of the date of this filing, our debt instruments are rated by the major debt rating agencies as shown below:


Description of Debt	Moody’s Rating		Standard & Poor’s

Senior Credit Facility		—		—
Term Loan Facility		Ba3		B	+
63/4% Notes		Ba3		B	−

With respect to Moody’s, a rating of “Baa” or above indicates an investment grade rating. A rating below “Baa” is considered to have speculative elements. A “Ba” ranking indicates an obligation that is judged to have speculative elements and is subject to substantial credit risk. A “B” rating from Moody’s signifies an obligation that is considered speculative and is subject to high credit risk. The “1,” “2” and “3” modifiers show the relative standing within a major category. A “1” indicates that an obligation ranks in the higher end of the broad rating category, a “2” indicating a mid-range ranking, and a “3” ranking at the lower end of the category.

With respect to Standard & Poor’s, a rating of “BBB” or above indicates an investment grade rating. A rating below “BBB” indicates that the security has significant speculative characteristics. A “B” rating indicates that Standard and Poor’s believes the issuer has the capacity to meet its financial commitment on the obligation, but that adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment to the obligation. Standard and Poor’s may modify its ratings with a ‘+” or a “−” sign to show the obligor’s relative standing within a major rating category.

Interest Rates

Financial market risks relating to our operations result primarily from changes in interest rates. Interest earned on our cash equivalents as well as interest paid on our variable rate debt and amounts received or paid on any interest rate swaps are sensitive to changes in interest rates. On April 5, 2004, we entered into an interest rate swap

agreement that converted $100.0 million of our 7% Notes (including the interest thereon) to a floating rate, set semi-annually in arrears, equal to the six month LIBOR + 283 basis points. In connection with the completion of our fiscal 2006 tender offer for our 7% Notes, we terminated the related interest rate swap agreement. We also entered into the Term Loan Facility, borrowings under which were used to purchase the 7% Notes in the tender offer and repay the 33/8% Notes upon the acceleration of their maturity, and amended certain terms of the 45/8% Notes, as described above under “— Liquidity and Capital Resources — Fiscal 2006 Transactions — Restructuring of 45/8% Notes.”

Under our current debt and capital lease agreements, as of February 4, 2007, 75% of our outstanding debt and capital leases was at variable interest rates and 25% of our outstanding debt was at fixed interest rates. As of February 4, 2007, with $401.1 million in variable rate debt outstanding, a 1% change in the LIBOR rate to which this variable rate debt is tied would result in a $4.0 million change in our annual interest expense. This estimate assumes that our debt balance remains constant for an annual period and the interest rate change occurs at the beginning of the period. Our variable rate debt relates to borrowings under our Senior Credit Facility and Term Loan Facility, which are vulnerable to movements in the LIBOR rate.

Critical Accounting Matters

The preparation of our financial statements requires us to make critical accounting estimates that affect the amounts reported in those financial statements. We define a critical accounting estimate as one that is both significant to the portrayal of our financial condition and results of operations, and requires management’s most difficult, subjective or complex judgments. Periodically throughout the fiscal year, we evaluate our accounting estimates based on historical experience and other relevant factors and make adjustments as appropriate. The following estimates involve a high degree of judgment and/or complexity.

Inventory Valuation

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


	•	We reduce the FIFO carrying value of our inventory for estimated loss due to shrinkage since the most recent physical inventory. Our store shrinkage estimates are determined by dividing the shrinkage loss based on the most recent physical inventory by the sales for that store since its previous physical inventory. That percentage is multiplied by sales since the last physical inventory through period end. Our shrinkage expense for fiscal 2006, 2005 and 2004 was approximately $31.6 million, $28.8 million and $20.8 million, 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.

Vendor Allowances

Vendor allowances consist of vendor rebates, discounts and allowances associated with our purchasing activities and promotional activities with certain vendors. We recognize such allowances as a reduction of our cost of inventory in accordance with EITF No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. Based on EITF No. 02-16, allowances provided by our vendors are presumed to be a reduction in the costs of purchasing inventories (to be recognized in inventory and cost of sales). Amounts recognized are based on written contracts with vendors and the Company enters into hundreds of contracts with allowances each year. Contractual disputes and misunderstandings can occur with vendors with respect to

specific aspects of a vendors program which could result in adjustments to allowances the Company recognizes. The Company adjusts its vendor allowance recognition for disputes when probable and reasonably estimable. Certain of our agreements have several year terms, thus requiring recognition over an extended period.

Warranty

We or the vendors supplying our products provide our customers with limited warranties on certain products that range from 30 days to lifetime warranties. In most cases, our vendors are responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on historical experience and recent trends. These obligations are recorded as a component of accrued expenses. We quarterly assess the adequacy of our recorded warranty liability and adjust the liability and cost of sales as necessary.

The following table reflects the changes in our warranty reserves ($ in thousands):


	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005

Warranty reserves, beginning of period	$	2,580		$	2,918		$	3,269
Provision for warranty		3,428			963			881
Allowances from vendors		6,067			5,841			5,851
Reserves utilized		(8,167	)		(7,142	)		(7,083	)

Warranty reserves, end of period	$	3,908		$	2,580		$	2,918

Deferred Tax Assets

Included in our net deferred tax asset are deferred tax assets of $40.0 million as of February 4, 2007, reflecting the benefit of federal and state tax loss carryforwards approximating $108.5 million and $48.2 million, respectively, which begin to expire in 2021 and 2007, respectively. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Utilization of certain of the net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized with the exception of a portion of California Enterprise Zone credits and a portion of Arizona net operating losses for which management has determined that a valuation allowance in the amount of $1.4 million and $0.3 million, respectively, is necessary.

Legal Matters

We currently and from time to time are involved in litigation incidental to the conduct of our business, including but not limited to asbestos and similar product liability claims, slip and fall and other general liability claims, discrimination and employment claims, vendor disputes, and miscellaneous environmental and real estate claims. The damages claimed in some of this litigation are substantial. Based on an internal review, we accrue reserves using our best estimate of the probable and reasonably estimable contingent liabilities. We do not currently believe that any of these legal claims incidental to the conduct of our business, individually or in the aggregate, will result in liabilities material to our consolidated financial position, results of operations or cash flows. However, if our estimates related to these contingent liabilities are incorrect, the future results of operations for any particular fiscal quarter or year could be materially adversely affected.

In addition to the litigation that is incidental to our business, we are also subject to the other litigation and the SEC investigation that are described in Item 3, “Legal Proceedings.” Although these matters are in their early stages and we cannot predict their outcome, an adverse outcome in any of them could have a material adverse effect on our results of operations, financial position or cash flows.

Self-Insurance Reserves

We purchase third-party insurance for workers’ compensation, automobile, product and general liability claims that exceed a certain dollar threshold. However, we are responsible for the payment of claims under these insured limits. In estimating the obligation associated with reported claims and incurred but not reported (“IBNR”) claims, we utilize independent third-party actuaries. These actuaries utilize historical data to project the future development of reported claims and estimate IBNR claims. Loss estimates are adjusted based upon actual claims settlements and reported claims. Although we do not expect the amounts ultimately paid to differ significantly from our estimates, self-insurance reserves could be affected if future claim experience differs significantly from the historical trends and actuarial assumptions. Our self-insurance reserves approximated $23.5 million and $20.8 million at February 4, 2007 and January 29, 2006, respectively, and are included with current liabilities in the accompanying consolidated balance sheets.

Store Closing Costs

If a store location does not meet our required standards, it is considered for closure, even if we are contractually committed for future rental costs. We provide a discounted allowance for estimated lease costs to be incurred subsequent to store closure. We establish this allowance based on an assessment of market conditions for rents and include assumptions for vacancy periods and sublease rentals.

There are several significant assumptions that underlie the estimates inherent in the closed store reserve. These assumptions include: (1) real estate broker estimates for vacancy periods and estimated sublease rates based on the broker’s experience and expertise; and (2) estimates for occupancy expenses based on historical averages and, in the case of real estate taxes, are subject to changes by taxing authorities. Accordingly, we continuously review these assumptions and revise the reserve as necessary.

In addition, there are certain assumptions that are sensitive to deviations and could produce actual results significantly different from management’s original estimates. These assumptions may be revised due to the following issues: (1) national or regional economic conditions that can shorten or lengthen vacancy periods; (2) changes in neighborhoods surrounding store locations resulting in longer than anticipated vacancy periods; (3) changing subtenant needs resulting in functional obsolescence of store locations; and (4) subtenant defaults or bankruptcies resulting in vacant properties. Historically, we have recorded revisions in estimates to the closed store reserve that have resulted from these issues. These revisions usually result from overall longer vacancy periods on store locations and realized sublease rates lower than originally anticipated.

Valuation of Long-lived Assets

We evaluate the carrying value of long-lived assets whenever events or changes in circumstances indicate that a potential impairment has occurred. A potential impairment has occurred if the projected future undiscounted cash flows are less than the carrying value of the asset(s). The estimate of cash flows includes management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. When a potential impairment has occurred, an impairment write-down is recorded if the carrying value of the long-lived asset exceeds its fair value. Our impairment analyses contain estimates due to the inherently judgmental nature of forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual results could differ from these estimates, which could materially impact our impairment assessment.

Goodwill Impairment

As disclosed in the consolidated financial statements, we have as of February 4, 2007 unamortized goodwill in the amount of $224.9 million. In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, we perform an annual impairment test of goodwill. Our test as of February 4, 2007, resulted in no impairment being identified. However, the process of evaluating goodwill for impairment involves the determination of the fair value of our Company. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of economic indicators and market valuations and assumptions about our strategic plans. To the extent that our strategic plans change, or that economic and market conditions worsen, it is

possible that our conclusion regarding goodwill impairment could change and result in a material effect on our financial position or results of operations, but an impairment charge would not affect our cash flows.

Recent Accounting Pronouncements

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

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

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

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (“SAB 108”). SAB 108 was issued in order to eliminate the diversity in practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires that registrants quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a misstated amount that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for financial statements covering the first fiscal year ending after November 15, 2006. The Company adopted SAB 108 for the year ended February 4, 2007 with no impact on its consolidated financial condition, results of operations or cash flows.

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

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


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk*

Financial market risks relating to our operations result primarily from changes in interest rates. We hold no securities for purposes of trading. Interest earned on our cash equivalents as well as interest paid on our variable rate debt and amounts received or previously paid on our interest rate swap are sensitive to changes in interest rates.

In fiscal 2004, we entered into an interest rate swap agreement that converted the interest on $100.0 million of our 7% Notes to a floating rate, set semi-annually in arrears, equal to the six month LIBOR + 283 basis points. Our variable rate debt relates to borrowings under our Senior Credit Facility and the $100.0 million amount of our rate swap, which are vulnerable to movements in the LIBOR rate. The swap agreement was for the term of the 7% Notes. The hedge is accounted for and recognized in results of operations as a “fair value” hedge; accordingly, the fair value of the derivative and changes in the fair value of the underlying debt are reported on our balance sheet. Changes in the fair value of this derivative and the underlying debt did not result in a material impact on net income. In fiscal 2006, we repurchased all of the 7% Notes and terminated the interest rate swap agreement.

Our variable rate debt relates to borrowings under our Senior Credit Facility and our Senior Term Facility that was entered into in June of 2006, which are subject to changes in the LIBOR rate. Our variable and fixed rate debt at February 4, 2007 consisted of the following ($ in thousands):


				Average
				Interest			Fixed or
	Balance			Rate			Variable
	(In U.S. dollars)

Term loan facility — matures June 2011	$	349,125			7.35	%		Variable
Senior credit facility — matures July 2010		52,000			5.85	%		Variable
63/4% senior exchangeable notes — matures December 2025 — $93,061 carrying value		100,000			6.75	%		Fixed
Discount on 63/4% senior exchangeable notes (EITF 06-6 accounting adjustment)		(6,939	)					Fixed
Seller financing arrangements		13,279			Various			Fixed
Capital leases		24,036			Various			Fixed

Total debt	$	531,501

At February 4, 2007, 75% of our outstanding debt and capital leases was at variable interest rates and 25% was at fixed interest rates. As of February 4, 2007, with $401.1 million in variable rate debt outstanding, a 1% change in the LIBOR rate to which this variable rate debt is tied would result in a $4.0 million change in our annual interest expense. This estimate assumes that our debt balance remains constant for an annual period and the interest rate change occurs at the beginning of the period.


Item 8.	*Financial Statements and Supplementary Data*

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of CSK Auto Corporation:

We have completed integrated audits of CSK Auto Corporation’s February 4, 2007 (“fiscal 2006”), January 29, 2006 (“fiscal 2005”) and January 30, 2005 (“fiscal 2004”) consolidated financial statements and of its internal control over financial reporting as of February 4, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedules

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of CSK Auto Corporation and its subsidiaries at February 4, 2007 and January 29, 2006, and the results of their operations and their cash flows for each of the three years in the period ended February 4, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2), present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal 2006.

Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that CSK Auto Corporation did not maintain effective internal control over financial reporting as of February 4, 2007, because of the effect of material weaknesses relating to (i) the Company’s control environment, which contributed to material weaknesses related to the Company’s controls surrounding the accounting for inventory, vendor allowances, certain accrued expenses, and store fixtures and supplies, and (ii) the Company’s resources, and policies and procedures to ensure proper and consistent application of accounting principles generally accepted in the United States of America (“GAAP”), which contributed to material weaknesses related to the Company’s controls surrounding the accounting for leases, allowance for sales returns, and accounting for certain accrued expenses, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and

evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment at February 4, 2007.

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

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

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

b) Accounting for Vendor Allowances — The Company’s lack of effective controls did not detect or prevent the inappropriate override of established procedures related to: (i) the review and approval process for initial vendor allowance agreements; (ii) the monitoring of modifications to existing vendor allowance agreements; and (iii) the accuracy of recording of various vendor allowance transactions, including applicable

cash collections and estimates. Furthermore, as a result of the lack of a sufficient complement of personnel with the requisite level of accounting knowledge, experience and training in GAAP, as discussed in 2) below, the Company did not identify that provisions in certain agreements were required to be accounted for differently. The Audit Committee-led investigation revealed that improper debits were issued and applied to accounts payable for amounts the Company was not entitled to receive. These amounts were subsequently repaid to those vendors through direct cash payments, the foregoing of future cash discounts, the acceptance of increased prices on future purchases and paybacks through the warranty account. This material weakness resulted in errors in vendor allowance receivables, inventory, accounts payable and costs of sales accounts.

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

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

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

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

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

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

Each of the aforementioned material weaknesses resulted in adjustments to the Company’s fiscal 2006 and 2005 annual and interim consolidated financial statements, and the restatement of the Company’s fiscal 2004 annual consolidated financial statements and interim consolidated financial statements for each of the first three quarters in fiscal 2005. In addition, each of these above material weaknesses could result in a material misstatement of the

Company’s interim or annual consolidated financial statements and disclosures that would not be prevented or detected. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, management’s assessment that CSK Auto Corporation did not maintain effective internal control over financial reporting as of February 4, 2007, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, CSK Auto Corporation has not maintained effective internal control over financial reporting as of February 4, 2007, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP

Phoenix, Arizona

July 6, 2007

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Fiscal Year Ended
	February 4,		January 29,		January 30,
	2007		2006		2005
	(In thousands, except share and per share data)

Net sales	$	1,907,776	$	1,651,285	$	1,604,991
Cost of sales		1,011,712		864,674		839,564

Gross profit		896,064		786,611		765,427
Other costs and expenses:
Operating and administrative		788,400		653,471		629,309
Investigation and restatement costs		25,739		—		—
Store closing costs		1,487		2,903		2,229

Operating profit		80,438		130,237		133,889
Interest expense		48,767		33,599		33,851
Loss on debt retirement		19,450		1,600		1,026

Income before income taxes and cumulative effect of change in accounting principle		12,221		95,038		99,012
Income tax expense		4,991		37,248		39,450

Income before cumulative effect of change in accounting principle		7,230		57,790		59,562
Cumulative effect of change in accounting principle, net of tax		966		—		—

Net income	$	6,264	$	57,790	$	59,562

Basic earnings per share:
Income before cumulative effect of change in accounting principle	$	0.16	$	1.30	$	1.30
Cumulative effect of change in accounting principle		0.02		—		—

Net income per share	$	0.14	$	1.30	$	1.30

Shares used in computing per share amounts		43,876,533		44,465,409		45,713,271

Diluted earnings per share:
Income before cumulative effect of change in accounting principle	$	0.16	$	1.29	$	1.29
Cumulative effect of change in accounting principle		0.02		—		—

Net income per share	$	0.14	$	1.29	$	1.29

Shares used in computing per share amounts		44,129,278		44,812,302		46,002,376

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	February 4,			January 29,
	2007			2006
	(In thousands,
	except share data)

ASSETS
Cash and cash equivalents	$	20,169		$	17,964
Receivables, net of allowances of $393 and $436, respectively		43,898			29,861
Inventories		502,787			508,507
Deferred income taxes		46,500			37,806
Prepaid expenses and other current assets		31,585			20,047

Total current assets		644,939			614,185
Property and equipment, net		174,409			174,112
Intangibles, net		67,507			71,807
Goodwill		224,937			223,507
Deferred income taxes		4,200			20,845
Other assets, net		35,770			35,578

Total assets	$	1,151,762		$	1,140,034


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	260,146		$	208,507
Accrued payroll and related expenses		60,306			48,483
Accrued expenses and other current liabilities		81,569			89,141
Current maturities of long-term debt		56,098			42,465
Current maturities of capital lease obligations		8,761			9,500

Total current liabilities		466,880			398,096

Long-term debt		451,367			507,523
Obligations under capital leases		15,275			18,106
Other liabilities		46,730			60,152

Total non-current liabilities		513,372			585,781
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 90,000,000 shares authorized, 43,950,751 and 43,830,322 shares issued and outstanding at February 4, 2007 and January 29, 2006, respectively		440			438
Deferred compensation		—			(1,735	)
Additional paid-in capital		433,912			426,560
Accumulated deficit		(262,842	)		(269,106	)

Total stockholders’ equity		171,510			156,157

Total liabilities and stockholders’ equity	$	1,151,762		$	1,140,034

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005
	(In thousands)

Cash flows provided by (used in) operating activities:
Net income	$	6,264		$	57,790		$	59,562
Adjustments:
Depreciation and amortization on property and equipment		40,645			36,628			32,882
Amortization of other items		7,585			4,231			4,209
Amortization of debt discount and deferred financing costs		4,539			2,161			1,883
Stock-based compensation expense		4,972			571			191
Tax benefit relating to exercise of stock options		—			231			390
Write downs on disposal of property, equipment and other assets		3,354			2,145			2,034
Loss on debt retirement		8,496			1,600			131
Deferred income taxes		3,771			36,008			38,078
Changes in operating assets and liabilities:
Receivables		(13,412	)		6,747			(3,557	)
Inventories		3,652			(23,588	)		(11,710	)
Prepaid expenses and other current assets		(11,538	)		7,616			5,286
Accounts payable		51,639			17,329			(20,546	)
Accrued payroll, accrued expenses, and other current liabilities		4,838			9,987			(4,222	)
Other operating activities		(5,165	)		2,867			(1,154	)

Net cash provided by operating activities		109,640			162,323			103,457

Cash flows used in investing activities:
Capital expenditures		(37,529	)		(36,775	)		(24,800	)
Business acquisitions, net of cash acquired		(4,292	)		(177,658	)		—
Other investing activities		(1,778	)		(1,499	)		(3,424	)

Net cash used in investing activities		(43,599	)		(215,932	)		(28,224	)

Cash flows provided by (used in) financing activities:
Borrowings under senior credit facility — term loan		—			—			20,600
Payments under senior credit facility — term loan		—			(252,450	)		(23,150	)
Borrowings under senior credit facility — line of credit		84,800			230,300			—
Payments under senior credit facility — line of credit		(126,800	)		(136,300	)		—
Borrowings under term loan facility		350,000			—			—
Payments under term loan facility		(875	)		—			—
Payment of debt issuance costs		(13,166	)		(9,612	)		(1,412	)
Retirement of 12% senior notes		—			—			(14,910	)
Proceeds from issuance of 4.625% exchangeable notes		—			100,000			—
Proceeds from issuance of 3.375% exchangeable notes		—			125,000			—
Retirement of 3.375% exchangeable notes		(125,000	)		—			—
Retirement of 7% senior notes		(225,000	)		—			—
Payments on capital lease obligations		(10,301	)		(10,893	)		(16,232	)
Proceeds from seller financing arrangements		428			3,164			1,175
Payments on seller financing arrangements		(484	)		(381	)		(214	)
Proceeds from repayment of stockholder receivable		—			10			63
Proceeds from exercise of stock options		1,196			1,130			2,074
Purchase of common stock		—			(25,029	)		(23,726	)
Net proceeds from termination of common stock call option and warrants		1,555			—			—
Premium on common stock call option		—			(26,992	)		—
Premium from common stock warrants		—			17,820			—
Other financing activities		(189	)		(423	)		(254	)

Net cash (used in) provided by financing activities		(63,836	)		15,344			(55,986	)

Net increase (decrease) in cash		2,205			(38,265	)		19,247
Cash and cash equivalents, beginning of period		17,964			56,229			36,982

Cash and cash equivalents, end of period	$	20,169		$	17,964		$	56,229

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

CSK AUTO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


							Additional
	Common Stock						Paid-in			Stockholder			Deferred			Accumulated			Total
	Shares			Amount			Capital			Receivable			Compensation			Deficit			Equity
	(In thousands, except share data)

Balances at February 1, 2004		46,497,936		$	465		$	467,563		$	(73	)	$	—		$	(386,458	)	$	81,497
Repurchase and retirement of common stock		(1,574,956	)		(16	)		(23,710	)											(23,726	)
Restricted stock		4,463						1,209						(1,164	)					45
Amortization of deferred compensation														146						146
Recovery of stockholder receivable											63									63
Exercise of options		188,858			2			2,072												2,074
Tax benefit relating to stock option exercises								390												390
Compensation expense, stock options								88												88
Net income																	59,562			59,562

Balances at January 30, 2005		45,116,301			451			447,612			(10	)		(1,018	)		(326,896	)		120,139
Repurchase and retirement of common stock		(1,409,300	)		(14	)		(25,015	)											(25,029	)
Restricted stock		17,731						1,159						(1,288	)					(129	)
Amortization of deferred compensation														571						571
Recovery of stockholder receivable											10									10
Exercise of options		105,590			1			1,129												1,130
Tax benefit relating to stock option exercises								231												231
Compensation expense, stock options								7												7
Warrants and call options, net of tax								1,437												1,437
Net income																	57,790			57,790

Balances at January 29, 2006		43,830,322			438			426,560			—			(1,735	)		(269,106	)		156,157
Restricted stock		28,466			1			(221	)											(220	)
Adoption of SFAS No. 123R (Note 2)								(1,735	)					1,735						—
Exercise of options		91,963			1			1,195												1,196
Compensation expense, stock-based awards								3,048												3,048
Warrants and call options, net of tax								390												390
Discount on senior exchangeable notes, net of tax								4,675												4,675
Net income																	6,264			6,264

Balances at February 4, 2007		43,950,751		$	440		$	433,912		$	—		$	—		$	(262,842	)	$	171,510

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CSK Auto Corporation is a holding company. At February 4, 2007, CSK Auto Corporation had no business activity other than its investment in CSK Auto, Inc. (“Auto”), a wholly-owned subsidiary. On a consolidated basis, CSK Auto Corporation and its subsidiaries are referred to herein as the “Company,” “we,” “us,” or “our.”

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

As of February 4, 2007, we operated 1,332 stores, including five Pay N Save stores, in 22 states, with our principal concentration of stores in the Western United States. Our stores are known by the following four brand names (referred to collectively as “CSK Stores”):


	•	Checker Auto Parts, founded in 1969, with 467 stores in the Southwestern, Rocky Mountain and Northern Plains states and Hawaii;

	•	Schuck’s Auto Supply, founded in 1917, with 228 stores in the Pacific Northwest and Alaska;

	•	Kragen Auto Parts, founded in 1947, with 506 stores primarily in California; and

	•	Murray’s Discount Auto Stores, founded in 1972, with 126 stores in the Midwest.

At February 4, 2007, we operated five value concept retail stores under the Pay N Save brand name in the Phoenix, Arizona metropolitan area, offering primarily tools, hardware, housewares and other household goods, and seasonal items. We closed three of the five Pay N Save stores during the first quarter of our fiscal year ending January 3, 2008 (“fiscal 2007”). The remaining two stores have been converted to clearance centers stocked primarily with product from the former Pay N Save store locations. We concluded that the sales performance of the Pay N Save stores was unsatisfactory and believed that acceptable performance would not be achievable without significant additional investment to increase the store count. The Pay N Save concept provided us with the ability to experiment with new products to determine the level of customer demand before committing to purchase and offer the products in the CSK Stores. This function is now being accommodated with a combination (“combo”) store shopping format in existing stores that are larger than our average store size of 7,500 square feet. At February 4, 2007, we had seven combo stores.


Note 1 —	Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of CSK Auto Corporation and Auto for all years presented. In addition, the consolidated financial statements include the accounts of the following wholly-owned subsidiaries of Auto for the periods indicated:


	•	Murray’s Inc., an automotive parts and accessories retailer, from December 19, 2005 (the acquisition date) through February 4, 2007. The Murray’s legal corporate entities were merged into Auto in fiscal 2006.

	•	Automotive Information Systems, Inc. (“AIS”), a provider of diagnostic vehicle repair information, for fiscal 2004 through the date of the sale of all of our issued and outstanding capital stock of AIS on January 21, 2005 to Mobile Productivity, Inc., (“MPI”).

All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

As more fully explained in Note 8 — Long-Term Debt, the Company has fully and unconditionally guaranteed bank borrowings by Auto. CSKAUTO.COM (the “Subsidiary Guarantor”) has also jointly and severally

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

guaranteed such debt on a full and unconditional basis. CSK Auto Corporation is a holding company and has no other direct subsidiaries or independent assets or operations. The Subsidiary Guarantor is a minor subsidiary and has no significant independent operations. Summarized financial statements and other disclosures concerning each of Auto and the Subsidiary Guarantor are not presented because management believes that they are not material to investors. The consolidated amounts in the accompanying financial statements are representative of the combined guarantors and issuer.

The Company reports its financial information as one reportable segment under Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of Enterprises and Related Information, as its operating segments are its individual stores which meet the criteria for aggregation into one reportable segment set forth in SFAS No. 131.

Fiscal Year

Our fiscal year end is on the Sunday nearest to January 31 of the following calendar year. Fiscal 2006 consisted of 53 weeks and fiscal 2005 and 2004 each consisted of 52 weeks.

Cash Equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less when purchased.

Fair Value of Financial Instruments

Due to their short-term nature, the carrying value of our cash and cash equivalents, receivables and short-term borrowings approximate fair value. The fair values of long-term debt and derivative financial instruments are disclosed in Note 17 — Fair Value of Financial Instruments.

Derivative Financial Instruments

Our fixed to floating interest rate swap agreement was accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and was recorded on the balance sheet at its fair value. Changes in the fair value of the swap and the hedged item are recognized currently in earnings. Our swap met the criteria to assume no hedge ineffectiveness. The fair value of our swap was determined from current market prices. During the second quarter of fiscal 2006, we terminated the swap agreement in connection with the completion of our fiscal 2006 tender offer for the $225 million of 7% senior subordinated notes. See Note 9 — Derivative Financial Instruments.

Receivables

Receivables are primarily comprised of amounts due from vendors for rebates or allowances and amounts due from commercial sales customers. We record an estimated provision for bad debts for commercial customers based on a percentage of sales and review the allowance quarterly for adequacy. Specific accounts are written off against the allowance when management determines the account is uncollectible.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. Historically, we have not experienced any loss of our cash and cash equivalents due to such concentration of credit risk.

We do not hold collateral to secure payment of our trade accounts receivable. However, management performs ongoing credit evaluations of our customers’ financial condition and provides an allowance for estimated potential losses. Exposure to credit loss is limited to the carrying amount.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Inventory Valuation


	•	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 fiscal 2006, 2005 and 2004 was approximately $31.6 million, $28.8 million and $20.8 million, respectively. While the shrinkage accrual is based on recent experience, there is a risk that actual losses may be higher or lower than expected.

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

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


	February 4,			January 29,
	2007			2006

FIFO cost	$	562,405		$	559,359
Administrative and overhead costs		28,725			31,679
Vendor allowances		(69,469	)		(67,959	)
Shrinkage		(18,116	)		(12,488	)
Obsolescence		(758	)		(2,084	)

Net inventory	$	502,787		$	508,507

Property and Equipment

Property and equipment, including purchased software, are recorded at cost. Depreciation and amortization are computed for financial reporting purposes utilizing the straight-line method over the estimated useful lives of the related assets, which range from three to 25 years or for leasehold improvements and property under capital leases, the shorter of the lease term or the economic life. Maintenance and repairs are charged to earnings when incurred. When property and equipment is retired or sold, the net book value of the asset, reduced by any proceeds, is charged to gain or loss. For stores in which we are a seller-lessee and do not recover substantially all construction costs, we record the costs in property and equipment and amounts funded by the lessor are recorded as a debt obligation in the accompanying balance sheet.

Internal Software Development Costs

Certain internal software development costs are capitalized and amortized over the life of the related software. Amounts capitalized during fiscal 2006, 2005 and 2004 were $1.8 million, $1.5 million and $2.9 million,

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

respectively. Accumulated amortization as of February 4, 2007 and January 29, 2006 was $4.7 million and $4.6 million, respectively.

Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is no longer amortized, but instead is assessed for impairment at least annually. Other intangible assets consist of: (1) leasehold interests representing the net present value of the excess of the fair rental value over the respective contractual rent of facilities under operating leases acquired in business combinations; (2) tradenames and trademarks; and (3) customer relationship intangibles. Amortization expense is computed on a straight-line basis over the respective life of the intangibles. See Note 7 — Goodwill and Other Intangible Assets for the impact of this amortization on the statement of operations.

Impairment of Other Long-Lived Assets

Long-lived assets and identifiable intangible assets to be held and used or disposed of are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event assets are impaired; losses are recognized based on the excess carrying amount over the estimated fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair market value less selling costs.

Lease Obligations

We lease all but one of our store locations in addition to our distribution centers, office space and most vehicles and equipment. At the inception of the lease, we evaluate each agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. Certain leases contain rent escalation clauses and rent holidays, which are recorded on a straight-line basis over the lease term with the difference between the rent paid and the straight-line rent recorded as a deferred rent liability. Lease incentive payments received from landlords are recorded as deferred rent liabilities and are amortized on a straight-line basis over the lease term as a reduction in rent. Certain leases contain provisions that require additional rental payments based upon a specified sales volume, which are accrued as the liabilities are incurred.

Self-Insurance Reserves

Revenue Recognition

We recognize sales upon the delivery of products to our customers, which generally occurs at our retail store locations. For certain commercial customers, we also deliver products to customer locations. All retail and commercial sales are final upon delivery of products. However, as a convenience to the customer and as typical of

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

most retailers, we will accept merchandise returns. We generally limit the period of time within which products may be returned to 60 days and require returns to be accompanied by original packaging and a sales receipt. We record an estimate for sales returns based on historical experience and record this estimate as a reduction of net sales.

We recognize as sales the fair value of recyclable auto parts we receive as consideration from customers that purchase a new auto part. The Company refers to a recyclable auto part, which may or may not have been purchased from our stores, as a “core.” The Company returns these cores to vendors for cash consideration or to settle an obligation to return a given number of cores to vendors in situations where the Company does not pay for the core component of the inventory acquisition costs. The Company charges customers who purchase a new auto part a specified amount for a core, which exceeds the value of the core, and refunds to customers that same amount if a used core is returned at the point of sale of the new part or upon returning the used part to the store at a later date. If the customer does not return a core at point of sale, the amount charged the customer which exceeds the value of the new core is also recognized as sales but is subject to a right of return at the point of sale and included in our sales return allowance for merchandise returns described above.

The Company occasionally sponsors mail-in rebate programs to stimulate sales of particular products. At any one time, the Company may have several of these programs in effect. The Company estimates, based on historical experience, the amount of rebates that will be paid to customers and reduces net sales for the expected rebate at the time of sale of the product subject to the rebate. Estimates are adjusted to actual redemptions at conclusion of the redemption period.

Vendor Allowances and Cost of Sales

Cost of sales includes product cost, net of earned vendor rebates, discounts and allowances associated with our purchasing activities and promotional activities with certain vendors. We recognize such allowances as a reduction of our cost of inventory in accordance with Emerging Issues Task Force (“EITF”) No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. Based on EITF No. 02-16, allowances provided by our vendors are presumed to be a reduction in the costs of purchasing inventories (to be recognized in inventory and cost of sales). Amounts recognized are based on written contracts with vendors and the Company enters into hundreds of contracts with allowances each year. Contractual disputes and misunderstandings can occur with vendors with respect to specific aspects of a vendor’s program which could result in adjustments to allowances the Company recognizes. The Company adjusts its vendor allowance recognition for disputes when probable and reasonably estimable. Certain of our agreements have several year terms, thus requiring recognition over an extended period.

Warranty

The Company or the vendors supplying its products provide the Company’s customers limited warranties on certain products that range from 30 days to lifetime warranties. In most cases, the Company’s vendors are responsible for warranty claims. Warranty costs relating to merchandise sold under warranty not covered by vendors are estimated and recorded as warranty obligations at the time of sale based on historical experience and recent trends. These obligations are recorded as a component of accrued expenses. The Company quarterly assesses the adequacy of its recorded warranty liability and adjusts the liability and cost of sales as necessary.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reflects the changes in our warranty reserves ($ in thousands):


	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005

Warranty reserves, beginning of period	$	2,580		$	2,918		$	3,269
Provision for warranty		3,428			963			881
Allowances from vendors		6,067			5,841			5,851
Reserves utilized		(8,167	)		(7,142	)		(7,083	)

Warranty reserves, end of period	$	3,908		$	2,580		$	2,918

Store Closing Costs

If a store location does not meet our performance standards, it is considered for closure, even if we are contractually committed for future rental costs. We provide a discounted allowance for estimated lease costs to be incurred subsequent to store closure. We establish this allowance based on an assessment of market conditions for rents and include assumptions for vacancy periods and sublease rentals.

There are several significant assumptions that underlie the estimates inherent in the closed store reserve, including: (1) real estate broker estimates for vacancy periods and estimated sublease rates based on the broker’s experience and expertise, and (2) estimates for occupancy expenses based on historical averages and, in the case of real estate taxes, are subject to changes by taxing authorities. Accordingly, we continuously review these assumptions and revise the reserve as necessary.

Advertising

Advertising costs are expensed as incurred. In accordance with EITF No. 02-16, cooperative advertising arrangements are considered a reduction of product costs, unless we are specifically required to substantiate costs incurred to the vendor and do so in the normal course of business. Advertising expense for fiscal 2006, 2005 and 2004 totaled $55.7 million, $50.4 million and $49.9 million, respectively.

Preopening Costs

Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred.

Income Taxes

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts (temporary differences) at each year-end based on enacted tax laws and statutory rates applicable to the period in which the temporary differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense includes both taxes payable for the period and the change during the period in deferred tax assets and liabilities. Income tax expense reflects our best estimates and

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning. Future changes in tax laws, changes in projected levels of taxable income, and tax planning could affect the effective tax rate and tax balances recorded.

Earnings per Share

SFAS No. 128, Earnings Per Share (“EPS”) requires earnings per share to be computed and reported as both basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and dilutive common stock equivalents (convertible notes and interest on the notes, stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options to purchase common stock were exercised for shares of common stock. The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations ($ and share data in thousands):


	Fiscal Year Ended
	February 4,		January 29,		January 30,
	2007		2006		2005

Numerator for basic and diluted earnings per share:
Net income	$	6,264	$	57,790	$	59,562

Denominator for basic earnings per share:
Weighted average shares outstanding (basic)		43,877		44,465		45,713

Denominator for diluted earnings per share:
Weighted average shares outstanding (basic)		43,877		44,465		45,713
Effect of dilutive securities		252		347		289

Weighted average shares outstanding (diluted)		44,129		44,812		46,002

Shares excluded as a result of anti-dilution:
Stock options		2,029		790		482

Incremental net shares for the exchange feature of the $100.0 million 63/4% senior exchangeable notes due 2025 will be included in our future diluted earnings per share calculations for those periods in which our average common stock price exceeds $16.50 per share.

Use of Estimates

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

Legal Matters

We currently and from time to time are involved in litigation incidental to the conduct of our business, including but not limited to asbestos and similar product liability claims, slips and falls and other general liability claims, discrimination and employment claims, vendor disputes, and miscellaneous environmental and real estate claims. The damages claimed in some of this litigation are substantial. Based on an internal review, we accrue reserves using our best estimate of the probable and reasonably estimable contingent liabilities. We do not currently believe that any of these legal claims incidental to the conduct of our business, individually or in the aggregate, will result in liabilities material to our consolidated financial position, results of operations or cash flows. However, if

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

our estimates related to these contingent liabilities are incorrect, the future results of operations for any particular fiscal quarter or year could be materially adversely affected.

In addition to the litigation that is incidental to our business, we are also subject to the other litigation and the SEC investigation that are described in Note 16 — Legal Matters. Although these matters are in their early stages and we cannot predict their outcome, an adverse outcome in any of them could have a material adverse effect on our results of operations, financial position or cash flows.


Note 2 —	Accounting Change for Share-Based Compensation

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

Stock Options

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

SFAS No. 123R requires share-based compensation expense recognized since January 30, 2006 to be based on the following: a) grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for unvested options granted prior to the adoption date; and b) grant date fair value estimated in accordance with the provisions of SFAS No. 123R for unvested options granted subsequent to the adoption date. The Company uses the Black-Scholes option-pricing model to value all options, and the straight-line method to amortize this fair value as compensation cost over the requisite service period. Total share-based compensation expense included in operating and administrative expense in the accompanying consolidated statements of operations for the fiscal year ended February 4, 2007 was approximately $2.0 million for the unvested options granted prior to the adoption date as well as stock options granted during fiscal 2006. The remaining unrecognized compensation cost related to unvested awards as of February 4, 2007 (net of estimated forfeitures) was $4.9 million and the weighted-average period of time over which this cost will be recognized is 3 years. Also in fiscal 2006, the Company extended the expiration dates on certain stock options due to expire during a period in which the Company prohibited option exercises due to filing delinquencies that required we suspend use of the relevant Form S-8 registration statements, resulting in approximately $0.4 million in operating and administrative expense. A summary of the Company’s stock option activity and weighted average exercise price is provided under Note 11 — Employee Benefit Plans.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Fiscal Year
	2006	2005	2004

Dividend yield	0%	0%	0%
Risk free interest rate	4.45%	3.86% - 4.40%	3.07% - 3.82%
Expected life of options	4.5 years	6 years	6 years
Expected volatility	38.03%	25% - 33%	27% - 36%

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

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

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

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

Under SFAS No. 123R forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Restricted Stock

The Company has in effect a performance incentive plan for the Company’s senior management under which the Company awards shares of restricted stock that vest equally over a three-year period. Shares are forfeited when an employee ceases employment. For accounting purposes, restricted stock is valued at the grant date fair value of the common stock. The Company’s accounting for restricted stock was not affected by the adoption of SFAS 123R. At January 29, 2006, the Company had $1.7 million of deferred compensation costs related to unvested restricted stock included in stockholders’ equity. In accordance with SFAS No. 123R, the deferred compensation balance of $1.7 million as of January 29, 2006 was reclassified to additional paid-in capital. Total share-based compensation expense for restricted stock included in operating and administrative expense in the accompanying consolidated statements of operations for the fiscal 2006, 2005 and 2004 was approximately $0.6 million, $0.6 million and $0.1 million, respectively. The remaining unrecognized compensation cost related to unvested awards as of February 4, 2007 was $1.7 million, and the weighted-average period of time over which this cost will be recognized is approximately two years. A summary of the Company’s restricted stock activity and weighted average grant date price is provided under Note 11 — Employee Benefit Plans.

Long-Term Incentive Plan

In fiscal 2005, the Compensation Committee of our Board of Directors adopted the CSK Auto Corporation LTIP. See Note 11 — Employee Benefit Plans. For accounting purposes, the awards granted under the LTIP are considered to be service-based, cash settled stock appreciation rights (“SARs”). The award is classified as a liability as the LTIP requires the units to be paid in cash. The Company does not have the option to pay the participant in any other form. While the amount of cash, if any, that will ultimately be received by the participant is not known until the end of the measuring period, the only condition that determines whether the award is vested is whether the employee is still employed by the Company (i.e., completes the required service) at the payment date. Since the amount of cash to be received by the participant is indeterminate at the grant date, SARs are subject to variable plan

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accounting treatment prior to adoption of SFAS No. 123R whereby the intrinsic value of the award is recognized each period (multiplied by the related percentage of service rendered). FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”) requires that the compensation cost for such awards be recognized over the service period for each separately vesting tranche of award as though the award were, in substance, multiple awards.

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

The LTIP units are classified as a liability award under SFAS No. 123R, and as such, must be measured at fair value at the grant date and recognized as compensation cost over the service period in accordance with FIN 28. The modified prospective transition rules under SFAS No. 123R require that for an outstanding instrument that previously was classified as a liability and measured at intrinsic value, an entity should recognize the effect of initially measuring the liability at its fair value, net of any related tax effect, as the cumulative effect of a change in accounting principle. At the beginning of fiscal 2006, the Company recorded $1.0 million, net of $0.6 million income tax benefit, as a cumulative effect of a change in accounting principle for the LTIP fair value liability under SFAS No. 123R upon adoption. For the fiscal year ended February 4, 2007, the Company recognized $0.3 million of expense related to the LTIP units. At February 4, 2007, the Company had recorded a liability of $1.9 million related to LTIP units and had $1.5 million of unrecognized compensation cost related to LTIP units. As a liability based instrument, the LTIP awards will be remeasured at each balance sheet date, such that the net compensation expense recorded over the full four-year vesting period of the LTIP units will equal the cash payments, if any, made by the Company to the LTIP participants.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Total stock-based compensation expense included in operating and administrative expenses in the Company’s statement of operations for the year ended February 4, 2007 was $3.4 million, and the Company recognized a corresponding income tax benefit of approximately $1.4 million. In addition, the Company incurred $1.6 million ($1.0 million net of income tax benefit) of transition expense upon adoption of SFAS 123R, which is shown as a cumulative effect of a change in accounting principle. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock plans for the fiscal years ended January 29, 2006 and January 30, 2005 (in thousands, except per share data):


	Fiscal Year Ended
	January 29,			January 30,
	2006			2005

Net income — as reported	$	57,790		$	59,562
Add: Stock-based employee compensation expense in reported net income, net of related income taxes		351			142
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income taxes		(4,535	)		(990	)

Net income — pro forma	$	53,606		$	58,714

Earnings per share — basic:
As reported	$	1.30		$	1.30
Pro forma	$	1.21		$	1.28
Earnings per share — diluted:
As reported	$	1.29		$	1.29
Pro forma	$	1.20		$	1.28
As reported shares
Basic		44,465			45,713
Diluted		44,812			46,002
Pro forma shares used in calculation:
Basic		44,465			45,713
Diluted		44,823			45,829

SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on when employees exercise stock options and the current market price), the amounts of operating cash flows recognized for such excess tax deductions for stock option exercises were $0.2 million and $0.4 million in fiscal 2005 and 2004, respectively.

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional paid-in-capital pool as prescribed in SFAS 123R, or the alternative method as described in the FSP. An entity that adopts SFAS 123R using the modified prospective application transition method may make a one-time election to adopt the transition method described in this FSP. We have elected to calculate the additional paid-in-capital pool as prescribed in the FSP (referred to as the “short-cut” method) effective with our adoption of SFAS 123R.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3 — Recent Accounting Pronouncements

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


Note 4 —	Business Acquisition

On December 19, 2005, we acquired all of the outstanding stock of Murray’s, a private company headquartered in Belleville, Michigan, that operated 110 automotive parts and accessories retail stores in Michigan, Illinois, Ohio and Indiana. The purchase price was $180.9 million. As of January 29, 2006, $2.8 million of the purchase price was

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recorded in other accrued liabilities, of which all was paid during fiscal 2007. The Murray’s acquisition complemented our existing operations and expanded our markets served from 19 to 22 states. The acquisition was funded from borrowings under a $325.0 million senior secured asset-based revolving credit facility and from the issuance of the 63/4% senior exchangeable notes. See Note 7 — Goodwill and Other Intangible Assets.

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

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


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

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

Total assets acquired		245,047

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

Total liabilities assumed		64,100

Fair value of net assets acquired	$	180,947

Employee termination and relocation costs have been recorded in the above purchase price allocation. As of the acquisition date, the Company began to formulate a plan to terminate or relocate certain Murray’s employees. The Company has finalized the appropriate staffing levels in Murray’s departments (including operations, finance, human resources, purchasing and information technology) and the experience levels required to perform certain

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

general and administrative functions, and paid approximately $1.2 million in severance and relocation costs in fiscal 2006. The Company did not close any Murray’s stores as a result of the acquisition.

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


Note 5 —	Receivables

Accounts receivable consist of the following ($ in thousands):


	February 4,			January 29,
	2007			2006

Amounts due under vendor allowance programs and cooperative advertising arrangements	$	24,122		$	10,587
Trade receivables from commercial and other customers		17,175			14,614
Landlord, subtenant receivables, and other		2,994			5,096

Gross receivables		44,291			30,297
Allowance for doubtful accounts		(393	)		(436	)

Net accounts receivable	$	43,898		$	29,861

We reflect amounts to be paid or credited to us by vendors as receivables. Pursuant to contract terms, we have the right to offset vendor receivables against corresponding accounts payable, thus minimizing the risk of non-collection of these receivables.


Note 6 —	Property and Equipment

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


	February 4,			January 29,
	2007			2006			Estimated Useful Life

Land	$	348		$	348
Buildings		15,251			14,198		15 - 25 years
Leasehold improvements		159,070			146,690		Shorter of lease term or useful life
Furniture, fixtures and equipment		168,845			164,745		3 - 10 years
Property under capital leases		97,974			94,220		5 - 15 years or life of lease
Purchased software		10,829			9,141		5 years

		452,317			429,342
Less: accumulated depreciation and amortization		(277,908	)		(255,230	)

Property and equipment, net	$	174,409		$	174,112

Accumulated amortization of property under capital leases totaled $73.1 million and $67.4 million at February 4, 2007 and January 29, 2006, respectively.

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 7 — Goodwill and Other Intangible Assets

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

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

In August 2006, we purchased a franchised Murray’s store which resulted in $1.4 million of goodwill. See Note 4 — Business Acquisition.

Of the $59.1 million of identifiable intangible assets resulting from the fiscal 2005 acquisition of Murray’s, $49.4 million was assigned to Murray’s trade name and trademarks (with a life of 30 years), $9.3 million was assigned to leasehold interests asset (with an average life of 17 years) and $0.4 million was assigned to customer relationships (with a life of 10 years). The excess purchase price over identifiable tangible and intangible assets was approximately $104.5 million, which was recorded as goodwill. See Note 4 — Business Acquisition.

On January 21, 2005, the Company sold its subsidiary, AIS, a provider of diagnostic vehicle repair information, to MPI. As a result of the sale, the Company received a note receivable with a fair value of approximately $7.1 million, and MPI granted a licensing agreement to us which was valued at approximately $4.4 million and is being amortized over seven years.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The changes in intangible assets, including goodwill, for fiscal 2006 are as follows ($ in thousands):


	Carrying											Carrying
	Value as of											Value as of
	January 29,											February 4,
	2006			Additions		Amortization			Adjustments			2007

*Amortized intangible assets:*
Leasehold interests	$	28,556		$	—	$	—		$	99		$	28,655
Accumulated amortization		(10,111	)		—		(1,952	)		(99	)		(12,162	)

		18,445			—		(1,952	)		—			16,493


License agreement		4,417			—		—			—			4,417
Accumulated amortization		(631	)		—		(643	)		—			(1,274	)

		3,786			—		(643	)		—			3,143


Tradenames and trademarks		49,400			—		—			—			49,400
Accumulated amortization		(190	)		—		(1,668	)		—			(1,858	)

		49,210			—		(1,668	)		—			47,542


Customer relationships		370			—		—			—			370
Accumulated amortization		(4	)		—		(37	)		—			(41	)

		366			—		(37	)		—			329


Amortized intangibles, net		71,807			—		(4,300	)		—			67,507

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

Total intangible assets, net	$	295,314		$	1,430	$	(4,300	)	$	—		$	292,444

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


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

	$	20,321

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8 — Long-Term Debt

Overview

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


	February 4,		January 29,
	2007		2006

Term loan facility	$	349,125	$	—
Senior credit facility		52,000		94,000
63/4% senior exchangeable notes, carrying balance decreased in fiscal 2006 by $6.9 million discount in accordance with EITF No. 06-6		93,061		100,000
7% senior subordinated notes, carrying balance decreased in fiscal 2005 by $6.7 million relating to SFAS No. 133 hedge accounting adjustment		—		218,279
33/8% senior exchangeable notes		—		125,000
Seller financing arrangements		13,279		12,709

Total debt		507,465		549,988
Less: Current portion of term loan facility		3,478		—
Senior credit facility(1)		52,000		42,000
Current maturities of seller financing arrangements		620		465

Total debt (non-current)	$	451,367	$	507,523


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

Fiscal 2006 Refinancing Transactions

Our inability to timely file our fiscal 2005 consolidated financial statements with the SEC as a result of both the Audit Committee-led investigation and the need to restate our financial statements created potential default implications under our borrowing agreements. As a result, in fiscal 2006, we completed a tender offer for our 7% senior subordinated notes (“7% Notes”), in which we repurchased $224.96 million of the 7% Notes, and we repaid all $125.0 million of our 33/8% senior exchangeable notes (“33/8% Notes”) upon the acceleration of their maturity. We entered into a $350.0 million term loan facility (“Term Loan Facility”), proceeds from which were used to pay the tender offer consideration for the 7% Notes and to repay the 33/8% Notes upon their acceleration. We also entered into a waiver with respect to our senior secured revolving line of credit (“Senior Credit Facility”) and a supplemental indenture to the indenture under which our 45/8% senior exchangeable notes (“43/8% Notes”) were originally issued.

Fiscal 2005 Financing Transactions

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Term Loan Facility

In order to repay the 7% Notes and the 33/8% Notes described below, we entered into a $350.0 million Term Loan Facility in June 2006. The loans under the Term Loan Facility (“Term Loans”) bear interest at a base rate or the LIBOR rate, plus a margin that will fluctuate depending upon the rating of the Term Loans. At February 4, 2007, the interest rate was 8.375%. The Term Loans are guaranteed by the Company and CSKAUTO.COM, Inc., a wholly owned subsidiary of Auto. The Term Loans are secured by a second lien security interest in certain of our assets, primarily inventory and receivables, and by a first lien security interest in substantially all of our other assets. The Term Loans call for repayment in consecutive quarterly installments, which began on December 31, 2006, in an amount equal to 0.25% of the aggregate principal amount of the Term Loans, with the balance payable in full on the sixth anniversary of the closing date, or June 30, 2012. Costs associated with the Term Loan Facility were approximately $10.7 million and, beginning June 30, 2006, are being amortized to interest expense following the interest method over the six-year term of the facility.

The Term Loan Facility contains, among other things, limitations on liens, indebtedness, mergers, disposition of assets, investments, payments in respect of capital stock, modifications of material indebtedness, changes in fiscal year, transactions with affiliates, lines of business, and swap agreements. Auto is also subject to financial covenants under the Term Loan Facility measuring its performance against standards set for leverage and fixed charge coverage. See Note 19 — Subsequent Events.

Senior Credit Facility

At February 4, 2007 and January 29, 2006, Auto had a $325.0 million senior secured revolving line of credit. Auto is the borrower under the agreement and it is guaranteed by the Company and CSKAUTO.COM, Inc. Borrowings under the Senior Credit Facility bear interest at a variable interest rate based on one of two indices, either (i) LIBOR plus an applicable margin that varies (1.25% to 1.75%) depending upon Auto’s average daily availability under the agreement measured using certain borrowing base tests, or (ii) the Alternate Base Rate (as defined in the agreement). The Senior Credit Facility matures in July 2010.

During fiscal 2006, we entered into a waiver under the Senior Credit Facility to allow us until June 13, 2007 to file certain periodic reports with the SEC. Costs associated with the waiver were approximately $1.6 million, were recorded as deferred financing fees in fiscal 2006, and are being amortized through July 2010. See Note 19 — Subsequent Events.

Availability under the Senior Credit Facility is limited to the lesser of the revolving commitment of $325.0 million and a borrowing base limitation. The borrowing base limitation is based upon a formula involving certain percentages of eligible inventory and eligible accounts receivable owned by Auto. As a result of the limitations imposed by the borrowing base formula, at February 4, 2007, Auto could only borrow up to an additional $140.0 million of the $325.0 million facility in addition to the $52.0 million already borrowed under the Senior Credit Facility at an average interest rate of approximately 6.875%, and $34.1 million of letters of credit outstanding under this facility as of February 4, 2007. At each balance sheet date, we classify, as a current liability, balances outstanding under the revolving portion of the Senior Credit Facility we expect to repay during the following 12 months. Loans under the Senior Credit Facility are collateralized by a first priority security interest in certain of our assets, primarily inventory and accounts receivable, and a second priority security interest in certain of our other assets. The Senior Credit Facility contains negative covenants and restrictions on actions by Auto and its subsidiaries including, without limitation, restrictions and limitations on indebtedness, liens, guarantees, mergers, asset dispositions, investments, loans, advances and acquisitions, payment of dividends, transactions with affiliates, change in business conducted and certain prepayments and amendments of indebtedness. In addition, since June 16, 2006, Auto has been required to maintain a minimum 1:1 Fixed Charge Coverage Ratio (as defined in the agreement).

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

45/8% Notes (Now 63/4% Notes)

In June 2006, we commenced a cash tender offer and consent solicitation with respect to our $100.0 million of 45/8% Notes. We did not purchase any notes in the tender offer because holders of a majority of the outstanding 45/8% Notes did not tender in the offer prior to its expiration date. We later obtained the consent of the holders of a majority of the 45/8% Notes to enter into a supplemental indenture to the indenture under which the 45/8% Notes were originally issued that (i) waived any default arising from Auto’s failure to file certain financial information with the Trustee for the notes, (ii) exempted Auto from compliance with the SEC filing covenants in the indenture until June 30, 2007, (iii) increased the interest rate of the notes to 63/4% per year until December 15, 2010 and 61/2% per year thereafter, and (iv) increased the exchange rate of the notes from 49.8473 shares of our common stock per $1,000 principal amount of notes to 60.6061 shares of our common stock per $1,000 principal amount of notes (hereinafter, these notes are referred to as the “63/4% Notes”). All other terms of the indenture are unchanged. Costs associated with the tender offer and supplemental indenture were approximately $0.5 million and were recognized in operating and administrative expenses in the second quarter of fiscal 2006. Under the registration rights agreement (see below), additional interest of 25 basis points began to accrue on the 63/4% Notes in March 2006 and increased to 50 basis points in June 2006. In total, we incurred approximately $1.5 million in additional interest expense in fiscal 2006 related to the increase in the coupon interest rate to 63/4% and the additional interest expense under the registration rights agreement. Also, in accordance with EITF No. 06-6, Debtor’s Accounting for a Modification (or Exchange) of Convertible Debt Instruments, the changes to the 63/4% Notes were recorded in fiscal 2006 as a modification, not an extinguishment, of the debt. The Company recorded the increase in the fair value of the exchange option as a debt discount with a corresponding increase to additional paid-in-capital in stockholders’ equity. The debt discount was $7.7 million and is being amortized to interest expense following the interest method to the first date the noteholders could require repayment. Total amortization on the debt discount was $0.8 million as of February 4, 2007.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


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

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


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

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

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

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

We have entered into a registration rights agreement with respect to the 63/4% Notes and the underlying shares of our common stock into which the 63/4% Notes are potentially exchangeable. Under its terms, we will be required to pay additional interest of up to 50 basis points on the 63/4% Notes until the earlier of the date the 63/4% Notes are no longer outstanding or the date two years after the date of their issuance if we fail to meet certain filing and effectiveness deadlines with respect to the registration of the 63/4% Notes and the underlying shares of our common stock. In the event the debt is exchanged, the additional interest is not payable.

7% Notes

In July 2006, we completed a tender offer for our 7% Notes, in which we repurchased virtually all of the 7% Notes for the principal amount of $224.96 million. We purchased the balance of the 7% Notes later in fiscal 2006. Unamortized deferred financing fees at the time of repurchase were 4.5 million, and costs associated with the transaction were approximately $0.6 million, all of which was recognized as a loss on debt retirement during the second quarter of fiscal 2006. In connection with the repurchase of the 7% Notes, we terminated our interest rate swap agreement, which was intended to hedge the fair value of $100.0 million of the 7% Notes. Consideration of $11.1 million was paid to terminate the swap, of which $10.4 million represented the fair value liability and $0.7 million represented accrued interest. The $10.4 million was recognized as a loss during the second quarter of fiscal 2006.

In January 2004, we issued $225 million of our 7% Notes due January 15, 2014, with interest payable semi-annually on January 15 and July 15. We were permitted to redeem all of the notes prior to January 15, 2009, pursuant to the make-whole provisions as defined in the indenture under which the 7% Notes were issued. In addition, we were permitted to redeem up to 35% of the aggregate principal amount of the notes before January 15, 2007 with the net proceeds of certain equity offerings. At any time on or after January 15, 2009, we were permitted to redeem some or all of the notes for cash, at our option, in whole or in part, at the following redemption prices, plus accrued and unpaid interest to the date of redemption (expressed as percentages of the principal amount): January 15, 2009 through January 15, 2010, 103.5%; January 15, 2010 through January 15, 2011, 102.3%; January 15, 2011 through January 15, 2012, 101.2%; and January 15, 2012 through maturity, 100%. If we experienced a Change of Control (as defined in the indenture under which the notes were issued), holders of the notes were permitted to require us to repurchase their notes at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest and liquidated damages, if any, to the date of the purchase.

The 7% Notes were unsecured general obligations of Auto. They ranked junior in right of payment to all of our existing and future senior debt, equal in right of payment to all of our future senior subordinated indebtedness, senior in right of payment to all of our future subordinated indebtedness and were unconditionally guaranteed by the Company and the subsidiary guarantors named in the indenture under which the notes were issued on a senior subordinated basis.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

33/8% Notes

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

The 33/8% Notes were exchangeable into cash and shares of our common stock. Upon exchange of the 33/8% Notes, we were to deliver cash equal to the lesser of the aggregate principal amount of notes to be exchanged and our total exchange obligation and, in the event our total exchange obligation exceeded the aggregate principal amount of notes to be exchanged, shares of our common stock in respect of that excess. The following table represents key terms under the 33/8% Notes:


Terms			33/8% Notes
Interest Rate			3.375% per year until August 15, 2010; 3.125% thereafter
Exchange Rate			43.3125 shares per $1,000 principal (equivalent to an initial exchange price of approximately $23.09 per share)
Maximum CSK shares exchangeable			5,414,063 common shares, subject to adjustment in certain circumstances
Maturity date			August 15, 2025
Guaranteed by			CSK Auto Corporation and all of Auto’s present and future domestic subsidiaries, jointly and severally, on a senior basis
Dates that the noteholders may require Auto to repurchase some or all for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest			August 15, 2010, August 15, 2015, and August 15, 2020 or following a fundamental change as described in the indenture
Issuance costs being amortized over a 5-year period, corresponding to the first date the noteholders could require repayment			$4.8 million
Auto will not be able to redeem notes			Prior to August 15, 2010
Auto may redeem for cash some or all of the notes			On or after August 15, 2010, upon at least 35 calendar days notice
Redemption price			Equal to 100% of the principal amount plus any accrued and unpaid interest and additional interest, if any, to, but not including, the redemption date

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Prior to their stated maturity, the 33/8% Notes were exchangeable by the holder only under the following circumstances:


	•	During any fiscal quarter (and only during that fiscal quarter) commencing after January 29, 2006, if the last reported sale price of our common stock was 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 33/8% Notes had been called for redemption by Auto; or

	•	Upon the occurrence of specified corporate transactions, such as a change in control, as described in the indentures under which the 33/8% Notes were issued.

If the 33/8% Notes had become exchangeable, the corresponding debt was to be reclassified from long-term to current for as long as the notes remained exchangeable.

In connection with the issuance of the 33/8% Notes, we paid $27.0 million to a counterparty to purchase a call option designed to mitigate the potential dilution from the exchange of the 33/8% Notes. Under the call option, as amended, we had an option to purchase from the counterparty 5,414,063 shares, subject to adjustment, of our common stock at a price of $23.09 per share, which is equal to the initial exchange price of the 33/8% Notes. We received an aggregate of $17.8 million of proceeds from the same counterparty relating to the sale of warrants to acquire, subject to adjustment, up to 5,414,063 shares of our common stock. The warrants were exercisable at a price of $26.29 per share. Both the call option and warrant transactions had five-year terms. The call option and warrant transactions were each to be settled through a net share settlement to the extent that the price of our common stock exceeds the exercise price set forth in the agreements. Our objective with these transactions was to reduce the potential dilution of our common stock upon an exchange of the 33/8% Notes. We accounted for the call option and the warrant as equity under EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.

The embedded exchange feature in the 33/8% Notes providing for the issuance of common shares to the extent our exchange obligation exceeded the debt principal, the embedded put options and the call options in the debt as well as the separate freestanding call options and the warrants associated with the 33/8% Notes each met the requirements of EITF No. 00-19 to be accounted for as equity instruments. As such, the share exchange feature, the put options and call options embedded in the debt and the separate freestanding call options and the warrants have not been accounted for as derivatives (which would be marked to market each reporting period). In the event the 33/8% Notes were exchanged, the exchange was to be accounted for in a similar manner to a conversion with no gain or loss (as the cash payment of principal reduces the recorded liability issued at par) and the issuance of common shares would have been recorded in stockholders’ equity. Any accrued interest on the debt would not be paid separately upon an exchange and would be reclassified to equity. In addition, the premium paid for the call option and the premium received for the warrant were recorded as additional paid-in capital in the accompanying consolidated balance sheet and were not accounted for as derivatives (which would be marked to market each reporting period). Incremental net shares for the 33/8% Notes exchange features and the warrant agreements were to be included in our future diluted earnings per share calculations for those periods in which our average common stock price exceeded $23.09 in the case of the 33/8% Notes, and $26.29 in the case of the warrants. The purchased call option was anti-dilutive and was excluded from the diluted earnings per share calculation.

We entered into a registration rights agreement with respect to the 33/8% Notes and the underlying shares of our common stock into which the 33/8% Notes were potentially exchangeable. Under its terms, we would have been required to pay additional interest of up to 50 basis points on the 33/8% Notes until the earlier of the date the 33/8% Notes were no longer outstanding or the date two years after the date of their issuance if we failed to meet certain filing and effectiveness deadlines with respect to the registration of the 33/8% Notes and the underlying shares of our common stock. In the event the debt was exchanged, the additional interest was not payable.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Seller Financing Arrangements

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

Debt Covenants

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

has expired. When we renegotiated the terms of our 45/8% (now 63/4%) Notes in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee for the 63/4% Notes our periodic SEC filings. We did not file and deliver all of our periodic SEC filings that are delinquent by June 30, 2007, and if a notice of default is given to the Company by the trustee for such Notes or by the holders of 25% of the Notes, a default will occur under the indenture under which the 63/4% Notes were issued that would entitle the holders of the 63/4% Notes to accelerate the payment of their Notes no sooner than August 31, 2007. The occurrence of an event of default under the indenture under which the 63/4% Notes were issued, along with the expiration of the applicable grace period thereunder, would result in an event of default under the Senior Credit Facility, which would in turn result in an event of default under the Term Loan Facility.

We expect to be able to complete all of our late periodic SEC filings by August 15, 2007, which is within the 60 day period following such a default during which we can cure such a default and prevent the holders of the 63/4% Notes from having the right to accelerate their Notes. Filing by August 15, 2007 should permit us to avoid the acceleration of the 63/4% Notes and any related negative consequences under the Senior Credit Facility and the Term Loan Facility. Nevertheless, if we were to fail to complete such filings by August 15, 2007, and were neither able to negotiate compromises that would avoid the acceleration or cross acceleration of all our other indebtedness for borrowed money nor refinance all or a portion of such indebtedness, the possibility exists that we would be unable to repay such indebtedness and could be declared insolvent.

Restrictions on Paying Dividends and Movement of Funds

Under the Senior Credit Facility and the Term Loan Facility, Auto is prohibited from declaring dividends or making other distributions with respect to its stock, subject to certain exceptions, including an exception permitting stock dividends. However, Auto may make distributions to the Company so that the Company may take certain actions, including, without limitation, payments of franchise taxes, other fees required to maintain its corporate existence, operating costs and income taxes, repurchases of the Company’s stock from former employees (subject to a dollar limitation), certain loans to employees and up to $25.0 million of other stock repurchases or redemptions, subject to certain conditions. In July 2005, the Company repurchased approximately $25.0 million of our common stock utilizing proceeds from the issuance of our 33/8% Notes and other funds.

Long-Term Debt Maturities

As of February 4, 2007, the maturities of long-term debt, excluding capital leases, were as follows ($ in thousands):


Fiscal 2007	$	56,098
Fiscal 2008		3,997
Fiscal 2009		4,058
Fiscal 2010		97,295
Fiscal 2011		4,454
Thereafter		341,563

	$	507,465


Note 9 —	Derivative Financial Instruments

During April 2004, we entered into an interest rate swap agreement to effectively convert $100.0 million of our 7% Notes to a floating rate, set semi-annually in arrears, equal to the six month LIBOR + 283 basis points. The agreement was for the term of the 7% Notes. The hedge was accounted for as a “fair value” hedge; accordingly, the fair value of the derivative and changes in the fair value of the underlying debt were reported on our consolidated balance sheet and recognized in the results of operations. Based upon our assessment of effectiveness of the hedge,

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

changes in the fair value of this derivative and the underlying debt did not have a significant effect on our consolidated results of operations.

At January 29, 2006, the fair value of the interest rate swap approximated $6.7 million, which was included as an increase in other long-term liabilities with an identical amount reflected as a basis adjustment to the 7% Notes on the accompanying consolidated balance sheet. The differential to be paid under the agreement was accrued consistent with the terms of the swap agreement and was recognized in interest expense over the term of the related debt. The related amount payable to the counter party was included in accrued liabilities.

In July 2006, we paid $11.1 million to terminate the swap agreement, representing $10.4 million of a fair value liability and $0.7 million of accrued interest. The $10.4 million was recognized as a loss on debt retirement during the second quarter of fiscal 2006. As of February 4, 2007, the Company had not entered into any derivative financial agreements.


Note 10 —	Leases and Other Commitments

We lease our office and warehouse facilities, all but one of our retail stores, and most of our vehicles and equipment. Generally, store leases provide for minimum rentals and the payment of utilities, maintenance, insurance and taxes. Certain store leases also provide for contingent rentals based upon a percentage of sales in excess of a stipulated minimum. The majority of lease agreements are for base lease periods ranging from 10 to 20 years, with three to five renewal options of five years each.

Operating lease rental expense is as follows ($ in thousands):


	Fiscal Year
	2006			2005			2004

Minimum rentals	$	140,484		$	122,378		$	114,613
Contingent rentals		802			1,068			1,125
Sublease rentals		(7,955	)		(8,306	)		(8,907	)

	$	133,331		$	115,140		$	106,831

Future minimum lease obligations (income) under non-cancelable leases at February 4, 2007 are as follows ($ in thousands):


	Capital			Operating		Sublease
	Leases			Leases		Rentals

Fiscal 2007	$	10,330		$	146,818	$	(6,723	)
Fiscal 2008		7,226			127,336		(4,041	)
Fiscal 2009		5,431			107,439		(2,365	)
Fiscal 2010		2,983			91,106		(1,630	)
Fiscal 2011		1,084			76,479		(1,003	)
Thereafter		446			262,791		(1,188	)

		27,500		$	811,969	$	(16,950	)

Less: amounts representing interest		(3,464	)

Present value of obligations		24,036
Less: current portion		(8,761	)

Long-term obligation	$	15,275

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On March 7, 2005, the Company entered into a five year logistics services agreement with Penske Logistics (“Penske”) whereby Penske provides substantially all of transportation services needs for inventory movement between each of our distribution centers, warehouses and stores. Billings from Penske contain bundled fixed and variable components covering the costs of dispatching, drivers, fuel, maintenance, equipment and other costs of providing the services. Although the agreement has a five-year term, it is cancellable by either party at each anniversary date of the agreement. Should the Company cancel the agreement early without cause, we would be subject to certain costs of early termination. Amounts expensed to Penske for logistics services were approximately $15.6 million for the period of March 7, 2005 through January 29, 2006 and $22.2 million for all of fiscal 2006.


Note 11 —	Employee Benefit Plans

We provide various health, welfare and disability benefits to our full-time employees that are funded primarily by Company contributions. Other than for certain of our senior executives, we do not provide post-employment or post-retirement health care or life insurance benefits to our employees.

Supplemental Retirement Plan Agreement

We have a supplemental executive retirement plan agreement with our Chairman and Chief Executive Officer, Maynard Jenkins, which provides supplemental retirement benefits for a period of 10 years beginning on the first anniversary of the effective date of termination of his employment for any reason other than for Cause (as defined in such retirement plan agreement). The benefit amount in this agreement is fully vested and payable to Maynard Jenkins at a rate of $600,000 per annum. In January 2006, this agreement was amended to make such changes as were necessary to bring the agreement into compliance with the American Jobs Creation Act of 2004. We have accrued the entire present value of this obligation of approximately $4.1 million as of January 29, 2006 and February 4, 2007.

Retirement Program

We sponsor a 401(k) plan that is available to all our employees who, up until December 31, 2006, had to have completed one year of continuous service to be eligible. Effective October 1, 1997, we match from 40% to 60% of employee contributions in 10% increments, based on years of service, up to 4% of the participant’s base salary. Participant contributions are subject to certain restrictions as set forth in the Internal Revenue Code of 1986, as amended. Our matching contributions totaled $1.9 million, $1.5 million and $1.5 million for fiscal 2006, 2005 and 2004 respectively. Effective January 1, 2007, we amended the 401(k) plan to provide immediate eligibility for participation at the date of hire if the employee is at least 21 years of age; however, no Company matching contributions vest until one year of plan participation (or three years of Company service).

We also sponsor the CSK Auto, Inc. Deferred Compensation Plan. This plan is maintained primarily to provide deferred compensation benefits for a select group of “management or highly compensated employees” as defined by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). For Internal Revenue Code (“IRC”) and ERISA purposes, this plan is deemed to be “unfunded.” The Deferred Compensation Plan permits participants voluntarily to defer up to 50% of their salary and 100% of their annual bonus without regard to the limitations under the IRC applicable to the Company’s tax-qualified plans. In addition, any refunds resulting from non-discrimination testing of the Company’s 401(k) Plan will be automatically transferred from the participant’s 401(k) account to the Deferred Compensation Plan. Although the Company may also make matching contributions to a participant’s account under this plan (except for automatic transfers of excess Company matching contributions from a participant’s 401(k) plan account), the Company has not elected to do so. Deferred amounts and any matching contributions under the Deferred Compensation Plan are 100% vested at all times, and are invested on behalf of the participant in investment vehicles selected from time to time by the administrators of the plan. Benefits are payable at retirement in either a lump sum or installments for up to 12 years. Benefits upon a termination of employment prior to retirement are payable only in a lump sum.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Long-Term Incentive Plan

In fiscal 2005, the Compensation Committee of our Board of Directors adopted the CSK Auto Corporation Long-Term Incentive Plan. The LTIP was established within the framework of the CSK Auto Corporation 2004 Stock and Incentive Plan, pursuant to which cash-based incentive bonus awards may be granted based upon the satisfaction of specified performance criteria. The Board also approved and adopted forms of Incentive Bonus Unit Award Agreements used to evidence the awards under the LTIP. Under the terms of the LTIP, participants (senior executive officers only) were awarded a certain number of incentive units that are subject to a four-year vesting period (25% per year, with the first vesting period ending in fiscal 2007) as well as stock performance criteria. Subject to specific terms and conditions governing a change in control of the Company, each incentive bonus unit, when vested, represents the participant’s right to receive cash payments from the Company on specified payment dates equal to the amounts, if any, by which the average of the per share closing prices of the Company’s common stock on the New York Stock Exchange over a specified period of time (after release by the Company of its fiscal year earnings) (the “measuring period”) exceeds $20 per share (which figure is subject to certain adjustments in the event of a change in the Company’s capitalization). The Company recorded $1.0 million, net of $0.6 million income tax benefit, as a cumulative effect of a change in accounting principle for the LTIP fair value liability under SFAS 123R. For the year ended February 4, 2007, the Company recognized $0.3 million of expense related to the LTIP units. At February 4, 2007, the Company had recorded a liability of $1.9 million related to LTIP units. See Note 2 — Share Based Employee Compensation Plans.

2004 Stock and Incentive Plan

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

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

The Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, stock units, incentive bonuses and other stock unit awards. Under the Plan, the number and kind of shares as to which options, stock appreciation rights, restricted stock, stock units, incentive bonuses or other stock unit awards may be granted is 4.0 million shares of our common stock plus any shares subject to awards made under the prior plans that were outstanding on the effective date of the Plan. The number of shares that can be granted for certain of the items listed above may be restricted per the Plan document. In no event will any option be exercisable more than 10 years after the date the option is granted. In general, the stock incentives vest in three years. As of February 4, 2007, there were approximately 1.6 million shares available for grant.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Options Activity

Activity in all of our stock option plans is summarized as follows:


				Weighted		Weighted				Weighted
				Average		Average				Average		Aggregate
	Number of			Exercise		Fair		Options		Exercisable		Intrinsic
	Shares			Price		Value		Exercisable		Price		Value

Balance at February 1, 2004		1,869,309		$	13.91				1,058,713	$	14.27
Granted at market price		1,127,896			13.78		5.55
Exercised		(188,858	)		10.97
Cancelled		(161,515	)		16.22

Balance at January 30, 2005		2,646,832			13.92				964,898	$	13.87	$	7,269,000

Granted at market price		918,527			15.92		5.74
Exercised		(105,590	)		10.70
Cancelled		(252,360	)		17.94

Balance at January 29, 2006		3,207,409			14.31				2,368,144	$	14.56	$	7,681,000

Granted at market price		626,236			16.62		6.35
Exercised		(91,963	)		13.05
Cancelled		(461,161	)		19.02

Balance at February 4, 2007		3,280,521		$	14.13				2,353,327	$	13.54	$	7,938,000

The following table summarizes information about our stock options at February 4, 2007:


	Options Outstanding						Options Exercisable
			Weighted						Weighted
			Average		Weighted				Average		Aggregate
	Number		Remaining		Average				Exercisable		Intrinsic
Range of Exercise Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Price		Value

$ 2.75 - $12.86		766,062		1.86	$	10.26		765,895	$	10.26
$12.88 - $13.32		765,603		4.55		13.32		520,438		13.32
$13.40 - $16.33		355,782		3.26		14.46		296,109		14.42
$16.35 - $16.35		663,716		4.67		16.35		663,716		16.35
$16.42 - $19.83		729,358		6.27		16.86		107,169		18.31

$ 2.75 - $19.83		3,280,521		4.19	$	14.13		2,353,327	$	13.54	$	6,873,000

In the fourth quarter of fiscal 2005, the Board of Directors approved the acceleration of the vesting of all “underwater” stock options (those stock options previously granted with exercise prices above $15.90, the market price of the Company’s stock on January 27, 2006) previously awarded to employees and executive officers. Option awards granted subsequent to the Board’s action are not included in the acceleration and will vest equally over the service period established in the award, typically three years.

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	Fiscal Year
	2006		2005		2004

Cash received	$	1,196	$	1,130	$	2,074
Tax benefits	$	—	$	231	$	390

Restricted Stock Activity

During fiscal 2006 and 2005, the Company issued 71,147 shares and 88,226 shares of restricted stock, respectively, at an average market price of $16.62 and $15.84, respectively, to our executive officers and other associates pursuant to the Plan, which vest equally over a three year period. At January 29, 2006, the Company had $1.7 million of deferred compensation costs related to unvested restricted stock included in stockholders’ equity and, in accordance with SFAS No. 123R, the deferred compensation balance was reclassified to additional paid-in capital. Compensation expense of $0.6 million, $0.6 million and $0.1 million was recorded during fiscal 2006, 2005 and 2004, respectively.

Activity for our restricted stock is summarized as follows:


				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value

Non-vested at January 29, 2006		137,779		$	14.72
Granted		71,147			16.62
Forfeited		(43,909	)		14.70
Cancelled		(36,708	)		14.46

Non-vested at February 4, 2007		128,309		$	15.86


Note 12 —	Income Taxes

The provision for income taxes (excluding the $0.6 million deferred income tax benefit allocated to the cumulative effect of a change in accounting principle in fiscal 2006) is comprised of the following ($ in thousands):


	Fiscal Year
	2006		2005		2004

Current
Federal	$	596	$	1,156	$	1,362
State		—		84		10

		596		1,240		1,372
Deferred
Federal		3,533		29,626		31,576
State		862		6,382		6,502

		4,395		36,008		38,078

Total	$	4,991	$	37,248	$	39,450

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the differences between our provision for income taxes and the statutory provision ($ in thousands):


	Fiscal Year
	2006			2005			2004

Income before income taxes	$	12,221		$	95,038		$	99,012
Federal income tax rate		35	%		35	%		35	%

Expected provision (benefit) for income taxes		4,277			33,263			34,654
Permanent wage add-back for federal tax credits		127			151			185
Non-deductible executive compensation		—			—			251
Permanent effect of stock based compensation		42			—			—
Other permanent differences		30			33			135
State taxes, net of federal benefit		550			4,114			4,263
Changes to tax reserves		—			1,096			—
Tax credits and other		(35	)		(1,409	)		(38	)

Actual provision for income taxes	$	4,991		$	37,248		$	39,450

The current and non-current deferred tax assets and liabilities reflected in the balance sheet consist of the following ($ in thousands):


	February 4,			January 29,
	2007			2006

Current deferred income taxes:
Store closing costs	$	999		$	1,196
Accrued employee benefits		15,809			16,101
Credits and other benefits		—			369
Property taxes		(2,146	)		(2,146	)
Provision for bad debts		155			171
Tax loss carryforwards		7,861			5,267
Inventory valuation differences		21,456			12,485
Other		3,156			4,992
Valuation allowance		(790	)		(629	)

Total current deferred income tax asset (liability)		46,500			37,806

Non-current deferred income taxes:
Store closing costs		951			1,580
Accrued employee benefits		2,490			—
Capital lease expenditures		(1,712	)		(1,478	)
Deferred rent and incentives		10,939			7,626
Credits and other benefits		11,697			10,608
Depreciation and amortization		(48,004	)		(45,708	)
Tax loss carryforwards		32,216			40,306
Call options for convertible debt		—			10,610
Discount on senior exchangeable notes		(2,727	)		—
Other		(688	)		(1,576	)
Valuation allowance		(962	)		(1,123	)

Total non-current deferred income tax asset (liability)		4,200			20,845

Net deferred tax asset	$	50,700		$	58,651

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have recorded deferred tax assets of approximately $40.0 million as of February 4, 2007 reflecting the benefit of federal and state tax loss carryforwards approximating $108.5 million and $48.2 million, which begin to expire in 2021 and 2007, respectively. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Utilization of certain of the net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code. Although realization is not assured, management believes it is more likely than not that all the deferred tax assets will be realized with the exception of a portion of California Enterprise Zone credits and a portion of Arizona net operating losses for which management has determined that a valuation allowance in the amount of $1.4 million and $0.3 million, respectively, is necessary.

We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is not required, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.


Note 13 —	Store Closing Costs

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Activity in the allowance for store closing costs and the related payments are as follows ($ in thousands):


	Fiscal Year Ended
	February 4,			January 29,			January 30,
	2007			2006			2005

Balance, beginning of year	$	7,033		$	7,774		$	12,001

Store closing costs:
Provision for store closing costs		258			246			285
Other revisions in estimates		112			1,505			604
Accretion		306			420			552
Operating expenses and other		811			732			788

Total store closing costs		1,487			2,903			2,229

Purchase accounting adjustments — Murray’s Discount Auto Stores		—			324			—

Payments:
Rent expense, net of sublease recoveries		(2,279	)		(2,227	)		(2,895	)
Occupancy and other expenses		(915	)		(740	)		(787	)
Sublease commissions and buyouts		(415	)		(1,001	)		(2,774	)

Total payments		(3,609	)		(3,968	)		(6,456	)

Balance, end of year	$	4,911		$	7,033		$	7,774

During fiscal 2004, we recorded the following: (1) $0.2 million in charges associated with fiscal 2004 store closures; (2) $0.6 million in charges resulting from revisions in estimates; (3) $0.6 million associated with accretion expense relating to the discounting of closed store liabilities; and (4) $0.8 million associated with other operating expenses such as utilities, repairs and maintenance costs that are expensed as incurred.


Note 14 —	Stock Repurchase Program

On July 25, 2005, we announced a share repurchase program for the purchase of up to $25.0 million (aggregate purchase price) of our common stock in connection with the refinancing transactions we completed in 2005 (discussed in Note 8 — Long Term Debt, above). In the second quarter of 2005, we repurchased 1,409,300 shares of common stock for an aggregate purchase price of $25.0 million.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 15 — Transactions and Relationships with Related Parties

Upon his retirement as President and Chief Operating Officer of the Company in April 2000, the Company entered into an employment agreement with Mr. James Bazlen, a member of our Board of Directors, for the performance of specific projects for the Company, as designated by the Chief Executive Officer or President, for an annual base salary of $50,000 and continued payment of certain medical, dental, insurance, 401(k) and other benefits. This agreement is terminable by either party upon written notice. In connection with his membership on our Board of Directors, Mr. Bazlen receives all compensation (including annual grants of stock options), except for the Annual Stipend, that is provided to our outside directors under the Outside Director Compensation Policy.

The Company entered into an agreement on November 18, 2005 with Evercore Financial Advisors L.L.C. (“Evercore”) for certain financial advisory services in connection with our acquisition of Murray’s. William A. Shutzer, one of our directors, is a Senior Managing Director of Evercore. Under the agreement, we agreed to pay, and the Board of Directors approved the payment of, approximately $1.4 million to Evercore upon the successful closing of the transaction. The agreement also contained standard terms and conditions. We closed the Murray’s transaction on December 19, 2005. In May 2006, the Board of Directors approved the Company’s entry into a separate agreement with Evercore for financial advisory services in connection with our refinancing in fiscal 2006, resulting in payments in fiscal 2006 to Evercore of approximately $610,000.

During 2005, Maynard Jenkins, Chairman of the Board of Directors and Chief Executive Officer of the Company, performed consulting services for an unaffiliated entity relating to a proposed acquisition for which he was paid a fee of $250,000. When he accepted the consulting engagement, Mr. Jenkins did not recall that his employment agreement with the Company (which initially was executed in 1998) requires prior approval by the Board of any outside work for compensation. In early 2006, this matter was raised by Mr. Jenkins with the Board and the Board requested, and Mr. Jenkins agreed, that he remit the after-tax proceeds of the consulting fee to the Company. As a result, in March, 2006, Mr. Jenkins paid to the Company the amount of $147,060.


Note 16 —	Legal Matters

Audit Committee Investigation and Restatement of the Consolidated Financial Statements

Overview

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


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

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

	•	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 inquiries that were made.

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Background

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

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

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

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Securities Class Action Litigation

100

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

thereunder, and Section 20(a) of the Exchange Act, against the same Defendants, except for James Riley, whom the plaintiffs voluntarily dismissed. Defendants have until July 13, 2007 to respond to the Second Amended Complaint and the Company anticipates that it will file a motion to dismiss the Second Amended Complaint prior to that date. This litigation is in its early stages, and we cannot predict its outcome; however, it is reasonably possible that the outcome could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Shareholder Derivative Litigation

On July 31, 2006, a shareholder derivative suit was filed in the United States District Court for the District of Arizona against certain of CSK’s current and former officers and all current and certain former directors. The Company is a nominal defendant. On March 2, 2007, plaintiff filed an amended derivative complaint. The amended derivative complaint alleged claims under Section 304 of the Sarbanes-Oxley Act of 2002 and for alleged breaches of fiduciary duties, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment. The amended derivative complaint sought, purportedly on behalf of the Company, damages, restitution, and equitable and injunctive relief. The Company filed a motion to dismiss arguing that plaintiff failed to plead facts establishing that plaintiff was excused from making a demand on the Company’s board of directors to pursue these claims. The individual defendants joined in the Company’s motion. While the motion to dismiss was pending, plaintiff filed a motion for leave to amend her complaint. On June 11, 2007, the court granted plaintiff leave to amend and plaintiff filed her Second Amended Complaint, which alleges the same claims as the prior complaint, but adds various supporting allegations. On June 22, 2007, the Company filed a motion to dismiss the Second Amended Complaint for failure to plead demand futility adequately or, in the alternative, to stay the case until the shareholder class action litigation is resolved. The individual defendants joined in the Company’s motion. No hearing date has been scheduled and the Company does not anticipate a ruling until at least August 2007. This litigation is also in its early stages, and we cannot predict its outcome.

SEC Investigation

Other Litigation

During the third quarter of fiscal 2003, we received notification from the State of California Board of Equalization (the “Board”) of an assessment for approximately $1.2 million for sales tax and approximately $0.6 million for related interest based on the Board’s audit findings for the tax periods of October 1997 through September 2000. During this time period, we refunded the sales tax associated with battery cores to customers who returned a battery core to our stores. The Board believed that the sales tax associated with the battery cores should have been remitted to the taxing authority rather than refunded to the customers. On February 6, 2006, we received notification from the Board that their position had changed and they were no longer seeking payment of any of the original assessment.

101

CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amount related to sales tax on returned battery cores. During this period, we changed our business practices to not refund to customers the sales tax associated with battery cores returned by them to our stores, which is the position advocated by the Board. The Company expensed and paid in fiscal 2006 approximately $375,000 with respect to other items of the assessment and filed a Petition for Redetermination with respect to the sales tax associated with battery cores. Based on the Board’s determination relative to the previous assessment described above, the Company does not believe it has liability for the portion of the assessment relating to the sales tax associated with returned battery cores.

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


Note 17 —	Fair Value of Financial Instruments

The estimated fair values of our financial instruments, which are determined by reference to quoted market prices, where available, or are based upon comparisons to similar instruments of comparable maturities, are as follows ($ in thousands):


	February 4, 2007				January 29, 2006
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value

Receivables	$	43,898	$	43,898	$	29,861	$	29,861
Amounts due under term loan facility	$	349,125	$	349,125	$	—	$	—
Amounts due under senior credit facility	$	52,000	$	52,000	$	94,000	$	94,000
Obligations under 63/4% senior exchangeable notes	$	93,061	$	124,211	$	100,000	$	105,325
Obligations under 7% senior subordinated notes	$	—	$	—	$	218,279	$	183,403
Obligations under 33/8% senior exchangeable notes	$	—	$	—	$	125,000	$	118,281


Note 18 —	Guarantees

In connection with the disposition and/or sublease of certain store locations and service centers, we have indemnified the purchasers/subtenants against claims arising from environmental contamination, if any, existing on

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CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the date of disposition. In some of these cases, we are indemnified by or have recourse to an unrelated third party for claims arising from any such contamination, and also, or in the alternative, have insurance coverage that may be available to offset the potential cost of the indemnity obligation. We also indemnify third party landlords under most of our store leases against claims resulting from the occurrence of certain triggering events or conditions arising out of our operations from the leased premises. We enter into various other agreements with unrelated parties in the ordinary course of our business, which may include indemnity obligations relating to a triggering event, or condition, which is, in most cases, based on our future performance. In some cases, the indemnity obligations are triggered by our prior acts or third parties’ future performance, but are otherwise not limited in duration or monetary exposure. However, in such instances, we have determined that the likelihood of occurrence of the triggering event is remote and/or that the potential cost to us of performance of the indemnity would not be material.

Our risk management philosophy is to limit risk in any transaction or relationship to the maximum extent reasonable in relation to commercial and other considerations. Before accepting any indemnity obligation, we make an informed risk management decision considering, among other things, the remoteness of the possibility that the triggering event will occur, the potential costs to perform any resulting indemnity obligation, possible actions to reduce the likelihood of a triggering event or to reduce the costs of performing an indemnity obligation, whether we are in fact indemnified by an unrelated third party, insurance coverage that may be available to offset the cost of the indemnity obligation, and the benefits to us from the transaction or relationship.

Because most of our indemnity obligations are not limited in duration or potential monetary exposure, we cannot calculate the maximum potential amount of future payments that could be paid under our indemnity obligations stemming from all our existing agreements. We also accrue for contingent liabilities, including those arising out of indemnity obligations, when a loss is probable and the amounts can be reasonably estimated. We are not aware of the occurrence of any triggering event or condition that would have a material adverse impact on our financial statements as a result of an indemnity obligation relating to such triggering event or condition.

We have issued standby letters of credit related to insurance coverage, lease obligations and other matters that expire during fiscal 2007. As of February 4, 2007, total amounts committed under these letters of credit were $37.5 million, which consists of $34.1 million of stand-by letters of credit and $3.4 million of commercial letters of credit.


Note 19 —	Subsequent Events

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

On June 11, 2007, we entered into a third waiver to our Senior Credit Facility that extended the then current waiver relating to the delivery thereunder of our delinquent periodic SEC filings and related financial statements until the earliest of (i) August 15, 2007, (ii) the filing with the SEC of all such delinquent SEC filings up to and including our form 10-Q for the first quarter of fiscal 2007, and (iii) the first date on which an event of default has occurred under the 63/4% Notes and any applicable grace period that must expire prior to acceleration of such notes has expired. When the Company renegotiated the terms of its 45/8% (now 63/4%) Notes in June 2006, we obtained an exemption until June 30, 2007 with respect to the covenant relating to the need to file and deliver to the trustee of such notes our periodic SEC filings. If we have not so filed and delivered all of our periodic SEC filings that are delinquent by June 30, 2007, and a notice of default is given to the Company by the trustee for such notes or by the holders of 25% of the notes at the earliest possible date, a default will occur under the indenture under which the 63/4% Notes were issued that would entitle the holders of the 63/4% Notes to accelerate the payment of their notes no sooner than August 31, 2007. We did not file all of our late periodic SEC filings by June 30, 2007; we do, however,

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CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expect to be able to complete all such filings by August 15, 2007, which is within the 60 day period following such a default and prior to the holders of the 63/4% Notes having the right to accelerate their notes.


Note 20 —	Quarterly Results (unaudited)

The following table sets forth certain quarterly unaudited operating data for fiscal 2006 and 2005. The unaudited quarterly information includes all adjustments which management considers necessary for a fair presentation of the information shown. Please note the sum of the quarterly earnings (loss) per share amounts within a fiscal year may differ from the total earnings (loss) per share for the fiscal year due to the impact of differing weighted average share outstanding calculations.


	Fiscal Year 2006
	First		Second			Third		Fourth
	Quarter		Quarter			Quarter		Quarter(1)
	(In thousands, except share and per share data)


Results of operations
Net sales	$	463,768	$	488,742		$	483,075	$	472,191
Gross profit	$	215,195	$	232,553		$	226,887	$	221,429
Investigation and restatement costs	$	3,670	$	11,962		$	6,736	$	3,371
Operating profit	$	29,213	$	20,463		$	18,731	$	12,031
Interest expense	$	10,321	$	10,999		$	13,308	$	14,139
Loss on debt retirement	$	—	$	19,336		$	90	$	24
Income (loss) before cumulative effect of change in accounting principle	$	18,892	$	(9,872	)	$	5,333	$	(2,132	)
Cumulative effect of change in accounting principle, net of tax	$	966	$	—		$	—	$	—
Net income (loss)	$	10,191	$	(5,817	)	$	3,359	$	(1,469	)
Basic earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle	$	0.25	$	(0.13	)	$	0.08	$	(0.03	)
Cumulative effect of change in accounting principle		0.02		—			—		—

Net income (loss) per share	$	0.23	$	(0.13	)	$	0.08	$	(0.03	)

Diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle	$	0.25	$	(0.13	)	$	0.08	$	(0.03	)
Cumulative effect of change in accounting principle		0.02		—			—		—

Net income (loss) per share	$	0.23	$	(0.13	)	$	0.08	$	(0.03	)

Shares used in computing per share amounts Basic		43,844		43,855			43,867		43,937
Diluted		44,218		44,083			44,050		44,361

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CSK AUTO CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal Year 2005(1)

First
Second
Third
Fourth

Quarter Quarter Quarter Quarter

(In thousands, except share and per share data)

Results of operations

Net sales
$ 405,277 $ 426,604 $ 415,919 $ 403,485

Gross profit
$ 188,540 $ 199,298 $ 195,302 $ 203,471

Operating profit
$ 30,202 $ 37,584 $ 33,258 $ 29,193

Interest expense
$ 8,726 $ 8,439 $ 7,554 $ 8,880

Loss on debt retirement
$ — $ 1,600 $ — $ —

Net income
$ 13,058 $ 16,749 $ 15,664 $ 12,319

Basic earnings per share:
$ 0.29 $ 0.37 $ 0.36 $ 0.28

Diluted earnings per share:
$ 0.29 $ 0.37 $ 0.36 $ 0.28

Shares used in EPS calculation
Basic
45,130 45,135 43,787 43,816

Diluted
45,494 45,539 44,121 44,086


(1)		Our fiscal year consists of 52 or 53 weeks, ends on Sunday nearest to January 31 and is named for the calendar year just ended. All fiscal years presented had 52 weeks except fiscal 2006, which contained 53 weeks. The additional week in fiscal 2006 is included in the fourth quarter.

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Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*

None.


Item 9A.	*Controls and Procedures*

AUDIT COMMITTEE INVESTIGATION AND RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS

Overview

In its 2005 10-K, the Company’s consolidated financial statements for fiscal 2004 and 2003 and quarterly financial information for the first three quarterly periods in fiscal 2005 and all of fiscal 2004 included in Item 8, “Financial Statements and Supplementary Data,” were restated to correct errors and irregularities of the type identified in the Audit Committee-led investigation (primarily focused in the Company’s accounting for inventory and vendor allowances) and other accounting errors and irregularities identified by the Company in the course of the restatement process, all more fully described in the “Background” section below.


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

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

	•	withholding 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 inquiries that were made.

Management, with the assistance of numerous experienced accounting consultants (other than its firm of independent registered public accountants) that the Company had retained near the onset of the investigation to assist the then new Chief Financial Officer with the restatement efforts, continued to review the Company’s accounting practices and identified additional errors and irregularities, which were corrected in the restatement and are included in the discussion under “Management’s Report on Internal Control Over Financial Reporting” presented below.

Background

In the Company’s 2004 10-K, management concluded that the Company did not maintain effective internal control over financial reporting as of January 30, 2005 due to the existence of material weaknesses as described in the 2004 10-K. The plan for remediation at that time called for, among other things, the Company to enhance staffing and capabilities in its Finance organization. During fiscal 2005, we made several enhancements to our Finance organization including the October 2005 hiring of a new Senior Vice President and Chief Financial Officer, Mr. James Riley. In the fourth quarter of 2005, new personnel in our Finance organization raised questions regarding the existence of inventory underlying certain general ledger account balances, and an internal audit of vendor allowances raised additional concerns about the processing and collections of vendor allowances. Management’s review of these matters continued into our fiscal 2005 year-end financial closing process. In early March 2006, it became apparent that inventories and vendor allowances were potentially misstated and that the effect was potentially material to the Company’s previously issued consolidated financial statements. The Audit Committee, acting through a Special Investigation Committee appointed by the Audit Committee consisting of the Audit

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Committee Chairman and the Company’s designated Presiding Director, retained independent legal counsel who, in turn, retained a nationally recognized accounting firm, other than the Company’s independent registered public accountants, to assist it in conducting an independent investigation relative to accounting errors and irregularities, relating primarily to the Company’s historical accounting for its inventories and vendor allowances.

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

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

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

The legal and accounting advisors to the Audit Committee spent thousands of hours in the period from March through the end of September 2006 reviewing relevant documentation and interviewing current and former officers and employees of the Company. The investigation and restatement process identified numerous instances of improperly supported journal entries recorded to general ledger accounts, override of Company policies and procedures, absence of appropriately designed policies and procedures, misapplication of GAAP and other ineffective controls. In addition, the investigation identified evidence of both a “tone” among certain senior executives of the Company that discouraged the raising of accounting concerns and other behavior that was deemed to not be acceptable by our Disinterested Directors.

On September 28, 2006, the Company announced the substantial completion of the Audit Committee-led investigation, and that the investigation had identified accounting errors and irregularities that materially and improperly impacted various inventory accounts, vendor allowance receivables, other accrual accounts and related expense accounts. The Company also announced that its President and Chief Operating Officer, Chief Administrative Officer (who, until October 2005, had served as the Company’s Senior Vice President and Chief Financial Officer) and several other individuals within the Company’s Finance area (including its Controller) were no longer employed by the Company. The Company also announced its intent to implement remedial measures in the areas of enhanced accounting policies, internal controls and employee training.

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a remediation plan to address the types of matters identified during the investigation. The proposed remediation plan that the Remediation Committee is working with reflects the input of the Disinterested Directors. While presently in the development phase, this remediation plan is generally expected to include a comprehensive review, and development or modification as appropriate, of various components of the Company’s compliance program, including ethics and compliance training, hotline awareness and education, corporate governance training, awareness of and education relative to key codes and policies, as well as departmental specific measures. See “Plan for Remediation of Material Weaknesses” below.

DISCLOSURE CONTROLS AND PROCEDURES

An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) was performed as of February 4, 2007, under the supervision and with the participation of our management, including our current Chief Executive Officer and current interim Chief Financial Officer, Mr. Steven Korby. Our disclosure controls and procedures have been designed to ensure that information we are required to disclose in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Based on this evaluation, our current Chief Executive Officer and our current interim Chief Financial Officer, Mr. Steven Korby, concluded that our disclosure controls and procedures were not effective as of February 4, 2007 because of the material weaknesses described below. The Company performed additional analyses and other post-closing procedures to ensure that our consolidated financial statements contained within this Annual Report were prepared in accordance with GAAP. Accordingly, management believes that the consolidated financial statements included in this Annual Report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention, or timely detection, of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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Under the supervision and with the participation of management, including our current Chief Executive Officer and current Chief Financial Officer, we conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of February 4, 2007. In making this assessment, management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) entitled “Internal Control-Integrated Framework.”

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

Management identified the following material weaknesses in the Company’s internal control over financial reporting as of February 4, 2007:

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

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

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

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discounts, the acceptance of increased prices on future purchases and paybacks through the warranty account. This material weakness resulted in errors in vendor allowance receivables, inventory, accounts payable and costs of sales accounts.

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

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

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

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

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

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

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

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Management has concluded that due to the aforementioned material weaknesses, the Company did not maintain effective internal control over financial reporting as of February 4, 2007 based on criteria established in “Internal Control — Integrated Framework” issued by COSO.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of February 4, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 8 of this Annual Report.

PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES

Remediation Initiatives

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

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

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

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

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

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

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

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

Accounting for Inventory — The Company has instituted monitoring processes to ensure compliance with its established policies to assure timely reconciliations of all physical inventories and reflection of the results of the reconciliations in the general ledger, as well as independent supervisory review of the reconciliations. Review and approval processes are in place for distribution centers, warehouses and stores to ensure inventory shrink estimates are calculated in accordance with established procedures. Although new personnel have already been hired with pertinent experience in accounting for inventories, additional hires in the inventory area are planned due to turnover. We plan to enhance our reconciliation process of the book and perpetual inventory for each reporting period to mitigate the risk of material unsubstantiated balances accumulating in general ledger accounts. Longer term, we expect to make system enhancements so that our book and perpetual systems function as one system that is used to replenish the operations and utilize the same information to account for on hand merchandise inventory and cost of sales. Currently, the Company uses an estimation technique for determining its in-transit inventory rather than halting operations to enable a physical inventory of in-transit merchandise to be conducted. This estimate is reviewed and approved on a quarterly basis. In the future, the Company expects to make modifications to its systems that will allow for a systematic method of determining the in-transit inventory balances. Access to product cost adjustments in our inventory system has now been appropriately restricted. We plan to enhance the approvals required for such adjustments and require a monthly manager level review of all adjustments entered into our system. In connection with the restatement of inventory and cost of sales for warranty, the Company has developed a more rigorous process for the independent review of the methodology and underlying judgments used in developing the estimates that underlie the accrual.

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


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

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

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

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

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

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

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

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

The Company has hired and plans to hire new Finance organization personnel who will have knowledge, experience and training in the application of GAAP to handle the Company’s operations and related financial reporting requirements. In view of the resignation of our current Chief Financial Officer (“CFO”), as noted in Part I — Significant Events — Management Changes above, we are seeking a permanent CFO to succeed him; in addition, we are seeking a new Controller. These personnel, along with a rigorous monthly financial statement review and comparison of actual results to budget, are intended to assist in substantiating that our financial reporting is in compliance with GAAP and SEC rules and regulations. The Company plans to increase the accounting, internal control, and SEC reporting acumen of its Finance organization personnel through a regular training program, which is planned to include, among other things, in-house training and education on corporate governance and compliance practices as well as modules/tutorials offered within curriculum provided by our third party ethics and compliance training vendor, which we expect to select in the near future.

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

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assessed approximately annually and revised/updated based upon changes in risk assessment or changed circumstances (e.g., acquisitions).

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

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

Interim Measures Pending Completion of Remediation Initiatives

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


	•	The fiscal 2006 year-end 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 fiscal 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 Annual 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 year-end reporting process.

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

Control deficiencies not constituting material weaknesses

In addition to the material weaknesses described above, management has identified other deficiencies in internal control over financial reporting that did not constitute material weaknesses as of February 4, 2007. The Company implemented during fiscal 2006 and plans to implement during fiscal 2007 various measures to remediate these control deficiencies and has undertaken other interim measures to address these control deficiencies.

Management’s conclusions

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

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

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over financial reporting, it may determine to take additional measures to address control deficiencies, and it may determine not to complete certain of the measures described above.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

In the fourth quarter of fiscal 2006, the Company completed the integration of the systems associated with its December 2005 acquisition of Murray’s, which enabled us to have standardized purchasing, accounting processes and internal controls over financial reporting, which materially affected, or is reasonably likely to materially affect our internal control over financial reporting.


Item 9B.	*Other Information*

None.

PART III


Item 10.	*Directors, Executive Officers and Corporate Governance*

Directors

Our Board of Directors (the “Board”) consists of seven members. The Board has authority under our Amended and Restated By-laws to fill vacancies and to increase or, upon the occurrence of a vacancy, decrease its size between annual meetings. Our directors are elected for terms of one year and hold office until the next annual meeting of our stockholders and until his or her successor has been elected and qualified. Our last annual meeting of stockholders was held on June 16, 2005. We did not hold an annual meeting in 2006 because of the delay in the filing of the 2005 10-K. All of our directors have served since our last annual meeting of stockholders.

The following table sets forth each director’s name, age as of June 1, 2007, and position with the Company. A brief account of each nominee’s business experience follows. Information concerning our executive officers is contained in Item 1, “Business,” of this Annual Report under the caption “Executive Officers.”


Name	Age		Position

Maynard Jenkins		64	Chairman of the Board and Chief Executive Officer
James G. Bazlen		57	Director
Morton Godlas		84	Director
Terilyn A. Henderson		50	Director
Charles K. Marquis		64	Director
Charles J. Philippin		57	Director
William A. Shutzer		60	Director

Maynard Jenkins became our Chairman of the Board and Chief Executive Officer in January 1997. Prior to joining us, Mr. Jenkins served for 10 years as President and Chief Executive Officer of Orchard Supply Hardware, a specialty retailer with 65 stores in California that was acquired by Sears, Roebuck & Co. Mr. Jenkins has more than 40 years of retail management experience. As discussed above, the Board of Directors announced in September 2006 that it had initiated a search for a new Chief Executive Officer for the Company to succeed Mr. Jenkins and, on June 8, 2007, the Company announced the selection of Lawrence N. Mondry as its new President and Chief Executive Officer to succeed Mr. Jenkins upon his retirement. As further discussed below in Item 11, “Executive Compensation,” under the caption “Employment Agreements,” once the new Chief Executive Officer is hired, Mr. Jenkins will retire from the Company but remain available to provide such assistance as the Board may request.

James Bazlen became one of our directors in July 1994. Mr. Bazlen previously served as one of our directors from November 1989 to June 1992. Mr. Bazlen served as our President and Chief Operating Officer from July 1994 until his retirement from day-to-day operations in April 2000. Upon his retirement as President and Chief Operating Officer of the Company in April 2000, the Company entered into an employment agreement with Mr. Bazlen that

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provided for him to work on specific projects as designated by the new Chief Operating Officer or Chief Executive Officer. Prior to July 1994, Mr. Bazlen served the Company in various executive positions since April 1991, including Senior Vice President, Vice Chairman and Chief Financial Officer. Prior to that, Mr. Bazlen served as Senior Vice President of The Trump Group, a private investment group, from March 1986. Prior to joining The Trump Group in 1986, Mr. Bazlen served in various executive positions with General Electric Company and GE Capital for 13 years.

Morton Godlas became one of our directors in October 1998. Mr. Godlas has been a consultant to the retail industry since retiring from Lucky Stores, Inc. in 1982 as a Corporate Senior Vice President. During his tenure with Lucky Stores, which owned both the Kragen Auto Supply and Checker Auto store chains now owned by the Company, the presidents of both Kragen and Checker reported to Mr. Godlas. Prior to his service with Lucky Stores, Mr. Godlas held various executive positions with Gemco, a division of Lucky Stores, over a 12 year period.

Terilyn A. Henderson became one of our directors in April 2002. She was formerly with McKinsey & Company, Inc. for 14 years from September 1987 to December 2001, the last six of which she served in a partnership capacity. While at McKinsey, Ms. Henderson was a co-leader of the Americas Consumer Industries practice, serving clients primarily concerning retail strategy and growth issues. Ms. Henderson has published and spoken on the particular challenges of growth for U.S. retailers.

Charles K. Marquis became one of our directors in April 1999. He has been a senior advisor to Investcorp, an international investment firm, or one or more of its wholly-owned subsidiaries since January 1999. Prior to joining Investcorp, Mr. Marquis was a partner in the law firm of Gibson, Dunn & Crutcher LLP, our primary outside corporate counsel. Mr. Marquis is also a director of Tiffany & Co., Inc.

Charles J. Philippin originally became one of our directors in October 1996. He resigned from our Board of Directors in April 2000 and was reappointed in January 2004. Since June 2002, Mr. Philippin has been a principal of GarMark Advisors, LLP, a mezzanine investment firm. Prior to that, he was Chief Executive Officer of On-Line Retail Partners, an internet software company. He has also served as a member of the management committee of Investcorp, an international investment firm, and was the National Director of Mergers & Acquisitions for Coopers & Lybrand LLP (now PricewaterhouseCoopers LLP, our independent auditor). Mr. Philippin is also a director of Alliance Laundry Systems LLC and Samsonite Corporation.

William A. Shutzer became one of our directors in December 2003. Mr. Shutzer is Senior Managing Director of Evercore Partners, a boutique investment banking firm that provides mergers and acquisitions and other financial advisory services and manages two private equity funds, and that has on occasion provided financial advisory services to the Company on an arm’s length basis (i.e., on terms the Company deemed to be comparable to those provided by unrelated parties). Prior to joining Evercore in April 2004, Mr. Shutzer was Managing Member of Tancredo Financial Advisors, a boutique financial advisory firm specializing in private company valuations and strategic financial advisory services. Prior to that, Mr. Shutzer was Managing Director in the Private Equity Group at Lehman Brothers Inc. from October 2000 until December 2003. He previously served as a Partner in Thomas Weisel Partners LLC, a merchant-banking firm, from 1999 through 2000, and held senior executive positions at ING Baring Furman Selz LLC from 1998 through 1999 and Furman Selz Inc. from 1994 through 1997. Mr. Shutzer is also a director of Jupiter Media Corp., Tiffany & Co., Inc. and Turbo Chef Technologies, Inc.

No family relationships exist between any of the directors or between any director and any executive officer of the Company.

Audit Committee

The current members of our Audit Committee are Ms. Henderson, Mr. Godlas, and Mr. Philippin, Chairman. The Board of Directors has determined that all of the members of the Audit Committee are independent as that term is defined in the applicable NYSE Corporate Governance Listing Standards (the “NYSE Listing Standards”) and in SEC Rule 10A-3. The Board of Directors has also determined that the Chair of the Audit Committee, Mr. Philippin, is an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K and that all members of the Audit Committee are financially literate as required by the NYSE.

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Corporate Governance Guidelines and Committee Charters

Our Corporate Governance Guidelines address topics such as board composition and committees, director responsibilities, compensation and orientation, stock ownership and Board of Directors self-evaluation. The Nominating & Corporate Governance Committee is responsible for overseeing and reviewing the Corporate Governance Guidelines and recommending any changes to the Board.

Our Corporate Governance Guidelines and the charters of our Audit, Compensation and Nominating and Corporate Governance Committees are available on the Corporate Governance pages of the Investors area of our website at www.cskauto.com, and printed copies are available to any shareholder upon request.

Communications with the Board of Directors

Any shareholder or other interested party who desires to communicate with the Board of Directors or any particular director(s) (including the presiding director or the non-management directors as a group) may do so electronically by sending an e-mail to boardofdirectors@cskauto.com. Alternatively, a shareholder or other interested party can contact the Board of Directors or any particular director(s) by writing to: CSK Auto, Inc., c/o Legal Department, Randi V. Morrison Attention: Board of Directors at 645 East Missouri Avenue, Suite 400, Phoenix, AZ 85012. Additional information concerning shareholder and other interested party communications with our Board is available on the Corporate Governance pages of the Investors area of our website at www.cskauto.com.

Codes of Business Conduct and Ethics

Our Code of Business Conduct and Ethics is designed to assist our associates and officers and our Board of Directors in resolving various types of ethical issues that may arise in the business environment. This Code covers topics such as conflicts of interest, insider trading, confidentiality, and compliance with laws. In addition, we have a Code of Ethics for Financial Officers applicable to the Chief Executive Officer, Chief Financial Officer, President, Controller, Treasurer, Director of Accounting and Financial Reporting and other officers performing similar functions, which addresses certain basic ethical principles and practices. Both of the codes are available on the Corporate Governance pages of the Investors area of our website at www.cskauto.com, and printed copies are available to any shareholder upon request. To the extent and in the manner required by SEC rules and the NYSE Listing Standards, we intend to disclose any future amendments to and/or waivers from (as the case may be) certain provisions of these codes on the Company’s website.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and persons who own more than 10% of the Company’s common stock (herein collectively, our “Section 16 insiders”) to file certain forms reporting their ownership and changes in ownership of our stock with the SEC and the NYSE, and to furnish the Company with copies of these filings.

Based solely on our review of the copies of such forms that we received and written representations from our Section 16 insiders, we believe that all of our Section 16 insiders complied with these reporting obligations for fiscal 2006.


Item 11.	*Executive Compensation*

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

Compensation Discussion and Analysis

Our Compensation Discussion and Analysis addresses the following topics:


	•	an overview and design of the Company’s executive compensation policies, programs and practices;

	•	the elements of our executive compensation program;

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	•	the Company’s stock ownership guidelines; and

	•	the impact of regulatory requirements on executive compensation.

Overview and Design of our Compensation Program

The Compensation Committee (for purposes of this Item 11, the “Committee”) administers the Company’s executive compensation program relative to the Chief Executive Officer and certain other executive officers, including each of the executive officers named in the Summary Compensation Table below (the “Named Executive Officers”). The Committee’s primary objective is to establish an executive compensation program that links the interests of management and stockholders and attracts, motivates and retains executive officers of high caliber and ability. The Committee’s overall long-term objective is to design and maintain an executive compensation program that includes as integral components performance metrics and targets that reward a desired level of Company and individual performance. The Committee believes that compensation paid to executive officers should be designed to encourage decisions and actions that have a positive long-term impact on overall Company performance.

Historically, the CEO has recommended to the Committee base salary adjustments and bonuses for the executive officers. As discussed further below, annual equity awards for executive officers (and other eligible employees) are approved by the Committee generally in accordance with the guidelines set forth in the Company’s Committee-approved equity grant policy; however, occasionally management may suggest to the Committee variations from the policy based on individual performance considerations. The Committee has final authority over compensation decisions in respect to the Company’s executive officers.

The Committee seeks to encourage management to acquire and retain Company stock to align their interests with those of our shareholders. The adoption of the 2004 Stock and Incentive Plan (the “2004 Stock Plan”) in June 2004 supported this objective, providing for management equity-based long-term incentive awards on an approximately annual basis, as described in more detail below. Also, in fiscal 2005, the Company adopted stock ownership guidelines, which require members of the Board of Directors and management to hold CSK Auto Corporation common stock. For a more detailed discussion of these guidelines, see the “Stock Ownership Guidelines” section of this Compensation Discussion and Analysis below.

Elements of the Executive Compensation Program

The Company’s executive compensation program includes the following short and long-term compensation elements:


	•	base salary;

	•	annual incentive awards payable in cash;

	•	long-term equity incentive awards in the form of stock options and restricted stock granted under the 2004 Stock Plan; and

	•	long-term incentive bonuses payable in cash and awarded under a Long Term Incentive Plan (“LTIP”) established pursuant to the 2004 Stock Plan.

In addition to these elements, the Company provides retirement, health and welfare benefits, certain perquisites and personal benefits and severance and retention arrangements to members of senior management, including each of the Named Executive Officers. Typically, the Committee’s decisions relative to these elements are influenced by the executive officer’s level of responsibility and function within the Company and the overall performance of the Company.

Base Salary

The Committee annually reviews and approves all base salaries for the Company’s Named Executive Officers. The Committee also reviews and approves adjustments to base salaries in connection with an executive officer’s promotion or other change in responsibilities. Adjustments to base salary are typically based upon duties performed, business growth and the general financial condition of the Company. In determining adjustments to base salary and

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salary ranges for a particular year, the Committee typically has also reviewed information included in its competitors’ proxy statements regarding salaries and other compensation elements for the named executive officers at its publicly held competitors. In making salary adjustments, the Committee also makes subjective determinations regarding the overall performance of individual officers.

Annual Cash Incentive Compensation

Each year, the Committee adopts an incentive compensation plan that provides for an annual cash incentive award for the Company’s executive officers. The Committee believes that annual incentive award opportunities assist the Company in attracting, retaining and motivating key personnel and reward eligible employees for assisting the Company in achieving its operational and strategic goals. Typically, bonuses for the Company’s executive officers under these plans are calculated using a predetermined percentage of an executive’s annual base salary relative to specified target levels for (1) the executive’s level of individual performance and (2) the Company’s performance based on achievement of pre-established Company and individual performance goals. The Committee establishes the threshold, target and maximum levels for each of the objective financial performance measures in the bonus plan based on the approved budget for the fiscal year and for individual performance based on performance relative to previously established individual goals or other individual achievements during the course of the fiscal year. Typically, if the threshold for a particular component is not attained, no payment will be made relative to that component. The Committee also has the discretion to award bonuses to executive officers in recognition of individual and/or Company performance outside of the context of the annual incentive bonus plan, as well as to reduce or increase the size of the annual cash incentive award.

Historically, the Committee has approved pre-established Company financial performance measures in the annual incentive plans, such as in fiscal 2004 when the annual incentive compensation plans were based on the Company’s performance of goals related to earnings per share (EPS), cash flow, and earnings before interest, taxes, depreciation and amortization (EBITDA), in addition to the achievement of individual performance goals. However, in view of the Audit Committee-led investigation and restatement process described in our 2005 10-K and above, the compensation program for fiscal 2005 and 2006 represented a departure from the norm as the Committee did not want to rely on previously established or develop new objective financial targets for annual incentive compensation in the absence at that time of current annual audited financial statements. As such, the Committee ultimately approved discretionary bonuses for the executive officers each of these fiscal years in acknowledgement of non-financial performance achievements during these periods and its desire to retain the Company’s management, notwithstanding the challenges being faced by the Company.

In November 2006, following the substantial conclusion of the Audit Committee-led investigation, the Committee adopted the 2006 General and Administrative Staff Incentive Plan (the “2006 Bonus Plan”). The 2006 Bonus Plan provided that bonuses were payable to the Names Executive Officers (as well as other eligible employees) based on (i) determination by management of the level of achievement of pre-established individual performance goals, which differ by individual, and (ii) assessment by the Committee of the Company’s overall performance and achievement of operational and strategic initiatives, during the 2006 fiscal year. Maximum bonus amounts for the Company’s Named Executive Officers under the 2006 Bonus Plan were established at 50% of each such officer’s annual base salary in effect as of the end of fiscal 2006. The target bonus award under the 2006 Bonus Plan for the Company’s Named Executive Officers was 30% of each such officer’s fiscal year-end base salary, as adjusted based on changes in position during the fiscal year and other factors provided for in the 2006 Bonus Plan. The target level under the 2006 Bonus Plan equated to 50% of the Company’s historical target bonus. In the case of the Named Executive Officers, other than our Chief Executive Officer, bonuses were awarded at the target level, equal to 30% of their year-end base salaries. The Committee took this approach in view of the continued unavailability of financial statements for 2006 and earlier periods as well as the Board of Directors’ desire to keep intact the Company’s management and administrative personnel notwithstanding the difficulties being faced by the Company, including the absence of financial statements, the recently concluded Audit Committee-led accounting investigation and results thereof and changes in senior management. Mr. Jenkins, whose bonus arrangements were separate from the 2006 Bonus Plan, was not awarded a bonus for the 2006 fiscal year. However, as announced by the Company in October 2006 and described below, the Committee determined that Mr. Jenkins would be entitled to receive a $900,000 bonus if he remained in place until his successor commenced employment with the Company

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and the Company entered into an agreement with him in April 2007 that provides for, among other things, payment of such bonus.

Long-Term Equity-Based Incentive Awards

In fiscal 2004, the Committee engaged a compensation consultant to assist it in developing a long-term incentive program designed to intensify focus on the Company’s long-term performance and to retain executive talent. The Committee adopted an equity grant policy and awarded equity to the executive officers and other eligible employees in October 2004 following shareholder approval of the 2004 Stock Plan. In view of the fact that the last grant had been made in April 2002 and the Committee’s objective to award equity approximately annually, the policy proposed that the next annual grant would be made in June 2005 and the one following would be made in March/April 2006. The 2005 grant was made in June as previously contemplated; however, the 2006 grant was deferred pending completion and public disclosure relative to the results of the above-discussed Audit Committee-led investigation. In accordance with the equity grant policy, annual grants since 2004 have consisted of a mix of stock options and restricted stock to the executive officers other than Mr. Jenkins, who was awarded stock options only to ensure maximum deductibility in the context of Section 162(m) of the Internal Revenue Code (“IRC”).

The grants are made pursuant to our 2004 Stock Plan, which provides for the award of equity based compensation (incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, stock units, incentive bonuses and other stock unit awards), and our equity grant policy, as such has been modified by the Committee from time to time. The 2004 Stock Plan is flexible and allows the Committee to design the Company’s compensation programs using a mixture of different elements. Plan participation is limited to employees of the Company, any subsidiary or parent of the Company and to directors of the Company.

Our equity grant policy provides for the grant of stock options and restricted stock to executive officers based on a 70%/30% mix of options and restricted stock, respectively. In addition, the Committee first establishes a total dollar value for equity awards (expressed as a percentage of base salary) and then determines the number of shares to be issued (in the form of options and restricted stock based on the 70/30 split) by reference to the grant date fair market value of the equity awards, which, for options, is based on the Black-Scholes option pricing model, which the Company uses for financial reporting purposes. In accordance with this policy, in fiscal 2006, the Committee approved the award of stock options and restricted stock for the Company’s executive officers. Each Named Executive Officer received an equity grant that was valued based on his salary on the date of grant. As illustrated by example below, the Company’s Executive Vice President, Mr. Ward, received equity compensation with a grant date value equal to 100% of his base salary, and its Senior Vice Presidents, including Messrs. Buresh, Ellis and Riley, each received equity compensation with a grant date value equal to 85% of their base salary.

Grant Date

Equity Grant

Percentage

Grant Date

Fair Market

as a

Total 2006

of Equity

Black-Scholes

Percentage of

Value of

Percentage of

Equity

Value

Value of

Equity Value

Executive’s

Executive

Value at

Granted in

Executive’s

Granted in

Restricted

Officer’s

Date of

Stock

Stock Option

Restricted

Stock

Salary

Grant

Options

Award

Stock

Award

Executive Officer’s Title

($)

(%)

($)

(%)

($)

(%)

($)

Executive Vice President

100,000

100

100,000

70,000

30,000

Senior Vice President

100,000

85,000

59,500

25,500

Equity awards under the 2004 Stock Plan are subject to certain time-based vesting conditions (described below) and may also be subject to other vesting conditions, including the attainment of performance goals. In some circumstances (including retirement if certain criteria are met), however, the vesting of equity awards under the 2004 Stock Plan may accelerate. The 2004 Stock Plan prohibits the repricing of options without approval of stockholders.

Stock Option Grants

The amount of stock option grants to the Named Executive Officers is determined using a Black Scholes option pricing model as described in the Grant of Plan Based Awards table below. The per share exercise price of options cannot be less than the market value of our common stock on the date of grant. Market value is defined under the

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2004 Stock Plan as the mean of the highest and lowest reported sale prices for our common stock on the NYSE on the date of grant. In general, stock options vest in increments of one-third annually on the anniversary of the grant and become fully vested in three years. Once vested, these stock options generally expire at the end of seven years from the date of grant; one year after eligible retirement, death, disability or involuntary termination by the Company (or any purchaser, successor or assign) in connection with a change-in-control (each defined in the 2004 Stock Plan); three months after employment is terminated for any other reason; or immediately upon an employee’s receipt of the notice of termination if the associate is terminated for Cause (as defined in the 2004 Stock Plan). However, in no event will any option be exercisable more than ten years after the date the option is granted.

Restricted Stock Grants

Commencing fiscal 2004, the Committee has awarded grants of restricted stock to the Named Executive Officers (except for Mr. Jenkins). Like stock option grants, under the 2004 Stock Plan, restricted stock grants vest in increments of one-third annually on the anniversary of the grant and become fully vested in three years. Restricted stock may vest prior to three years in the event of an eligible retirement, death, disability or involuntary termination by the Company (or any purchaser, successor or assign) in connection with a change-in-control (each defined in the 2004 Stock Plan). If a holder of restricted stock ceases to be employed for any reason other than as described in the preceding sentence, all shares held by such stockholder that are still subject to the restrictions shall be forfeited.

Long-term Incentive Bonuses

In June 2005, to motivate and ultimately reward senior management for the development and execution of incremental and alternative growth strategies that would, ideally, materially and positively impact shareholder value, the Company granted to all of our then senior executive officers, including the Named Executive Officers, awards of cash-based incentive bonus units under the LTIP. These at-risk incentive bonus units vest and become payable (subject to continued employment with the Company and the achievement of certain performance vesting criteria established by the Committee relating to the per share value of the Company’s common stock) in equal installments over 4 years; provided that vesting and payment will accelerate upon a termination of employment within 12 months following a change in control of the Company, by the Company without cause, by the executive for good reason or by reason of the executive’s death, disability or retirement. Each vested incentive bonus unit entitles the holder thereof to a cash payment equal to the excess of the average closing price of the Company’s common stock during a specified period of time (or, in the case of a change in control, the transaction value per share) over $20 per share. The Committee believes that tying this at-risk bonus to the Company’s stock price will further align the interests of management with the interests of shareholders.

Mr. Jenkins was granted a total of 1,000,000 incentive bonus units pursuant to the Long-Term Incentive Plan and other executive officers, including our Named Executive Officers, were each granted between 250,000 or 500,000 incentive bonus units. In the aggregate, 2,500,000 incentive bonus units were granted in June 2005 to the then seven senior executive officers, including Mr. Jenkins. Subsequent to the initial grant in June 2005, other executive officers have been granted a total of 475,000 incentive bonus units, 125,000 of which were granted to Mr. Riley in October 2005 upon his employment with the Company as the Chief Financial Officer. At fiscal 2006 year end, the Company had granted a total of 2,975,000 incentive bonus units, of which 850,000 had been forfeited in connection with certain executive departures from the Company. In fiscal 2007, the Committee determined that the performance vesting criteria was not achieved; therefore, that portion of each LTIP participant’s bonus unit award that would have otherwise become payable on the applicable payment date was forfeited without consideration.

The LTIP provides that if the Company issues restated financial statements that reflect a material reduction in previously published sales or earnings and the restatement is attributable, in whole or in material part, directly or indirectly, to the malfeasance or gross negligence of an LTIP participant, the LTIP participant will be required to repay any payments received within the 24-month period ending on the date the restatement is issued and will forfeit the right to receive any future payments under the LTIP. Upon termination of employment for any reason other than death, disability, or a termination by the Company without cause, the LTIP participant is required to repay any payments received within the 24-month period ending on the termination date and any payments received after the

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termination date, and will forfeit the right to receive future payments under the LTIP, if the participant engages in any competitive activity (as defined in the LTIP).

Other benefits

401(k) Plan

The Company sponsors a 401(k) plan that is available to all our executive officers and other employees upon their hire date. The Company matches from 40% to 60% of employee contributions in 10% increments, based on years of service, up to 4% of the participant’s base salary. Participant contributions are subject to certain restrictions as set forth in the IRC.

Deferred Compensation Plan

We also sponsor the CSK Auto, Inc. Deferred Compensation Plan. This plan is maintained primarily to provide deferred compensation benefits for a select group of “management or highly compensated employees” as defined by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). For IRC and ERISA purposes, this plan is deemed to be “unfunded.” The Deferred Compensation Plan permits participants voluntarily to defer up to 50% of their salary and 100% of their annual bonus without regard to the limitations under the IRC applicable to the Company’s tax-qualified plans. In addition, any refunds resulting from non-discrimination testing of the Company’s 401(k) Plan will be automatically transferred from the participant’s 401(k) account to the Deferred Compensation Plan. Although the Company may also make matching contributions to a participant’s account under this plan (except for automatic transfers of excess Company matching contributions from a participant’s 401(k) plan account), the Company has not elected to do so. Deferred amounts and any matching contributions under the Deferred Compensation Plan are 100% vested at all times, and are invested on behalf of the participant in investment vehicles selected from time to time by the administrators of the plan. Benefits are payable at retirement in either a lump sum or installments for up to 12 years. Benefits upon a termination of employment prior to retirement are payable only in a lump sum. See the “Non-Qualified Deferred Compensation” table below.

Perks and other personal benefits

The Company provides certain perquisites and personal benefits to its executive officers that are not generally available to other employees. The Committee believes that the perquisites and personal benefits that are provided to the Company’s executive officers are generally comparable to those provided by companies that compete in the marketplace for the services of our executive officers. Historically, management has provided certain senior executives with the use of a Company vehicle for personal use, as well as a car allowance in the nature of the Company payment’s or reimbursement of expenses for gasoline, repair and maintenance, registration, insurance and other costs and expenses and a tax gross-up, as noted in the footnotes corresponding to the “All Other Compensation” column of the “Summary Compensation Table” below, which set forth the Company’s costs for the perquisites and personal benefits provided to our Named Executive Officers in fiscal 2006.

Employment and post-employment arrangements

Employment Agreement

The Company has an employment agreement with Mr. Jenkins. Under the agreement, Mr. Jenkins’ annual bonus is awarded based upon goals for financial performance and operating results of the Company as established by the Compensation Committee of the Board of Directors during the first part of the fiscal year. The Compensation Committee has broad discretion in determining the measures upon which Mr. Jenkins’ bonus will be based, but in the past has used criteria such as EBITDA, EPS, and cash flow. For information on Mr. Jenkins’ post-employment arrangements, see the “Potential Payments Upon Termination or Change-in-Control” table below.

Mr. Jenkins’ employment agreement was amended on April 16, 2007 to reflect the terms and conditions of Mr. Jenkins’ retirement from the Company and to ensure a smooth and efficient transition of the CEO role. The amendment provides that Mr. Jenkins will be employed on an at will basis until the later of (i) the date he attains age 65 or (ii) the earlier of (x) the date on which a new CEO commences employment with the Company and

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(y) September 30, 2007 (the later of (i) and (ii) being the “Retirement Date”). So long as Mr. Jenkins remains employed through the Retirement Date, he shall be entitled to a lump-sum bonus payment of $900,000 upon the Retirement Date.

The employment agreement provides that at the time of the termination of Mr. Jenkins’ employment, Mr. Jenkins and the Company will execute a mutual release of all claims, as further set forth in the agreement. Mr. Jenkins’ agreement also contains certain confidentiality provisions. Other than Mr. Jenkins, our incoming President and Chief Executive Officer, Mr. Mondry, and our interim Chief Financial Officer, Mr. Korby (see “Significant Events” in Part I above), no executive officer has an employment agreement that specifies compensation or length of employment.

Supplemental Retirement Compensation

To retain and motivate Mr. Jenkins, in August 2000, the Company entered into a supplemental executive retirement plan (SERP) agreement with Mr. Jenkins that provides supplemental retirement benefits for a period of ten years beginning thirty days after the effective date of termination of his employment. The benefit amount payable to Mr. Jenkins under this agreement is $600,000 per annum. Pursuant to the agreement, the Company will also provide to Mr. Jenkins and his spouse substantially comparable medical benefits (utilizing, as applicable, such other medical benefit policies/programs as may then be available, such as COBRA benefits, supplemental policies to any applicable Medicare policy and/or reimbursement of out-of-pocket co-insurance and deductible payments) as are made available by the Company to its executive officers for a period of ten years commencing upon the termination of his employment for any reason other than for Cause. For further information on Mr. Jenkins’ SERP arrangements, see the “Potential Payments Upon Termination or Change-in-Control” table below. Other than Mr. Jenkins, no executive officer has a SERP agreement with the Company.

Severance and Retention Agreements

The Company has entered into severance and retention agreements with certain members of our senior management team, including the Named Executive Officers (except for Mr. Jenkins who has an employment agreement with the Company). All of such agreements entitle these executives to receive certain severance benefits if the Company terminates the executive’s employment without Cause (as defined in such agreement) or if the executive terminates his employment for Good Reason (as defined). During fiscal 2006, the severance benefits consisted of the continued payment of a certain percentage (between 50% — 100% for these executives) of salary, benefits and incentive compensation for a certain period (six to twelve months for these executives), the amount of then accrued and unused vacation and outplacement services (the value of such services not to exceed 15% of current salary). Any benefits arising under the severance and retention agreements are conditioned on the executive’s execution of a general release of claims and agreement to abide by specific non-compete, non-solicit, confidentiality and other obligations set forth in the agreements.

These agreements also contain change of control provisions that provide these executives with supplemental retention and severance benefits in the event of a Change of Control (as defined) of the Company. Generally, these benefits consist of a lump sum retention bonus payment equal to three months of the executive officer’s then-current salary if the executive remains employed with the Company or surviving corporation for a period of time after a Change of Control or the Company terminates his employment without Cause or the executive terminates his employment for Good Reason within such period of time after the Change of Control date. The agreements also provide these executives with special severance benefits, consisting generally of continued salary, benefits and incentive compensation, accrued and unused vacation, and outplacement services, if, within twelve months following a Change of Control of the Company, the executive terminates his employment for Good Reason or the Company terminates such executive’s employment without Cause. The Committee believes that the protections provided to certain executive officers by the severance and retention agreements will reinforce and encourage the management team’s continued attention and dedication to the Company during times of uncertainty.

In furtherance of this objective, in February 2007, the Committee reviewed and approved modifications to the form of severance and retention agreement applicable to each of the Company’s executive and senior vice presidents (including the Named Executive Officers), consisting principally of an increase in standard severance

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benefits (payable in the event of a termination of employment by the Company without cause or by the executive for good reason) from 50% of salary plus target bonus (as was formerly the arrangement for all but one of the senior officers) to 100% of salary plus target bonus.

Stock Ownership Guidelines

In 2005, the Company adopted stock ownership guidelines applicable to all members of the Board of Directors and senior executive officers of the Company to more closely align the interests of the directors and officers with those of our shareholders. Ownership requirements are expressed as a minimum number of shares (1,000) for members of the Board of Directors and as a minimum percentage of then current base salary (50%) for senior officers. Ownership of the required shares includes stock owned directly by the officer or director, shares held in a trust whereby the officer or director has power over disposition of the shares in the trust and any shares held in a 401(k) Plan or similar arrangement. Restricted (unvested) shares and unexercised stock options are not counted in calculating ownership for purposes of these guidelines.

The senior officer guidelines are subject to a phase-in component. Until such time that an officer is in compliance with these guidelines, he or she is prohibited from selling any shares of Company stock (except for shares acquired upon the exercise of options) and must retain all restricted shares (less shares sold for taxes required to be withheld or paid) awarded by the Committee. All of our directors and some of our executive officers have already attained or exceeded these ownership levels.

Impact of Regulatory Requirements on Compensation

The Committee is mindful of the potential impact upon the Company of Section 162(m) of the IRC, which prohibits public companies from deducting certain executive remuneration in excess of $1,000,000. While reserving the right of the Company to offer such compensation arrangements as may be necessary to attract and retain executive officers of high caliber and ability, the Committee intends generally to structure such arrangements, where feasible, so as to minimize or eliminate the impact of the limitations of Section 162(m) of the IRC.

Beginning on January 29, 2006, the Company began accounting for stock-based payments in accordance with the requirements of Statement of Financial Accounting Standard 123(R).

Compensation Committee Report

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report.

Respectfully Submitted,

Compensation Committee

Charles K. Marquis, Chairman
Morton Godlas
Terilyn A. Henderson
Charles J. Philippin

Compensation Committee Processes and Procedures

The Committee administers the Company’s executive compensation programs. The current members of our Committee are Ms. Henderson, Messrs. Godlas and Philippin, and Mr. Marquis, Chairman. The Board of Directors has determined that all of the members of the Committee are independent as that term is defined under the applicable NYSE Listing Standards.

124

The Committee operates under a written Charter that was first adopted by the Board of Directors in December 2003 and has since periodically been updated and amended. The Committee reviews and reassesses the adequacy of the Charter from time to time and recommends any proposed changes to the Board of Directors for approval. The Charter is available on the Corporate Governance pages of the Investors area of our website at www.cskauto.com and printed copies are available to any shareholder upon request.

The primary duties and responsibilities of the Committee are as follows:


	•	annually review and approve corporate goals and objectives relevant to the compensation of the Chief Executive Officer; evaluate the Chief Executive Officer’s performance in light of these goals and objectives; and either as a committee or together with the other independent directors (as directed by the Board of Directors), determine and approve the Chief Executive Officer’s compensation level based on this evaluation;

	•	oversee the annual evaluation of the executive management of the Company and approve the executive officers’ annual base salary, and incentive, equity-based and other compensation;

	•	review and make recommendations to the Board of Directors at least annually with respect to non-CEO compensation and incentive and equity-based compensation plans;

	•	adopt, administer, approve and ratify awards under incentive compensation and equity-based plans, and review and monitor awards under such plans as may be required to comply with applicable tax laws and SEC rules; and

	•	annually review the form and amount of director compensation and make recommendations to the Board of Directors, as appropriate, in accordance with the Company’s Corporate Governance Guidelines.

The Committee meets either in person or telephonically or acts via unanimous written consent in lieu of a meeting as often as it deems necessary or appropriate to perform its duties and responsibilities. When the Committee meets in person or telephonically, it most often meets in executive session outside the presence of management, although the Committee also often seeks input from the Chief Executive Officer and General Counsel in connection with fulfilling its duties and responsibilities.

The Committee has the sole authority under its Charter to retain any compensation consultant to assist in the evaluation of director, CEO or senior executive compensation, including the sole authority to approve the firm’s fees and other retention terms. The Committee retained compensation consultants in 2004 and 2006-2007 to assist it with discharging its duties and responsibilities.

Compensation Committee Interlocks and Insider Participation

No current member of our Committee was, during fiscal 2006, one of our executive officers or employees or was formerly one of our officers. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors.

Executive Compensation Tables

CSK Auto Corporation is a holding company with no business operations of its own; all of its business is conducted through its wholly-owned subsidiary, CSK Auto, Inc. The officers of the Company receive their compensation from CSK Auto, Inc. and receive no additional compensation in their capacities as officers of the Company.

125

Summary Compensation Table

The following table sets forth information concerning the total compensation earned in fiscal 2006 by our Chief Executive Officer, Chief Financial Officer, our three highest paid executive officers during fiscal year 2006 other than our CEO and CFO and two other individuals who would have been one of the three most highly compensated executive officers other than our CEO and CFO had either of them served as an executive officer at the end of fiscal year 2006 (collectively, our fiscal 2006 “Named Executive Officers” or “NEOs”):


												Change in
												Pension
												Value and
												Nonqualified
												Deferred
							Stock		Option			Compensation		All Other
			Salary		Bonus		Awards		Awards			Earnings		Compensation		Total
Name and Principal Position	Year		($)		($)(1)		($)(2)		($)(3)			($)(4)		($)(5)		($)

Maynard Jenkins —		2006		900,000		—		—		447,454			317,420		43,536		1,708,410
Chairman and Chief Executive Officer
James Riley —		2006		319,612		90,840		25,430		82,852			—		60,005		578,739
Senior Vice President and Chief Financial Officer
Dale Ward —		2006		337,365		105,000		51,530		89,991			—		21,960		605,846
Executive Vice President
Larry Buresh —		2006		321,916		99,000		48,779		81,969			—		8,764		560,428
Senior Vice President and Chief Information Officer
Larry Ellis —		2006		243,305		75,000		36,454		61,244			—		7,329		423,332
Senior Vice President — Logistics
Martin Fraser —		2006		396,346		—		9,305		(43,482	)		—		814,028		1,176,197
Former President and Chief Operating Officer(6)
Don Watson —		2006		264,321		—		3,727		(19,900	)		—		498,289		746,437
Former Senior Vice President and Chief Administrative Officer(7)


(1)		Fiscal 2006 amounts represent discretionary bonuses paid in fiscal 2007. Bonuses for eligible associates under the 2006 General and Administrative Staff Incentive Plan (the “2006 G&A Plan”) were calculated using a predetermined percentage of a participant’s annual base salary relative to specified target levels for the eligible associate’s level of individual performance and the Company’s performance. In the case of the NEOs, other than our Chief Executive Officer, bonuses were awarded at the target level, equal to 30% of an officer’s year-end base salary (Mr. Riley’s bonus was prorated due to an approved medical leave of absence during a portion of fiscal 2006). The Committee took this approach in view of the continued unavailability of financial statements for 2006 and earlier periods as well as the Board of Directors’ desire to keep intact the Company’s management and administrative personnel notwithstanding the difficulties being faced by the Company.

(2)		The amounts included in the “Stock Awards” column represent the compensation cost recognized by the Company in fiscal 2006 related to non-option stock awards granted in 2004, 2005 and 2006, in accordance with FAS 123(R). Messrs. Fraser and Watson forfeited 14,899 and 6,695 restricted shares, respectively, upon their departures from the Company in September 2006. Compensation cost in fiscal 2006 for Messrs. Fraser and Watson was impacted by these forfeitures.

		All stock awards shown are based on the average of the high and low prices of the Company’s common stock on the date of grant. For a discussion of valuation assumptions, see Note 2 to the Company’s Consolidated Financial Statements above. Please also see the “Grants of Plan Based Awards Table” below for more information regarding the option awards the Company granted during fiscal year 2006.

126


(3)		The amounts included in the “Option Awards” column are the amounts of compensation cost recognized by the Company in fiscal 2006 related to stock option awards in 2004, 2005 and 2006, in accordance with FAS 123(R). Mr. Fraser and Mr. Watson forfeited 56,566 and 25,890 stock options respectively upon their departures from the Company in September 2006. Compensation cost in fiscal 2006 for Messrs. Fraser and Watson was impacted by these forfeitures.

		For a discussion of valuation assumptions, see Note 2 to the Company’s Consolidated Financial Statements above. Please also see the “Grants of Plan Based Awards Table” below for more information regarding the option awards the Company granted during fiscal year 2006.

(4)		The amounts included in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column are the changes in values of Mr. Jenkins’ Supplemental Executive Retirement Plan (“SERP”) during fiscal 2006. For additional information on the valuation assumptions used to calculate the pension value, refer to the “Pension Benefits” table below.

(5)		The amounts shown in the “All Other Compensation” column are attributable to the following:

•		Mr. Jenkins: Matching contributions to Mr. Jenkins’ 401(k) Plan; life insurance premiums; actual incremental cost attributed to the personal use of a Company-provided vehicle; taxable cost of group-term life insurance; and $14,121 tax gross up in relation to personal use of Company-provided vehicle.

•		Mr. Riley: Life insurance premiums; actual incremental cost attributed to the personal use of a Company-provided vehicle; taxable cost of group-term life insurance; relocation and living expenses paid by the Company; cost paid by the Company for a chartered flight relative to Mr. Riley’s medical leave of absence; $273 tax gross up in relation to Mr. Riley’s personal use of Company-provided vehicle; and $11,710 tax gross up in relation to Mr. Riley’s commuting and interim living expenses.

•		Mr. Ward: Matching contributions to Mr. Ward’s 401(k) Plan; life insurance premiums; actual incremental cost attributed to the personal use of a Company-provided vehicle; taxable cost of group-term life insurance; and $5,267 tax gross up in relation to Mr. Ward’s personal use of Company-provided vehicle.

•		Mr. Buresh: Matching contributions to Mr. Buresh’s 401(k) Plan, $1,992 of which was later transferred to Mr. Buresh’s Deferred Compensation Plan (see “Non-Qualified Deferred Compensation” below); life insurance premiums; and taxable cost of group-term life insurance.

•		Mr. Ellis: Matching contributions to Mr. Ellis’ 401(k) Plan; life insurance premiums; and taxable cost of group-term life insurance.

•		Mr. Fraser: Matching contributions to Mr. Fraser’s 401(k) Plan; life insurance premiums; actual incremental cost attributed to the personal use of a Company-provided vehicle; taxable cost of group-term life insurance; and severance and related post-employment payments described below in footnote 6.

•		Mr. Watson: Matching contributions to Mr. Watson’s 401(k) Plan; life insurance premiums; actual incremental cost attributed to the personal use of a Company-provided vehicle; taxable cost of group-term life insurance; and severance and related post-employment payments described below in footnote 7.

(6)		Mr. Fraser was an officer of the Company until his departure in September 2006. In addition to the amounts described in footnote (5) above, the amounts included in the “All Other Compensation” column for Mr. Fraser include cash severance payments in the amount of $688,107, the cost to the Company for nine months of post-separation benefits (consisting of nine months of continued medical, vision and dental insurance and estimated executive health/medical expense reimbursements) in the amount of $18,993 and outplacement services not to exceed $135,000 ($90,000 of which have been incurred to date).

(7)		Mr. Watson was an officer of the Company until his departure in September 2006. In addition to the amounts described in footnote (5) above, the amounts included in the “All Other Compensation” column for Mr. Watson include cash severance in the amount of $376,991, the cost to the Company for nine months of post-separation benefits (consisting of nine months of continued medical, vision and dental insurance and estimated executive health/medical expense reimbursements) in the amount of $12,528 and outplacement services in the amount of $90,000.

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Grants of Plan-Based Awards in 2006

The following table shows all Grants of Plan-Based Awards in 2006 to each of the NEOs:


			All Other		All Other
			Stock		Option						Grant
			Awards:		Awards:		Exercise		Closing		Date
			Number of		Number of		or Base		Price of		Fair Value
			Shares of		Securities		Price of		Stock on		of Stock and
			Stock or		Underlying		Option		Grant		Option
	Grant		Units		Options		Awards		Date		Awards
Name	Date		(#)(1)		(#)		($/Sh)(2)		($/Sh)		($)(3)

Maynard Jenkins		—		—		—		—		—		—
James Riley		11/30/06		—		30,247		16.62		16.65		192,135
		11/30/06		5,065		—		—		16.65		84,155
Dale Ward		11/30/06				37,741		16.62		16.65		239,738
		11/30/06		6,320		—		—		16.65		105,007
Larry Buresh		11/30/06		—		30,247		16.62		16.65		192,135
		11/30/06		5,065		—		—		16.65		84,155
Larry Ellis		11/30/06		—		22,914		16.62		16.65		145,554
		11/30/06		3,837		—		—		16.65		63,752
Martin Fraser		—		—		—		—		—		—
Don Watson		—		—		—		—		—		—


(1)		Represents time vested restricted stock awards. The terms of the restricted stock awards provide for three equal annual vestings commencing one year from the award date.

(2)		On November 30, 2006, the Compensation Committee, by unanimous written consent, granted stock options and awarded restricted stock to certain Company employees, including the NEOs. The exercise price of the stock options was $16.615 per share, the high-low average of our common stock as reported on the NYSE. We use the average of the high and low prices of the Company’s common stock on the date of the grant in accordance with the terms of our 2004 Stock Plan, described in more detail in the Compensation Discussion and Analysis above. The terms of the options provide for vesting in three equal annual installments commencing one year from the grant date. The options have a term of seven years and will expire on November 30, 2013.

(3)		The deemed grant date present values for the stock option grants are based on the Black-Scholes option pricing model. Based on assumed (i) risk free interest rate of 4.45%, (ii) expected stock price volatility of 38.08%, (iii) no dividend yield and (iv) option exercises occurring after six years, the model produces a per option share value of $6.35.

128

Outstanding Equity Awards at Fiscal 2006 Year-End

The following table includes certain information concerning unexercised stock options, stock options that have not vested, LTIP awards and stock awards that have not vested for each of the NEOs as of February 4, 2007:


												Stock Awards
	Option Awards													Market
	Number of		Number of									Number of		Value of
	Securities		Securities									Shares or		Shares or
	Underlying		Underlying									Units of		Units of
	Unexercised		Unexercised			Option						Stock that		Stock that
	Options		Options			Exercise			Option			have not		have not
	Exercisable		Unexercisable			Price			Expiration			Vested		Vested
Name	(#)		(#)			($)			Date			(#)		($)(1)

Maynard Jenkins		36,000		—			14.00			12/31/2007			—		—
		72,000		—			11.00			02/09/2009			—		—
		216,365		—			11.00			02/09/2009			—		—
		50,000		—			9.87			04/05/2009			—		—
		242,424		80,808			13.32			10/18/2011			—		—
		183,673					16.35			06/28/2012			—		—
		—		1,000,000	(2)		N/A	(3)		5/15/2010	(2)
James Riley		13,333		26,667			15.03			10/24/2012			3,334		54,878
		—		30,247			16.62			11/30/2013			5,065		83,370
				125,000	(2)		N/A	(3)		5/15/2010	(2)
Dale Ward		9,150		—			14.00			12/31/2007			—		—
		4,125		—			9.87			04/05/2009			—		—
		27,289		13,645			13.32			10/18/2011			1,884		31,011
		28,676		—			16.35			06/28/2012			3,164		52,079
		—		37,741			16.62			11/30/2013			6,320		104,027
				250,000	(2)		N/A	(3)		5/15/2010	(2)
Larry Buresh		9,150		—			14.00			12/31/2007			—		—
		25,000		—			11.00			02/09/2009			—		—
		17,000		—			11.00			02/09/2009			—		—
		1,250		—			11.00			02/09/2009			—		—
		12,500		—			9.87			04/05/2009			—		—
		25,427		12,714			13.32			10/18/2011			1,755		28,887
		27,555		—			16.35			06/28/2012			3,040		50,038
		—		30,247			16.62			11/30/2013			5,065		83,370
				250,000	(2)		N/A	(3)		5/15/2010	(3)
Larry Ellis		2,800		—			11.00			02/09/2009			—		—
		5,000		—			9.87			04/05/2009			—		—
		18,954		9,478			13.32			10/18/2011			1,309		21,546
		20,643		—			16.35			06/28/2012			2,277		37,479
		—		22,914			16.62			11/30/2013			3,837		63,157
				250,000	(2)		N/A	(3)		5/15/2010	(2)
Martin Fraser		12,200		—			11.00			02/09/2009			—		—
		25,000		—			9.87			04/05/2009			—		—
		64,286		—			16.35			06/28/2012			—		—
Don Watson		12,200		—			11.00			02/09/2009			—		—
		17,500		—			9.87			04/05/2009			—		—
		23,022		—			16.35			06/28/2012			—		—

129


(1)		Based on the closing price of our common stock as of February 4, 2007 ($16.46 per share), as reported on the NYSE.

(2)		Represents number of incentive units granted under the LTIP unvested at fiscal 2006 year-end. Subject to specific exceptions (e.g., retirement) as set forth in the LTIP, each LTIP participant will be entitled to receive a distribution of cash on May 15 of each of the calendar years 2007, 2008, 2009 and 2010 (each date being a “Payment Date”) equal in value to the amount by which the average of the per share closing prices of the Company’s common stock over a specified period of time (after release of the fiscal year earnings for the immediately preceding fiscal year) exceeds the base value of $20.00 (which is subject to adjustment in the event of a change in the Company’s capitalization) multiplied by 25% of the LTIP participant’s aggregate number of incentive bonus units, so long as LTIP participant remains continuously employed by the Company through the applicable Payment Date. In the event the formula described above results in no payment to the LTIP participant on a Payment Date, then the incentive bonus units vesting on such date will be forfeited without consideration. On May 15, 2007, the formula described above resulted in no payment to the LTIP participants. Accordingly, on May 15, 2007, Messrs. Jenkins, Riley, Ward, Buresh and Ellis each forfeited 25% of their total incentive bonus units.

(3)		There is no exercise price for LTIP incentive units.

Vesting Schedule of all Outstanding Stock Option and Restricted Stock Grants at Fiscal 2006 Year-End

The following table includes vesting information on each of the outstanding stock option and restricted stock grants represented in the Outstanding Equity Awards at Fiscal 2006 Year-End Table:

Option/Stock

Vesting Date -

Award

First 1/3 of

Second 1/3 of

Final 1/3 of

Expiration

Option/Stock

Date

Award

12/31/2007

(1)

12/21/2000

12/21/2001

12/21/2002

02/09/2009

(2)

—

04/05/2009

04/05/2003

04/05/2004

04/05/2005

10/18/2011

10/18/2005

10/18/2006

10/18/2007

06/28/2012

(3)

01/29/2006

10/24/2012

10/24/2006

10/24/2007

10/24/2008

11/30/2013

11/30/2007

11/30/2008

11/30/2009


(1)		In December 2006, due to a “blackout” imposed by the Company in light of its lack of currency in its financial reporting, associates who were awarded stock options under the Company’s stock option plans were unable to exercise outstanding options until the Company became current with its financial reporting obligations. This grant would have expired during the blackout period. On December 15, 2006, all associates with outstanding stock options under this grant were provided the opportunity to elect to either exercise their amended options during the calendar year 2007 after the expiration of the blackout period (and subject to other applicable trading restrictions) or have their options expire unexercised on December 31, 2007. Some of the NEOs had outstanding stock options under this grant and accordingly executed their respective election agreements.

(2)		In 2001, the Compensation Committee authorized the re-price and re-grant of all stock option awards outstanding with an exercise price greater than $14.00 for certain members of senior management, including the then NEOs. Such options were to be re-granted with an exercise price the higher of 1) the fair market value of the Company’s common stock on the re-grant date, or 2) a value between $10.00 and $11.00. Each of the stock option grants would continue to vest (if not already fully vested) based on its original vesting schedule.

(3)		On January 29, 2006, the last day of fiscal 2005, the Compensation Committee authorized the acceleration of all stock option grants with an exercise price greater than $15.90. This included the stock option grant set to expire on June 28, 2012. The restricted stock granted June 28, 2005 shall continue to vest in 3 installments each on the first, second and third anniversaries of the grant date.

130

Option Exercises and Stock Vested in 2006

The following table includes certain information with respect to the options exercised by each of the NEOs as of February 4, 2007:


	Option Awards				Stock Awards
	Number of				Number of
	Shares		Value		Shares		Value
	Acquired on		Realized on		Acquired on		Realized on
	Exercise		Exercise		Vesting		Vesting
Name	(#)		($)(1)		(#)		($)(2)

Maynard Jenkins		—		—		—		—
James Riley		—		—		1,666		25,823
Dale Ward		—		—		1,581		19,130
		—		—		1,883		29,243
Larry Buresh		—		—		1,519		18,380
		—		—		1,755		27,255
Larry Ellis(3)		1,400		3,647		1,138		13,770
		—		—		1,308		20,313
Martin Fraser		28,282		83,856		3,545		42,895
Don Watson		17,945		38,462		1,545		18,695


(1)		Represents the difference between the exercise price of the option and the market price at the time of exercise.

(2)		Represents the market value of the shares of Restricted Stock on the day the stock vested. These shares represent restricted stock granted in 2004 and 2005.

(3)		Mr. Ellis exercised and held these options in November 2006. These options were set to expire in December 2006.

Pension Benefits in 2006

The following table includes certain information with respect to any plans that provide for payments to our NEOs at, or following retirement from the Company:


				Number of		Present		Payments
				Years		Value of		During
				Credited		Accumulated		Last Fiscal
				Service		Benefit		Year
Name	Plan Name			(#)		($)(1)		($)

Maynard Jenkins		SERP	(2)		N/A		4,062,075		0
James Riley		—			—		—		—
Dale Ward		—			—		—		—
Larry Buresh		—			—		—		—
Larry Ellis		—			—		—		—
Martin Fraser		—			—		—		—
Don Watson		—			—		—		—


(1)		The estimated present value of the accumulated benefit is based on the following assumptions: (1) retirement date of June 30, 2007 and (2) an applicable discount rate of 8.5%.

(2)		The Company entered into this SERP with Mr. Jenkins in August 2000. He vested 331/3% of the maximum SERP benefit on February 1, 2002 and an additional 162/3% of the maximum SERP benefit on February 1 of each of the next four years. Mr. Jenkins thus became fully vested in the maximum SERP benefit on February 1, 2006 after five years of credited service.

Additional information regarding the SERP can be found above under the heading “Compensation Discussion and Analysis.”

131

Non-qualified Deferred Compensation in 2006

The Company sponsors the CSK Auto, Inc. Deferred Compensation Plan, an unfunded deferred compensation plan maintained primarily to provide deferred compensation benefits for a select group of “management or highly compensated employees” as defined by the Employee Retirement Income Security Act of 1974, as amended. The deferred compensation plan permits participants voluntarily to defer up to 50% of their salary and 100% of their annual bonus without regard to the limitations under the Internal Revenue Code of 1986, as amended, applicable to the Company’s tax-qualified plans. In addition, any refunds made to a participant from the Company’s 401(k) plan will be automatically transferred to the Deferred Compensation Plan. The Company may also make matching contributions to a participant’s account under this plan. Deferred amounts and any matching contributions under the deferred compensation plan are 100% vested at all times, and are invested on behalf of the participant in investment vehicles selected from time to time by the administrators of the plan. Benefits are payable at retirement in either a lump sum or installments for up to 12 years. Benefits upon a termination of employment prior to retirement are payable only in a lump sum. As reflected in the following table, only one of the Named Executive Officers receives any nonqualified deferred compensation:


										Aggregate
	Executive		Registrant			Aggregate		Aggregate		Balance at
	Contributions in		Contributions in			Earnings in		Withdrawals/		Fiscal 2006
	Fiscal 2006		Fiscal 2006			Fiscal 2006		Distributions		Year-End
Name	($)(1)		($)			($)		($)		($)

Maynard Jenkins		—		—			—		—		—
James Riley		—		—			—		—		—
Martin Fraser		—		—			—		—		—
Dale Ward		—		—			—		—		—
Larry Buresh		48,287		0	(2)		4,337		0		52,624
Don Watson		—		—			—		—		—
Larry Ellis		—		—			—		—		—


(1)		To the extent required to be reported, all cash awards were reported as compensation to the NEO in the Summary Compensation Table.

(2)		Although no dollars were contributed by the Company into Mr. Buresh’s Deferred Compensation account in fiscal 2006, $3,077 was transferred from Mr. Buresh’s 401(k) account (of which $1,992 represented Company contribution) in March 2007 as a result of the Company’s 401(k) non-discrimination testing.

132

Potential Payments Upon Termination or Change-in-Control

The following tables illustrate estimated amounts of compensation payable to our Named Executive Officers in the event of termination of such executive’s employment based on existing severance and retention arrangements, equity plans, and in the case of Mr. Jenkins, his SERP and employment agreements. See “— Compensation Discussion and Analysis — Employment and post-employment arrangements” for a detailed description of these arrangements. These tables assume a February 2, 2007 termination date, and, where applicable, the closing price of our common stock was $16.46 (as reported on the NYSE on February 2, 2007). Actual compensation paid can only be determined at the time of the executive officer’s departure from the Company.

Maynard Jenkins


														Involuntary
														not for
														Cause (by						Involuntary
														Company)			Involuntary			Termination
														or for Good			Termination			(by Executive)
												Involuntary		Reason (by			Following a			Following a
	Voluntary											for Cause		Executive)			Change in			Change in
Executive Payments Upon	Termination		Retirement			Death			Disability			Termination		Termination			Control			Control
Termination	($)		($)			($)			($)			($)		($)			($)			($)

Cash Severance		—		900,000	(1)		1,800,000			1,800,000			—		1,800,000			1,800,000			1,800,000
Acceleration of Unvested Equity Awards
Stock Options		—		253,737			253,737			253,737			—		—			253,737			—
Restricted Stock		—		—			—			—			—		—			—			—
Retirement Benefits
SERP		6,000,000		6,000,000			6,000,000			6,000,000			6,000,000		6,000,000			6,000,000			6,000,000
Health and Welfare coverage(2)		121,806		121,806			121,806			121,806			—		121,806			121,806			121,806
LTIP Units(3)		—		0	(4)		0	(5)		0	(5)		—		0	(6)		0	(7)		0	(7)
Tax Gross Up		—		—			—			—			—		—			0			0
Earned Vacation		153,312		153,312			153,312			153,312			156,740		156,740			156,740			156,740
Outplacement Services		—		—			—			—			—		—			—			—


(1)		As previously announced in a Current Report on Form 8-K filed April 18, 2007, the Compensation Committee of the Board approved amendments to Mr. Jenkins’ Employment Agreement to memorialize a $900,000 bonus opportunity available to Mr. Jenkins, subject to his continued service with the Company until the new Chief Executive Officer is hired. As previously discussed, on June 8, 2007, the Company announced that Lawrence N. Mondry would succeed Mr. Jenkins as the Company’s Chief Executive Officer.

(2)		This figure represents the estimated cost of the continued medical benefits for 10 years under Mr. Jenkins’ SERP agreement based on a projected increase of premium costs at 8% per annum as well as an average annual reimbursement of $4,000 per year of out-of-pocket Exec-U-Care expenses (amounts not to be grossed up for taxes).

(3)		For each incentive bonus unit vested, the LTIP participant shall be entitled to receive a cash payment from the Company equal to the per share excess amount, if any, by which the average of the per share closing prices of the Company’s common stock on the NYSE over a specified period of time (after release by the Company of its fiscal year earnings) (the “measuring period”) exceeds $20 per share (which figure is subject to certain adjustments in the event of a change in the Company’s capitalization) (the “LTIP Payment”).

(4)		If Mr. Jenkins’ employment is terminated by reason of his retirement (as defined in the LTIP) and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Jenkins will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him pursuant to the LTIP, with such amount determined and paid as if he had not retired but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Jenkins is not known until the end of the measuring period (which, barring a

133


		change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Jenkins would be $0.


(5)		If Mr. Jenkins’ employment is terminated due to death or following a disability and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Jenkins or his estate will be entitled to an LTIP Payment of (1) 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs and (2) 50% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year immediately following the Plan Year in which the termination date occurs, in each case with such amounts determined and paid as if he had not died or become disabled but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Jenkins is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Jenkins would be $0.

(6)		If Mr. Jenkins’ employment is terminated by the Company without Cause (as defined in the LTIP) after October 31, 2006 and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Jenkins will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs, with such amounts determined and paid as if he had remained employed by the Company through the applicable remaining payment date. The amount of cash, if any, that will ultimately be received by Mr. Jenkins is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Jenkins would be $0.

(7)		If Mr. Jenkins’ employment is terminated following a change in control of the Company (1) by reason of his death, disability or retirement or (2) by reason of a termination of employment by the Company without Cause or by Mr. Jenkins with Good Reason (Cause and Good Reason being defined in the LTIP), Mr. Jenkins will be entitled to an immediate cash payment equal to the per share excess, if any, of the per share value of the consideration received by the Company’s common stockholders in a change in control transaction as determined by the Committee in good faith and $20, multiplied by 100% of the aggregate number of incentive bonus units awarded to Mr. Jenkins and in respect of which Mr. Jenkins has not yet received payment. Assuming the per share transaction value of the consideration received by the Company’s common stockholders following a change in control of the Company is the same as the stock price on February 2, 2007, the total amount payable to Mr. Jenkins would be $0.

134

James B. Riley (1)


														Involuntary
														not for
														Cause (by						Involuntary
														Company)			Involuntary			Termination
														or for			Termination			(by Executive)
												Involuntary		Good Reason			Following a			Following a
	Voluntary											for Cause		(by Executive)			Change in			Change in
Executive Payments Upon	Termination		Retirement			Death			Disability			Termination		Termination			Control			Control
Termination	($)		($)			($)			($)			($)		($)			($)			($)

Cash Severance		—		—			—			—			—		429,000			429,000			429,000
Acceleration of Unvested Equity Awards
Stock Options		—					38,267			38,267			—		—			38,267			—
Restricted Stock		—		—			138,248			138,248			—		—			138,248			—
Retirement Benefits
SERP		—		—			—			—			—		—			—			—
Health and Welfare coverage(2)		—		—			—			—			—		14,000			14,000			14,000
LTIP Units(3)		—		0	(4)		0	(5)		0	(5)		—		0	(6)		0	(7)		0	(7)
Tax Gross Up		—		—			—			—			—		—			—			—
Earned Vacation		47,008		47,008			47,008			47,008			55,797		55,797			55,797			55,797
Outplacement benefits		—		—			—			—			—		49,500			49,500			49,500


(1)		In a Current Report on Form 8-K filed June 8, 2007, the Company announced that Mr. Riley resigned to accept a position as CFO with Ormet, an aluminum production company in his home state of Ohio. His resignation will be effective at the end of June 2007. Upon his resignation, Mr. Riley will forfeit all unvested stock options and restricted stock awards.

(2)		This figure represents the estimated cost of the continued medical benefits for one year under Mr. Riley’s severance and retention agreement based on the current premium costs as well as an estimated reimbursement of $7,500 per year of out-of-pocket Exec-U-Care expenses (amounts not to be grossed up for taxes).

(3)		For each incentive bonus unit vested, the LTIP participant shall be entitled to receive the LTIP Payment (as defined above).

(4)		If Mr. Riley’s employment were terminated by reason of his retirement (as defined in the LTIP) on February 2, 2007, Mr. Riley would have been entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him pursuant to the LTIP, with such amount determined and paid as if he had not retired but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that ultimately would have been received by Mr. Riley would not be known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remained the same as the price on February 2, 2007, the total amount payable to Mr. Riley would have been $0.

(5)		If Mr. Riley’s employment were terminated due to death or following a disability on February 2, 2007, Mr. Riley or his estate would have been entitled to an LTIP Payment of (1) 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurred and (2) 50% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year immediately following the Plan Year in which the termination date occurred, in each case with such amounts determined and paid as if he had not died or become disabled but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that ultimately would have been received by Mr. Riley would not be known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remained the same as the price on February 2, 2007, the total amount payable to Mr. Riley would have been $0.

(6)		If Mr. Riley’s employment were terminated by the Company without Cause (as defined in the LTIP) on February 2, 2007, Mr. Riley would have been entitled to an LTIP Payment of 100% of the amount, if any, that

135


		would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurred, with such amounts determined and paid as if he had remained employed by the Company through the applicable remaining payment date. The amount of cash, if any, that ultimately would have been received by Mr. Riley would not be known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remained the same as the price on February 2, 2007, the total amount payable to Mr. Riley would have been $0.

(7)		If Mr. Riley’s employment were terminated following a change in control of the Company (1) by reason of his death, disability or retirement or (2) by reason of a termination of employment by the Company without Cause or by Mr. Riley with Good Reason (Cause and Good Reason being defined in the LTIP), Mr. Riley would have been entitled to an immediate cash payment equal to the per share excess, if any, of the per share value of the consideration received by the Company’s common stockholders in a change in control transaction as determined by the Committee in good faith and $20, multiplied by 100% of the aggregate number of incentive bonus units awarded to Mr. Riley and in respect of which Mr. Riley had not yet received payment. Assuming the per share transaction value of the consideration received by the Company’s common stockholders following a change in control of the Company is the same as the stock price on February 2, 2007, the total amount payable to Mr. Riley would have been $0.

Dale Ward


														Involuntary
														not for
														Cause (by						Involuntary
														Company)			Involuntary			Termination
														or for			Termination			(By Executive)
												Involuntary		Good Reason			Following a			Following a
	Voluntary											for Cause		(by Executive)			Change in			Change in
Executive Payments Upon	Termination		Retirement			Death			Disability			Termination		Termination			Control			Control
Termination	($)		($)			($)			($)			($)		($)			($)			($)

Cash Severance		—		—			—			—			—		455,000			455,000			455,000
Acceleration of Unvested Equity Awards
Stock Options		—					42,844			42,844			—		—			42,844			—
Restricted Stock		—		—			187,117			187,117			—		—			187,117			—
Retirement Benefits
SERP		—		—			—			—			—		—			—			—
Health and Welfare coverage(1)		—		—			—			—			—		20,000			20,000			20,000
LTIP Units(2)		—		0	(3)		0	(4)		0	(4)		—		0	(5)		0	(5)		0	(6)
Tax Gross Up		—		—			—			—			—		—			—			—
Earned Vacation		26,344		26,344			26,344			26,344			58,341		58,341			58,341			58,341
Outplacement benefits		—		—			—			—			—		52,500			52,500			52,500


(1)		This figure represents the estimated cost of the continued medical benefits for one year under Mr. Ward’s severance and retention agreement based on the current premium costs as well as an estimated reimbursement of $7,500 per year of out-of-pocket Exec-U-Care expenses (amounts not to be grossed up for taxes).

(2)		For each incentive bonus unit vested, the LTIP participant shall be entitled to receive the LTIP Payment (as defined above).

(3)		If Mr. Ward’s employment is terminated by reason of his retirement (as defined in the LTIP) and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Ward will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him pursuant to the LTIP, with such amount determined and paid as if he had not retired but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Ward is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Ward would be $0.

136


(4)		If Mr. Ward’s employment is terminated due to death or following a disability and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Ward or his estate will be entitled to an LTIP Payment of (1) 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs and (2) 50% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year immediately following the Plan Year in which the termination date occurs, in each case with such amounts determined and paid as if he had not died or become disabled but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Ward is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Ward would be $0.

(5)		If Mr. Ward’s employment is terminated by the Company without Cause (as defined in the LTIP) after October 31, 2006 and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Ward will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs, with such amounts determined and paid as if he had remained employed by the Company through the applicable remaining payment date. The amount of cash, if any, that will ultimately be received by Mr. Ward is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Ward would be $0.

(6)		If Mr. Ward’s employment is terminated following a change in control of the Company (1) by reason of his death, disability or retirement or (2) by reason of a termination of employment by the Company without Cause or by Mr. Ward with Good Reason (Cause and Good Reason being defined in the LTIP), Mr. Ward will be entitled to an immediate cash payment equal to the per share excess, if any, of the per share value of the consideration received by the Company’s common stockholders in a change in control transaction as determined by the Committee in good faith and $20, multiplied by 100% of the aggregate number of incentive bonus units awarded to Mr. Ward and in respect of which Mr. Ward has not yet received payment. Assuming the per share transaction value of the consideration received by the Company’s common stockholders following a change in control of the Company is the same as the stock price on February 2, 2007, the total amount payable to Mr. Ward would be $0.

Larry Buresh


														Involuntary
														not for
														Cause (by						Involuntary
														Company)			Involuntary			Termination
														or for			Termination			(by Executive)
												Involuntary		Good Reason			Following a			Following a
	Voluntary											for Cause		(by Executive)			Change in			Change in
Executive Payments Upon	Termination		Retirement			Death			Disability			Termination		Termination			Control			Control
Termination	($)		($)			($)			($)			($)		($)			($)			($)

Cash Severance		—		—			—			—			—		429,000			429,000			429,000
Acceleration of Unvested Equity Awards st
Stock Options		—					39,921			39,921			—		—			39,921			—
Restricted Stock		—		—			162,296			162,296			—		—			162,296			—
Retirement Benefits
SERP		—		—			—			—			—		—			—			—
Health and Welfare coverage(1)		—		—			—			—			—		20,000			20,000			20,000
LTIP Units(2)		—		0	(3)		0	(4)		0	(4)		—		0	(5)		0	(5)		0	(6)
Tax Gross Up		—		—			—			—			—		—			—			—
Earned Vacation		40,479		40,479			40,479			40,479			48,640		48,640			48,640			48,640
Outplacement benefits		—		—			—			—			—		49,500			49,500			49,500

137


(1)		This figure represents the estimated cost of the continued medical benefits for one year under Mr. Buresh’s severance and retention agreement based on the current premium costs as well as an estimated reimbursement of $7,500 per year of out-of-pocket Exec-U-Care expenses (amounts not to be grossed up for taxes).

(2)		For each incentive bonus unit vested, the LTIP participant shall be entitled to receive the LTIP Payment (as defined above).

(3)		If Mr. Buresh’s employment is terminated by reason of his retirement (as defined in the LTIP) and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Buresh will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him pursuant to the LTIP, with such amount determined and paid as if he had not retired but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Buresh is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Buresh would be $0.

(4)		If Mr. Buresh’s employment is terminated due to death or following a disability and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Buresh or his estate will be entitled to an LTIP Payment of (1) 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs and (2) 50% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year immediately following the Plan Year in which the termination date occurs, in each case with such amounts determined and paid as if he had not died or become disabled but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Buresh is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Buresh would be $0.

(5)		If Mr. Buresh’s employment is terminated by the Company without Cause (as defined in the LTIP) after October 31, 2006 and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Buresh will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs, with such amounts determined and paid as if he had remained employed by the Company through the applicable remaining payment date. The amount of cash, if any, that will ultimately be received by Mr. Buresh is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Buresh would be $0.

(6)		If Mr. Buresh’s employment is terminated following a change in control of the Company (1) by reason of his death, disability or retirement or (2) by reason of a termination of employment by the Company without Cause or by Mr. Buresh with Good Reason (Cause and Good Reason being defined in the LTIP), Mr. Buresh will be entitled to an immediate cash payment equal to the per share excess, if any, of the per share value of the consideration received by the Company’s common stockholders in a change in control transaction as determined by the Committee in good faith and $20, multiplied by 100% of the aggregate number of incentive bonus units awarded to Mr. Buresh and in respect of which Mr. Buresh has not yet received payment. Assuming the per share transaction value of the consideration received by the Company’s common stockholders following a change in control of the Company is the same as the stock price on February 2, 2007, the total amount payable to Mr. Buresh would be $0.

138

Larry Ellis


														Involuntary
														not for
														Cause (by						Involuntary
														Company)			Involuntary			Termination
														or for			Termination			(by Executive)
												Involuntary		Good Reason			Following a			Following a
	Voluntary											for Cause		(by Executive)			Change in			Change in
Executive Payments Upon	Termination		Retirement			Death			Disability			Termination		Termination			Control			Control
Termination	($)		($)			($)			($)			($)		($)			($)			($)

Cash Severance		—		—			—			—			—		325,000			325,000			325,000
Acceleration of Unvested Equity Awards
Stock Options		—					29,761			29,761			—		—			29,761			—
Restricted Stock		—		—			122,183			122,183			—		—			122,183			—
Retirement Benefits
SERP		—		—			—			—			—		—			—			—
Health and Welfare coverage(1)		—		—			—			—			—		14,000			14,000			14,000
LTIP Units(2)		—		0	(3)		0	(4)		0	(4)		—		0	(5)		0	(5)		0	(6)
Tax Gross Up		—		—			—			—			—		—			—			—
Earned Vacation		29,712		29,712			29,712			29,712			42,567		42,567			42,567			42,567
Outplacement benefits		—		—			—			—			—		37,500			37,500			37,500


(1)		This figure represents the estimated cost of the continued medical benefits for one year under Mr. Ellis’ severance and retention agreement based on the current premium costs as well as an estimated reimbursement of $7,500 per year of out-of-pocket Exec-U-Care expenses (amounts not to be grossed up for taxes).

(2)		For each incentive bonus unit vested, the LTIP participant shall be entitled to receive the LTIP Payment (as defined above).

(3)		If Mr. Ellis’ employment is terminated by reason of his retirement (as defined in the LTIP) and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Ellis will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him pursuant to the LTIP, with such amount determined and paid as if he had not retired but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Ellis is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Ellis would be $0.

(4)		If Mr. Ellis’ employment is terminated due to death or following a disability and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Ellis or his estate will be entitled to an LTIP Payment of (1) 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs and (2) 50% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year immediately following the Plan Year in which the termination date occurs, in each case with such amounts determined and paid as if he had not died or become disabled but had remained employed by the Company through each of the then remaining payment dates. The amount of cash, if any, that will ultimately be received by Mr. Ellis is not known until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Ellis would be $0.

(5)		If Mr. Ellis’ employment is terminated by the Company without Cause (as defined in the LTIP) after October 31, 2006 and the termination date occurs prior to the occurrence of a change in control of the Company, Mr. Ellis will be entitled to an LTIP Payment of 100% of the amount, if any, that would have otherwise been payable to him with respect to the Plan Year (as defined in the LTIP) in which the termination date occurs, with such amounts determined and paid as if he had remained employed by the Company through the applicable remaining payment date. The amount of cash, if any, that will ultimately be received by Mr. Ellis is not known

139


		until the end of the measuring period (which, barring a change in control would be April 30 of 2007, 2008, 2009 and 2010). Assuming the stock price remains the same as the price on February 2, 2007, the total amount payable to Mr. Ellis would be $0.

(6)		If Mr. Ellis’ employment is terminated following a change in control of the Company (1) by reason of his death, disability or retirement or (2) by reason of a termination of employment by the Company without Cause or by Mr. Ellis with Good Reason (Cause and Good Reason being defined in the LTIP), Mr. Ellis will be entitled to an immediate cash payment equal to the per share excess, if any, of the per share value of the consideration received by the Company’s common stockholders in a change in control transaction as determined by the Committee in good faith and $20, multiplied by 100% of the aggregate number of incentive bonus units awarded to Mr. Ellis and in respect of which Mr. Ellis has not yet received payment. Assuming the per share transaction value of the consideration received by the Company’s common stockholders following a change in control of the Company is the same as the stock price on February 2, 2007, the total amount payable to Mr. Ellis would be $0.

On September 27, 2006, Don Watson, former Senior Vice President and Chief Administrative Officer, departed from the Company. In connection with his departure and pursuant to the terms of his Severance and Retention Agreement with the Company dated February 14, 2002 (as amended), Mr. Watson was eligible to receive an amount in cash equal to 75% of his then base salary, benefits and target bonus. On March 30, 2007, Mr. Watson was paid a lump sum severance payment of $251,327, representing the equivalent of six months’ base salary, target bonus and car allowance. Thereafter, Mr. Watson was to be paid the remainder of his severance in three additional equal monthly installment payments, each in the amount of approximately $41,888. From and after the date of termination of employment, Mr. Watson also continued to receive executive health/medical benefits for nine months (at an approximate valuation of $12,528). Pursuant to his Agreement, he also received outplacement services in the amount of $90,000. In connection with his departure, Mr. Watson forfeited 25,890 unvested stock options, 6,665 shares of restricted stock and all 250,000 incentive bonus units granted to him under the LTIP.

On September 27, 2006, Martin Fraser, former President and Chief Operating Officer, departed from the Company. In connection with his departure and pursuant to the terms of his Severance and Retention Agreement with the Company dated February 14, 2002 (as amended), Mr. Fraser was eligible to receive an amount in cash equal to 75% of his then base salary, benefits and target bonus. On March 30, 2007, Mr. Fraser was paid a lump sum severance payment of $458,738, representing the equivalent of six months’ base salary, target bonus and car allowance. Thereafter, Mr. Fraser was to be paid the remainder of his severance in three additional equal monthly installment payments, each in the amount of approximately $76,457. From and after the date of termination of employment, Mr. Fraser also continued to receive executive health/medical benefits for nine months (at an approximate value of $18,993). Pursuant to his Agreement, he also received outplacement services in the amount of $90,000, with eligibility for additional such services not to exceed a total of $135,000. In connection with his departure, Mr. Fraser forfeited 56,566 unvested stock options, 14,899 shares of restricted stock and all 500,000 incentive bonus units granted to him under the 2005 LTIP Plan.

Compensation of Directors

Outside Director Compensation Policy

Pursuant to our Outside Director Compensation Policy, as amended, our outside directors are paid an annual cash stipend of $50,000 (“Annual Stipend”). This Policy also provides for (i) an annual award of options to purchase 10,000 shares of our common stock at the close of business on the date of each annual meeting of stockholders, with an exercise price equal to the fair market value at the close of trading on the grant date (such options being granted pursuant to the 2004 Stock Plan adopted by our stockholders in June 2004); (ii) payment of fees of $1,500 plus reimbursement of reasonable expenses for each regular Board of Directors meeting attended in person or telephonically, $1,500 plus reimbursement of reasonable expenses for attendance in person at any committee meeting or special Board meeting that is not held in conjunction with a regular Board meeting, and $500 for each committee meeting or special Board meeting attended telephonically; and (iii) payment of annual fees of $15,000, $7,500 and $7,500 to the chairpersons of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, respectively.

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2006 Non-Employee Director Compensation Table

The following table summarizes the compensation provided by the Company to the Non-Employee Directors for fiscal year ended February 4, 2007:


									Change in
									Pension
									Value and
	Fees								Nonqualified
	Earned or						Non-Equity		Deferred
	Paid in		Stock		Option		Incentive Plan		Compensation		All Other
	Cash		Awards		Awards		Compensation		Earnings		Compensation		Total
Name	($)(1)		($)		($)(2)		($)		($)		($)		($)

James G. Bazlen(3)		14,000		—		57,200		—		—		51,200		122,400
Morton Godlas		76,000		—		57,200		—		—		—		133,200
Terilyn A. Henderson		78,000		—		57,200		—		—		—		135,200
Charles K. Marquis(4)(5)		196,500		—		57,200		—		—		—		253,700
Charles J. Philippin(5)(6)		195,000		—		57,200		—		—		—		252,200
William A. Shutzer(7)		74,000		—		57,200		—		—		—		131,200


(1)		Pursuant to our Outside Director Compensation Policy outlined above, Non-Employee Directors are also eligible for reimbursement of reasonable expenses (e.g., travel expenses) incurred in connection with attendance at Board and/or Committee meetings. Expense amounts reimbursed are not included in the table above.

(2)		The amounts included in the “Option Awards” column are the amounts of compensation cost recognized by the Company in fiscal 2006 related to stock option awards that have not yet vested, in accordance with FAS 123(R). Non-management director stock option grants become fully vested on the first anniversary of the grant date and expire seven years from the grant date.

		All option awards shown are based on the average of the high and low prices of the Company’s common stock on the date of grant. For a discussion of valuation assumptions, see Note 2 to the Company’s Consolidated Financial Statements above. The grant date fair value of the stock options underlying the expense shown in this column is as follows (for each director): (1) $50,455 for the 10,000 options granted October 18, 2005 and (2) $63,522 for the 10,000 options granted November 30, 2006.

(3)		As discussed in Item 13 below under the caption “Certain Relationships and Related Transactions,” Mr. Bazlen, formerly our President and Chief Operating Officer and currently a member of our Board of Directors, has an employment agreement with the Company that provides for payment of all compensation and reimbursement of expenses provided to outside directors under the Outside Director Compensation Policy except for the Annual Stipend, as well as payment of an annual base salary (equal to the Annual Stipend) and certain benefits. Amounts included in the “All Other Compensation” column for Mr. Bazlen include his annual base salary as well as Company matching contributions to his 401(k) Plan.

(4)		Mr. Marquis is Chair for both the Compensation Committee and the Nominating and Corporate Governance Committee.

(5)		In addition to the standard director fees payable under our Outside Director Compensation Policy, in July 2006, in connection with the Audit Committee-led accounting investigation discussed above, the three disinterested members of the Board of Directors (as respects such investigation and excluding Messrs. Philippin and Marquis) authorized the payment to each of Messrs. Philippin and Marquis (comprising the Special Investigation Committee of the Audit Committee of the Board of Directors) for their services during fiscal 2006 of an additional stipend of $50,000, plus $50,000 in meeting fees, based on the approximate number of telephonic and in-person meetings in which they participated and our standard director meeting fees of $1,500 and $500 for in-person and telephonic meetings, respectively.

(6)		Mr. Philippin is the Chair for the Audit Committee.

(7)		The Company entered into an agreement in June 2006 with Evercore Financial Advisors L.L.C. (“Evercore”) for certain financial advisory services in connection with our financial restructuring in fiscal year 2006 described in our Annual Report. Pursuant to the agreement, the Company paid approximately $0.6 million to

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		Evercore during fiscal 2006. In Mr. Shutzer, a member of our Board of Directors, is a Senior Managing Director of Evercore.

Directors’ Outstanding Equity Awards at 2006 Fiscal-Year End

The following table includes certain information concerning non-management directors’ outstanding equity awards as of February 4, 2007:


	Outstanding
	Stock
	Options
Name	(#)(1)

James Bazlen(2)		106,500
Morton Godlas		30,000
Terilyn Henderson		30,000
Charles Marquis		30,000
Charles Philippin		30,000
William Shutzer		30,000


(1)		For each director, all options are fully vested and exercisable with the exception of 10,000 options awarded to each director during fiscal 2006. Those options will become fully vested and exercisable on November 30, 2007.

(2)		Outstanding stock options for Mr. Bazlen comprise 76,500 options awarded to him while he was the President and Chief Operating Officer of the Company and 30,000 options awarded to him since 2004 as a member of our Board of Directors, after his retirement as President and COO.

No current member of our Compensation Committee was, during fiscal 2006, one of our executive officers or employees or was formerly one of our officers. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

The following table sets forth certain information concerning beneficial ownership of our common stock as of June 1, 2007 (the “Ownership Date”) (except as indicated below), by (1) each person we know to be a beneficial owner of more than 5% of our outstanding common stock, (2) each director of the Company who could be deemed to be the beneficial owner of shares of our common stock, (3) our Chief Executive Officer and our Named Executive Officers who could be deemed to be the beneficial owner of shares of our common stock, and (4) all directors and executive officers of the Company as a group. The number of shares and total voting power shown include shares

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that these persons had a right to acquire within 60 days after June 1, 2007, through the exercise of stock options and vested shares they hold in the Company’s 401(k) Plan.


	Number of		Total Voting
Name	Shares		Power (%)*

OppenheimerFunds, Inc.(1)		5,596,820		12.61
Karsch Capital Management LP(2)		4,096,830		9.40
GLG Partners LP(3)		3,891,447		8.88
Blue Harbour Group(4)		3,350,300		7.65
Viking Global Performance LLC(5)		2,219,700		5.10
James Bazlen(6)(7)		358,357		**
Morton Godlas(7)(8)		28,521		**
Terilyn A. Henderson(7)		21,012		**
Charles K. Marquis(7)		70,000		**
Charles J. Philippin(7)		35,601		**
William A. Shutzer(7)(9)		33,671		**
Maynard Jenkins(7)(10)		743,524		1.69
Larry Buresh(7)(11)		155,617		**
Larry Ellis(7)(11)(12)		59,800		**
James B. Riley(7)(11)		33,173		**
Dale Ward(7)(11)		85,921		**
Martin Fraser(7)(13)		164,249		**
Don Watson(7)(14)		110,353		**
All directors and executive officers as a group (13 persons)(6)-(12)		1,694,274		3.85


*		As of the Ownership Date, 43,950,751 shares of common stock were issued and outstanding.

**		Less than 1%.

(1)		OppenheimerFunds, Inc. (“OFI”) is an investment adviser and manager of Oppenheimer Capital Income Fund (“OCIF”), a registered investment company. OFI has beneficial ownership of 5,596,820 shares and OCIF has beneficial ownership of 5,417,320 shares. OFI has shared voting and dispositive power with respect to 5,596,820 shares and OCIF has shared voting and dispositive power with respect to 5,417,320 shares. The address for OFI is Two World Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281-1008. The address for OCIF is 6803 S. Tucson Way, Centennial, Colorado 80112. The information with respect to OFI and OCIF is as of December 29, 2006, and was obtained from the Schedule 13G/A filed with the SEC on their behalf on February 6, 2007.

(2)		Karsch Management GP, LLC (“Karsch GP”) is the general partner of Karsch Capital Management, LP, an investment adviser. (“Karsch Management”) Michael A. Karsch is the managing member of Karsch GP. Each of Karsch GP, Karsch Management and Michael A. Karsch has shared voting power and shared dispositive power with respect to all 4,096,830 of such shares. The business address of each of the reporting entities is 110 East 59th Street, 22nd Floor, New York, NY 10022. The information with respect to Karsch GP, Karsch Management and Michael A. Karsch is as of February 20, 2007 and was obtained from the Schedule 13D/A filed with the SEC on their behalf on February 21, 2007.

(3)		GLG Partners Limited (the “General Partner”) is the general partner of GLG Partners LP. Each of Noam Gottesman, Pierre Lagrange, and Emmanuel Roman is a managing director of the General Partner (the “Managing Directors”). Each of GLG Partners LP, the General Partner, and the Managing Directors has shared voting and dispositive power with respect to all 3,891,447 of such shares. The business address of each of the reporting entities is c/o GLG Partners LP, 1 Curzon Street, London W1J BHB, United Kingdom. The information with respect to the General Partner, GLG Partners LP and the Managing Directors is as of December 31, 2006 and was obtained from the Schedule 13G/A filed with the SEC on their behalf on February 14, 2007.

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(4)		Blue Harbour Group, LP (“Blue Harbor”) provides investment advisory and investment management services to Blue Harbour Strategic Value Partners Master Fund, LP, which beneficially owns and has shared voting and dispositive power with respect to 2,788,150 shares, and Blue Harbor Institutional Partners Master Fund, L.P., which beneficially owns and has shared voting and dispositive power with respect to 562,150 shares (collectively, the “Funds”), and, among other things, exercises all voting and other powers and privileges attributable to any securities held for the Funds’ account. Blue Harbour GP, LLC is a general partner of the Funds. Blue Harbour Holdings, LLC is a general partner of Blue Harbour (each of Blue Harbor GP, LLC, Blue Harbor Holdings, LLC and Blue Harbor are collectively referred to as the “Blue Harbor Entities”). Clifton S. Robbins is Chief Executive Officer of Blue Harbour. All of the securities held by the Funds are deemed beneficially owned by the Blue Harbor Entities and Mr. Robbins and each of the Blue Harbour Entities and Mr. Robbins has shared voting and dispositive power with respect to all 3,350,300 of such shares. The address of each of the Funds, the Blue Harbour Entities and Mr. Robbins is 240 Greenwich Avenue, Third Floor, Greenwich, Connecticut, 06830. The foregoing information is as of July 13, 2006 and was obtained from the Schedule 13D filed with the SEC on behalf of the Blue Harbor Entities on July 17, 2006.

(5)		Viking Global Performance LLC (“VGP”) is the general partner of Viking Global Equities LP (“VGE”). Viking Global Investors LP (“VGI”) is an affiliate of VGP that provides managerial services to VGE. VGE beneficially owns and has shared voting and dispositive power with respect to 917,600 shares. VGP and VGI may be deemed to beneficially own all shares owned by VGE. O. Andreas Halvorsen and David C. Ott are Managing Directors of VGI and Members of VGP (the “Managing Directors”). Each of VGP, CGI and the Managing Directors has shared voting and dispositive power with respect to all 2,219,700 shares. The business address for each of the reporting entities is 55 Railroad Avenue, Greenwich, CT 06830. The foregoing information is as of December 31, 2006 and was obtained from the Schedule 13G/A filed with the SEC on their behalf on February 14, 2007.

(6)		Includes 259,857 shares of common stock held by a revocable family trust and 2,000 shares of common stock owned by Mr. Bazlen’s children.

(7)		Includes the following shares of our common stock that the following individuals have the right to acquire within 60 days after June 1, 2007, through the exercise of options: James Bazlen (96,500); Morton Godlas (20,000); Terilyn A. Henderson (20,000); Charles K. Marquis (20,000); Charles J. Philippin (20,000); William A. Shutzer (20,000); Maynard Jenkins (719,924); Larry Buresh (117,882); Larry Ellis (47,397); James B. Riley (13,333); Dale Ward (69,240); Martin Fraser (131,198); Don Watson (90,629); (and all directors and executive officers as a group (1,215,642).

(8)		Consists of 8,521 shares of common stock held in a revocable family trust.

(9)		Includes 2,000 shares of common stock held by a Defined Benefit Plan.

(10)		Includes 23,600 shares of common stock held in revocable family trusts.

(11)		Includes shares of restricted stock awarded to our executive officers, net of a portion of the restricted stock that has already vested as well as shares that were surrendered back to the Company to satisfy tax obligations arising from these vestings (total net shares as of June 1, 2007 are shown in parentheses after each named individual): Dale Ward (11,368), Larry Buresh (9,860), Larry Ellis (7,423), James Riley (8,399) and all executive officers as a group (48,408). Such shares vest as to 331/3% on each of the first, second and third year anniversaries of the grant date and confer the holders with the entire beneficial ownership interest in, and all rights and privileges of a stockholder as to, such restricted shares, including voting rights.

(12)		Consists of 4,980 shares of common stock held in a revocable family trust.

(13)		As discussed above in Item 1, “Business,” as of September 2006, Mr. Fraser was no longer employed by the Company. The number of shares owned by Mr. Fraser is as of September 27, 2006.

(14)		As discussed above in Item 1, “Business,” as of September 2006, Mr. Watson was no longer employed by the Company. The number of shares owned by Mr. Watson is as of September 27, 2006.

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The following table summarizes the number of stock options issued, the weighted-average exercise price and the number of securities remaining to be issued under all outstanding equity compensation plans as of February 4, 2007.

Equity Compensation Plan Information


	Number of Securities				Number of Securities
	to be Issued Upon		Weighted-average		Remaining Available for
	Exercise of		Exercise Price of		Future Issuance under
	Outstanding Options,		Outstanding Options,		Equity Compensation
Plan Category	Warrants and Rights		Warrants and Rights		Plans(1)

Equity compensation plans approved by security holders		2,136,692	$	14.92		1,560,765
Equity compensation plans not approved by security holders(2)		216,635	$	11.00		—

Total		2,353,327	$	13.54		1,560,765


(1)		Excludes the securities to be issued upon exercise of outstanding options, warrants and rights. Availability for future issuance under our 2004 Stock Plan has been reduced based on previously issued restricted stock awards weighted as set forth in such plan.

(2)		Consists of stock options awarded to our Chief Executive Officer, Mr. Jenkins, under the terms of his employment agreement approved by the Board of Directors effective concurrent with the Company’s initial public offering in 1998.


Item 13.	*Certain Relationships and Related Transactions and Director Independence*

The Company has a written policy and has established procedures regarding approval of transactions between the Company and any employee, officer, director and certain immediate family members and other related persons including those required to be reported under Item 404(a) of Regulation S-K. Under this policy, the Nominating and Corporate Governance Committee or the Committee’s authorized delegate (which, for purposes of this policy, is the Chairman of the Committee) must approve any transaction between the Company and any related party. If a member of the Committee, or any of his or her immediate family members, is a party to any proposed transaction, the Committee member shall not participate in any review, consideration or approval of the related party transaction.

Upon his retirement as President and Chief Operating Officer, Mr. Jenkins, of the Company in April 2000, the Company entered into an employment agreement with Mr. Bazlen, a member of our Board of Directors, for the performance of specific projects for the Company, as designated by the Chief Executive Officer or President, for an annual base salary ($50,000 since April 2005) and continued payment of certain medical, dental, insurance, 401(k) and other benefits. This agreement is terminable by either party upon written notice. In connection with his membership on our Board of Directors, Mr. Bazlen receives all compensation (including annual grants of stock options), that is provided to our outside directors under the Outside Director Compensation Policy described in Item 11, “Executive Compensation,” above under the caption “Compensation of Directors” except for the Annual Stipend

The Board of Directors has determined not to characterize Mr. Shutzer as “independent” pursuant to the NYSE Listing Standards because they determined that Mr. Shutzer, or a company by which he is employed, may provide investment banking or other financial advisory services to the Company in the future. Since joining Evercore Partners (together with its affiliates and/or subsidiaries, “Evercore”) as a Senior Managing Partner in April 2004, the Company has entered into two agreements with Evercore for financial advisory services. In November 2005, we entered into an agreement with Evercore for certain financial advisory services in connection with our acquisition of Murray’s. Under the agreement, we agreed to pay, and the Board of Directors approved the payment of, approximately $1.4 million to Evercore upon the successful closing of the transaction. In May 2006, the Board of Directors approved our entry into an agreement with Evercore for financial advisory services in connection with our refinancing in fiscal 2006, resulting in payments to Evercore in fiscal 2006 of approximately $610,000.

145

During 2005, Maynard Jenkins, Chairman of the Board of Directors and Chief Executive Officer of the Company, performed consulting services for an unaffiliated entity relating to a proposed acquisition for which he was paid a fee of $250,000. When he accepted the consulting engagement, Mr. Jenkins did not recall that his employment agreement with the Company (which initially was executed in 1998) requires prior approval by the Board of any outside work for compensation. In early 2006, this matter was raised by Mr. Jenkins with the Board and the Board requested, and Mr. Jenkins agreed, that he remit the after-tax proceeds of the consulting fee to the Company. As a result, in March 2006, Mr. Jenkins paid to the Company the amount of $147,060.

Our Corporate Governance Guidelines provide that the Board will meet the criteria for independence as established by the New York Stock Exchange (“NYSE”). In addition, the Board considered transactions and relationships between each director and any member of his or her immediate family and the Company and its affiliates and subsidiaries, to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent. Pursuant to the NYSE Listing Standards, and based on its review of director independence (considering relationships between each of the directors and their immediate family members and the Company, both in the aggregate and individually), the Board has determined that a majority of the Company’s directors, specifically Ms. Henderson and Messrs. Godlas, Marquis and Philippin, are “independent directors.” In so doing, the Board determined that each of these individuals meets the “bright line” independence standards of the NYSE. In addition, the Board determined that all of the members of the Audit Committee are independent as that term is defined in the applicable NYSE listing standards and in SEC Rule 10A-3.

Our non-management directors meet regularly in executive session without the presence of Company management. In addition, an executive session is held at least once a year to be attended only by the independent directors. Each of these executive sessions is chaired by a designated presiding director appointed annually by and from the independent directors. Mr. Marquis is currently our Board’s designated presiding director.


Item 14.	*Principal Accountant Fees and Services*

Audit Committee Pre-Approval Policies

Pursuant to paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X, the Audit Committee has adopted policies and procedures for approving all audit and permissible non-audit services performed by our independent registered public accounting firm. Consistent with these policies, all engagements of the independent auditor to perform any audit services and non-audit services have been pre-approved by the Audit Committee. No services provided by our independent auditor were approved by the Audit Committee pursuant to the “de minimis” exception to the pre-approval requirement set forth in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

The Company incurred the following fees for services performed by PricewaterhouseCoopers LLP for fiscal 2006 and fiscal 2005:


	2006		2005

Audit Fees(1)	$	1,614,160	$	5,750,975
Audit-Related Fees(2)		14,057		134,513
Tax Fees(3)		776,821		328,059
All Other Fees(4)		—		—

	$	2,405,038	$	6,213,547


(1)		The audit fees for fiscal 2006 and 2005, respectively, were for professional services rendered for the fiscal 2006 integrated audit (including services pertaining to SOX 404) and fiscal 2005 audit (including services pertaining to SOX 404) of the consolidated financial statements of the Company, the issuance of consents and comfort letters in connection with Company financings, the review of additional documents filed with the SEC and consultations with respect to the application and adoption of new accounting pronouncements. The audit fees for fiscal 2006 were substantially lower than fiscal 2005 due to the complexity of the matters addressed in the restatement of our previously reported consolidated financial statements and the length of time it took to complete the Audit Committee-led investigation, restatement and evaluation of the Company’s internal control over financial reporting. The audit fees for fiscal 2005 include amounts billed through April 15, 2007 related to

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		the restatement and completion of our Annual Report on Form 10-K for fiscal 2005, which was filed on May 1, 2007. The audit fees for fiscal 2006 include amounts billed through June 15, 2007 and include $364,160 billed after May 1, 2007 related to the finalization of our Form 10-K for fiscal 2005.

(2)		The audit-related fees for fiscal 2006 were primarily for professional services rendered relating to a review of a response to a SEC staff comment letter. The audit-related fees for fiscal 2005 were for professional services rendered relative to the Company’s acquisition of Murray’s Inc. and for audit services relative to certain of the Company’s employee benefit plans.

(3)		Tax fees for fiscal 2006 and 2005, respectively, were for services related to tax compliance (including reviewing tax returns) and tax advice. For fiscal 2006, fees for tax compliance totaled $175,744 and fees for tax advice totaled $601,077. For fiscal 2005, fees for tax compliance totaled $88,800 and fees for tax advice totaled $239,259.

(4)		There were no fees billed to the Company during fiscal 2006 or 2005 for services other than those described above.

The Audit Committee has considered whether the provision by PricewaterhouseCoopers LLP of non-audit services is compatible with the firm’s maintaining its independence in connection with its audit of the Company’s financial statements, and has determined that the permissible non-audit services conducted by PricewaterhouseCoopers LLP do not impair or impede the firm’s independence.

PART IV


Item 15.	*Exhibit and Financial Statement Schedules*

(a)(1) The following consolidated financial statements of CSK Auto Corporation are included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report.

Consolidated Statements of Operations — Fiscal Years Ended February 4, 2007, January 29, 2006 and January 30, 2005

Consolidated Balance Sheets — February 4, 2007 and January 29, 2006

Consolidated Statements of Cash Flows — Fiscal Years Ended February 4, 2007, January 29, 2006 and January 30, 2005

Consolidated Statements of Stockholders’ Equity — Fiscal Years Ended February 4, 2007, January 29, 2006 and January 30, 2005

Notes to Consolidated Financial Statements

(a)(2) The following financial statement schedules of CSK Auto Corporation for the three years ended February 4, 2007 are included in this Report on Form 10-K, as required by Item 14(d): Schedule I Financial Information of the Registrant and Schedule II Valuation and Qualifying Accounts. Other schedules have been omitted because information is not required or otherwise is included in the Notes to Consolidated Financial Statements.

(a)(3) and (b) Exhibits:

The Exhibit Index included at the end of this Annual Report is incorporated herein by reference.

147

Schedule I

CSK AUTO CORPORATION

(Parent Company Only)

STATEMENTS OF OPERATIONS


	Fiscal Year Ended
	February 4,		January 29,		January 30,
	2007		2006		2005
	($ in thousands, except share and per share data)

Equity interest in income from subsidiaries	$	6,264	$	57,790	$	59,562

Income before income taxes and cumulative effect of change in accounting principle		12,221		95,038		99,012
Income tax expense		4,991		37,248		39,450

Income before cumulative effect of change in accounting principle		7,230		57,790		59,562
Cumulative effect of change in accounting principle, net of tax		966		—		—

Net income	$	6,264	$	57,790	$	59,562

Basic earnings per share:
Income before cumulative effect of change in accounting principle	$	0.16	$	1.30	$	1.30
Cumulative effect of change in accounting principle		0.02		—		—

Net income per share	$	0.14	$	1.30	$	1.30

Shares used in computing per share amounts		43,876,533		44,465,409		45,713,271

Diluted earnings per share:
Income before cumulative effect of change in accounting principle	$	0.16	$	1.29	$	1.29
Cumulative effect of change in accounting principle		0.02		—		—

Net income per share	$	0.14	$	1.29	$	1.29

Shares used in computing per share amounts		44,129,278		44,812,302		46,002,376

The accompanying note is an integral part of these financial statements.

149

Schedule I

CSK AUTO CORPORATION

(Parent Company Only)

STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common Stock						Additional Paid-			Stockholder			Deferred			Accumulated
	Shares			Amount			in Capital			Receivable			Compensation			Deficit			Total Equity
	(In thousands, except share data)

Balances at February 1, 2004		46,497,936		$	465		$	467,563		$	(73	)	$	—		$	(386,458	)	$	81,497
Repurchase and retirement of common stock		(1,574,956	)		(16	)		(23,710	)											(23,726	)
Restricted stock		4,463						1,209						(1,164	)					45
Amortization of deferred compensation														146						146
Recovery of stockholder receivable											63									63
Exercise of options		188,858			2			2,072												2,074
Tax benefit relating to stock option exercises								390												390
Compensation expense, stock options								88												88
Net income																	59,562			59,562

Balances at January 30, 2005		45,116,301			451			447,612			(10	)		(1,018	)		(326,896	)		120,139
Repurchase and retirement of common stock		(1,409,300	)		(14	)		(25,015	)											(25,029	)
Restricted stock		17,731						1,159						(1,288	)					(129	)
Amortization of deferred compensation														571						571
Recovery of stockholder receivable											10									10
Exercise of options		105,590			1			1,129												1,130
Tax benefit relating to stock option exercises								231												231
Compensation expense, stock options								7												7
Warrants and call options, net of tax								1,437												1,437
Net income																	57,790			57,790

Balances at January 29, 2006		43,830,322			438			426,560			—			(1,735	)		(269,106	)		156,157
Restricted stock		28,466			1			(221	)											(220	)
Adoption of SFAS No. 123R								(1,735	)					1,735						—
Exercise of options		91,963			1			1,195												1,196
Compensation expense, stock-based awards								3,048												3,048
Warrants and call options, net of tax								390												390
Discount on senior exchangeable notes, net of tax								4,675												4,675
Net income																	6,264			6,264

Balances at February 4, 2007		43,950,751		$	440		$	433,912		$	—		$	—		$	(262,842	)	$	171,510

The accompanying note is an integral part of these financial statements.

150

CSK AUTO CORPORATION AND SUBSIDIARIES

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

For the Fiscal Years 2006, 2005, and 2004


	Balance at		Charged to			Purchase					Balance at
	Beginning of		Costs and			Accounting					End of
	Period		Expenses			Adjustments		Deductions			Period
	($ in thousands)

Allowance for Bad Debts:
Year Ended January 30, 2005	$	1,526		6,579			—		(7,536	)	$	569
Year Ended January 29, 2006	$	569		2,674			49		(2,856	)	$	436
Year Ended February 4, 2007	$	436		105			—		(148	)	$	393
Allowance for Closed Stores:
Year Ended January 30, 2005	$	12,001		2,229			—		(6,456	)	$	7,774
Year Ended January 29, 2006	$	7,774		2,903			324		(3,968	)	$	7,033
Year Ended February 4, 2007	$	7,033		1,487			—		(3,609	)	$	4,911
Allowance for Inventory Shrink:
Year Ended January 30, 2005	$	19,624		20,840			—		(27,385	)	$	13,079
Year Ended January 29, 2006	$	13,079		28,780			658		(30,029	)	$	12,488
Year Ended February 4, 2007	$	12,488		31,605			—		(25,977	)	$	18,116
Allowance for Inventory Obsolescence:
Year Ended January 30, 2005	$	—		1,469			—		—		$	1,469
Year Ended January 29, 2006	$	1,469		(462	)		1,127		(50	)	$	2,084
Year Ended February 4, 2007	$	2,084		—			—		(1,326	)	$	758
Allowance for Deferred Tax Asset:
Year Ended January 30, 2005	$	1,752		—			—		—		$	1,752
Year Ended January 29, 2006	$	1,752		—			—		—		$	1,752
Year Ended February 4, 2007	$	1,752		—			—		—		$	1,752

153

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 6th day of July, 2007.

CSK AUTO CORPORATION


	By:	/s/ MAYNARD L. JENKINS, JR.

Maynard L. Jenkins, Jr.

Chairman and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Randi V. Morrison with full power of substitution and full power to act as his or her true and lawful attorney-in-fact and agent with full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorney-in-fact and agent may or shall lawfully do, or cause to be done, in connection with the proposed filing by CSK Auto Corporation with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, of an Annual Report on Form 10-K for the fiscal year ended February 4, 2007 (the “Annual Report”), including but not limited to, such full power and authority to do the following: (i) execute and file such Annual Report; (ii) execute and file any amendment or amendments thereto; (iii) receive and respond to comments from the Securities and Exchange Commission related in any way to such Annual Report or any amendment or amendments thereto; and (iv) execute and deliver any and all certificates, instruments or other documents related to the matters enumerated above, as the attorney-in-fact in her sole discretion deems appropriate.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant, and in the capacities indicated, on this 6th day of July, 2007.


/s/ MAYNARD L. JENKINS JR. Maynard L. Jenkins Jr.				Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

/s/ JAMES G. BAZLEN James G. Bazlen				Director

/s/ MORTON GODLAS Morton Godlas				Director

/s/ TERILYN A. HENDERSON Terilyn A. Henderson				Director

/s/ CHARLES K. MARQUIS Charles K. Marquis				Director

/s/ CHARLES J. PHILIPPIN Charles J. Philippin				Director

154

Exhibit Index


Exhibit
Number			Description of Exhibits

	2	.01	Agreement and Plan of Merger, dated as of November 30, 2005, among CSK Auto Corporation, Fastlane Merger Corp., Murray’s, Inc., the sellers named therein, and J.W. Childs Associates, L.P., as seller representative, incorporated herein by reference to Exhibit 2.1 of our Current Report on Form 8-K, filed on December 1, 2005. (File No. 001-13927).
	3	.01	Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.01 of our Annual Report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).
	3	.02	Certificate of Correction to the Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.02 of our Annual Report on Form 10-K, filed on May 4, 1998 (File No. 001-13927).
	3	.03	Certificate of Amendment to the Restated Certificate of Incorporation of CSK Auto Corporation, incorporated herein by reference to Exhibit 3.2.1 of our Quarterly Report on Form 10-Q, filed on September 18, 2002 (File No. 001-13927).
	3	.04	Second Certificate of Amendment of the Restated Certificate of Incorporation of CSK Auto Corporation, incorporated herein by reference to Exhibit 3.04 of our Quarterly Report on Form 10-Q, filed on December 9, 2005 (File No. 001-13927).
	3	.05	Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3.03 of our Annual Report on Form 10-K, filed on April 28, 1999 (File No. 001-13927).
	3	.05.1	First Amendment to Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3.03.1 of our annual report on Form 10-K, filed on May 1, 2001. (File No 001-13927).
	3	.05.2	Second Amendment to Amended and Restated By-laws of the Company, incorporated herein by reference to Exhibit 3.03.2 of our Quarterly Report on Form 10-Q, filed on June 14, 2004 (File No. 001-13927).
	4	.01	Form of Common Stock certificate, incorporated herein by reference to Exhibit 4.05 of our Registration Statement on Form S-1/A, filed on March 3, 1998 (File No. 333-43211).
	4	.02	Indenture, dated January 16, 2004, by and among CSK Auto, Inc., CSK Auto Corporation, Automotive Information Systems, Inc. and CSKAUTO.COM, Inc. as guarantors, and the Bank of New York, as Trustee, incorporated herein by reference to Exhibit 99.3 of our Current Report on Form 8-K, filed on January 20, 2004 (File No. 001-13927).
	4	.03	Indenture, dated as of July 29, 2005, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc. and the Bank of New York Trust Company, N.A., as Trustee (including form of note), incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed on July 29, 2005 (File No. 001-13927).
	4	.04	Indenture, dated as of December 19, 2005, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc. as guarantors, and the Bank of New York Trust Company, N.A., as Trustee, incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed on December 20, 2005 (File No. 001-13927).
	4	.05	Third Supplemental Indenture, dated as of June 30, 2006, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc., and The Bank of New York Trust Company, N.A., as Trustee, incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed on July 7, 2006 (File No. 001-13927).
	4	.06	Second Supplemental Indenture, dated as of July 27, 2006, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc., and The Bank of New York Trust Company, N.A., as Trustee, incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed on July 31, 2006 (File No. 001-13927).
	10	.01	Amended and Restated Employment Agreement, dated as of June 12, 1998, between CSK Auto, Inc. and Maynard Jenkins, incorporated herein by reference to Exhibit 10.02 of our Quarterly Report on Form 10-Q, filed on September 11, 1998 (File No. 001-13927).†

156


Exhibit
Number			Description of Exhibits

	10	.01.1	Amendment to Employment Agreement, dated as of September 24, 1999, between CSK Auto, Inc. and Maynard Jenkins, incorporated herein by reference to Exhibit 10.03.1 of our Annual Report on Form 10-K, filed on April 28, 2000 (File No. 001-13927).†
	10	.01.2	Form of Amendment to Employment Agreement, by and between CSK Auto, Inc. and Maynard Jenkins, incorporated herein by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed on March 3, 2006 (File No. 001-13927).†
	10	.01.3	Form of Amendment to Employment Agreement, by and between CSK Auto, Inc. and Maynard Jenkins, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on April 18, 2007 (File No. 001-13927).†
	10	.02	Stock Option Agreement, dated March 9, 1998, between the Company and Maynard Jenkins, incorporated herein by reference to Exhibit 10.26 of our Registration Statement on Form S-1/A, filed on March 10, 1998 (File No. 333-43211).†
	10	.03	Restated 1996 Associate Stock Option Plan, dated as of June 5, 1998, incorporated herein by reference to Exhibit 10.11 of our Registration Statement on Form S-1, filed on November 13, 1998 (File No. 333-67231).†
	10	.04	Amended and Restated Supplemental Executive Retirement Plan Agreement, effective January 1, 2005, between CSK Auto, Inc. and Maynard Jenkins, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on December 21, 2004 (File No. 001-13927).†
	10	.04.1	Form of First Amendment to Amended and Restated Supplemental Executive Retirement Plan Agreement, dated as of January 1, 2005, between CSK Auto, Inc. and Maynard Jenkins, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on March 3, 2006 (File No. 001-13927).†
	10	.05	Restated 1996 Executive Stock Option Plan (Amended and Restated June 8, 1999), incorporated herein by reference to Appendix B of our definitive Proxy Statement, filed on May 11, 1999 (File No. 001-13927).†
	10	.06	1999 Employee Stock Option Plan, incorporated by reference to Appendix C of our definitive Proxy Statement, filed on May 11, 1999 (File No. 001-13927).†
	10	.07	2004 Stock and Incentive Plan (as amended and restated effective as of January 1, 2005), incorporated herein by reference to Exhibit 10.7 of our Current Report on Form 8-K, filed on September 26, 2005 (File No. 001-13927).†
	10	.08	Form of Restricted Stock Agreement pursuant to the CSK Auto Corporation Directors Stock Plan, incorporated herein by reference to Exhibit 10.14 of our Annual Report on Form 10-K, filed on April 28, 2000 (File No. 001-13927).†
	10	.09	CSK Auto Corporation 2000 Senior Executive Stock Loan Plan, incorporated herein by reference to Exhibit 10.11 of our Annual Report on Form 10-K, filed on May 1, 2001 (File No. 001-13927).†
	10	.10	Amended and Restated Lease, dated October 23, 1989 (the Missouri Falls Lease), between CSK Auto, Inc. (formerly known as Northern Automotive Corporation) and Missouri Falls Associates Limited Partnership, incorporated herein by reference to Exhibit 10.10 of CSK Auto, Inc’s Registration Statement on Form S-4, filed on February 28, 1997 (File No. 333-22511).
	10	.11	First Amendment to the Missouri Falls Lease, dated November 22, 1991, between CSK Auto, Inc. (formerly known as Northern Automotive Corporation) and Missouri Falls Associates Limited Partnership, incorporated herein by reference to Exhibit 10.11 of CSK Auto, Inc’s Registration Statement on Form S-4, filed on February 28, 1997 (File No. 333-22511).
	10	.12	Amendment to Leases, dated October 30, 1996, by and between Missouri Falls Associates Limited Partnership and CSK Auto, Inc. (formerly known as Northern Automotive Corporation), incorporated herein by reference to Exhibit 10.12 of CSK Auto, Inc’s Registration Statement on Form S-4, filed February on 28, 1997 (File No. 333-22511).

157


Exhibit
Number			Description of Exhibits

	10	.13	Lease, dated July 31, 1997, between Missouri Falls Partners and CSK Auto, Inc.; First Amendment to Lease, dated April 1, 2000, incorporated herein by reference to Exhibit 10.15 of our Annual Report on Form 10-K, filed on May 1, 2001 (File No. 001-13927).
	10	.14	Lease, dated April 20, 2000, between Missouri Falls Partners and CSK Auto, Inc.; First Amendment to Lease, dated February 23, 2001, incorporated herein by reference to Exhibit 10.16 of our Annual Report on Form 10-K, filed on May 1, 2001 (File No. 001-13927).
	10	.15	Lease, dated April 20, 2000, between Missouri Falls Partners and CSK Auto, Inc.; First Amendment to Lease dated August 20, 2000, incorporated herein by reference to Exhibit 10.17 of our Annual Report on Form 10-K, filed on May 1, 2001 (File No. 001-13927).
	10	.16	Amendment to all CSK Auto, Inc. Leases at Missouri Falls, dated December 6, 2001, between Missouri Falls Partners and MFP Holdings, LLC and CSK Auto, Inc., incorporated herein by reference to Exhibit 10.24 of our Registration Statement on Form S-4, filed on February 11, 2002 (File No. 333-82492).
	10	.17	Employment Agreement, dated October 13, 1995, between CSK Auto, Inc. (formerly known as Northern Automotive Corporation) and Don Watson, incorporated herein by reference to Exhibit 10.21 of our Annual Report on Form 10-K, filed on May 1, 2001 (File No. 001-13927).†.
	10	.18	Employment Agreement, dated February 25, 1997, between CSK Auto, Inc. and Dale E. Ward, incorporated herein by reference to Exhibit 10.23 of our Annual Report on Form 10-K, filed on May 1, 2001 (File No. 001-13927).†
	10	.19	Form of Indemnity Agreement, between CSK Auto Corporation and each Director, incorporated herein by reference to Exhibit 10.21 of our Annual Report on Form 10-K, filed on May 2, 2005 (File No. 001-13927).
	10	.20	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Dale Ward, dated February 14, 2002, incorporated herein by reference to Exhibit 10.32 of our Annual Report on Form 10-K, filed on April 23, 2002 (File No. 001-13927).†
	10	.21	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Don Watson, dated February 14, 2002, incorporated herein by reference to Exhibit 10.33 of our Annual Report on Form 10-K, filed on April 23, 2002 (File No. 001-13927).†
	10	.22	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Martin Fraser, dated February 14, 2002, incorporated herein by reference to Exhibit 10.34 of our Annual Report on Form 10-K, filed on April 23, 2002 (File No. 001-13927).†
	10	.23	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Larry Ellis, dated February 14, 2002, incorporated herein by reference to Exhibit 10.35 of our Annual Report on Form 10-K, filed on April 23, 2002 (File No. 001-13927).†
	10	.24	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Larry Buresh, dated February 14, 2002, incorporated herein by reference to Exhibit 10.36 of our Annual Report on Form 10-K, filed on April 23, 2002 (File No. 001-13927).†
	10	.25	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Bill Evans, dated February 14, 2002, incorporated herein by reference to Exhibit 10.37 of our Annual Report on Form 10-K, filed on April 23, 2002 (File No. 001-13927).†
	10	.26	Severance and Retention Agreement, between CSK Auto, Inc. and James B. Riley, dated October 24, 2005, incorporated herein by reference to Exhibit 10.05 to our Quarterly Report on Form 10-Q, filed on December 9, 2005 (File No. 001-13927).†
	10	.27	Amended and Restated Severance and Retention Agreement, between CSK Auto, Inc. and Louis Mancini, dated December 20, 2005, incorporated herein by reference to Exhibit 10.29 of our Annual Report on Form 10-K, filed on May 1, 2007 (File No. 001-13927).†
	10	.28	Form of First Amendment to Severance and Retention Agreements, between CSK Auto, Inc. and each of its then senior executive officers (other than Maynard Jenkins), incorporated herein by reference to our Current Report on Form 8-K, filed on March 3, 2006 (File No. 001-13927).†

158


Exhibit
Number			Description of Exhibits

	10	.29	Indicative Callable Swap Term Sheet, effective as of April 5, 2004, between Lehman Brothers and CSK Auto, Inc., incorporated herein by reference to Exhibit 10.57 of our Annual Report on Form 10-K, filed on April 15, 2004 (File No. 001-13927).
	10	.30	Amended and Restated Registration Rights Agreement, dated as of May 16, 2002, by and among CSK Auto Corporation, LBI Group Inc. and Investcorp CSK Holdings L.P., incorporated herein by reference to Exhibit 4.05.01 to our Registration Statement on Form S-3/A, filed on May 17, 2002 (File No. 333-77008).
	10	.31	Registration Rights Agreement, dated July 29, 2005, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc. and the initial purchasers listed therein, incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, filed on July 29, 2005 (File No. 001-13927).
	10	.32	Registration Rights Agreement, dated December 19, 2005, among CSK Auto, Inc., CSK Auto Corporation, CSKAUTO.COM, Inc. and JPMorgan Securities Inc., incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, filed on December 20, 2005 (File No. 001-13927).
	10	.33	Employment Agreement, dated March 30, 2000, between CSK Auto, Inc. and Jim Bazlen, incorporated herein by reference to Exhibit 10.47 of our Annual Report on Form 10-K, filed on May 5, 2003 (File No. 001-13927).†
	10	.33.1	Amendment to Employment Agreement with James Bazlen, effective October 15, 2004, incorporated herein by reference to Exhibit 99.4 of our Current Report on Form 8-K, filed on October 20, 2004 (File No. 001-13927).†
	10	.34	Form of Non-Qualified Stock Option Agreement to be used in connection with our 2004 Stock and Incentive Plan, incorporated herein by reference to Exhibit 99.1 of our Current Report on Form 8-K, filed on October 20, 2004 (File No. 001-13927).†
	10	.35	Form of Non-Qualified Stock Option Agreement to be used in connection with our 2004 Stock and Incentive Plan, incorporated herein by reference to Exhibit 99.2 of our Current Report on Form 8-K, filed on October 20, 2004 (File No. 001-13927).†
	10	.36	Form of Restricted Stock Agreement to be used in connection with our 2004 Stock and Incentive Plan, incorporated herein by reference to Exhibit 99.3 of our Current Report on Form 8-K, filed on October 20, 2004 (File No. 001-13927).†
	10	.37	Stock Purchase Agreement relating to Automotive Information Systems, Inc., dated January 21, 2005, by and between CSK Auto, Inc. and Mobile Productivity, Inc., incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on January 27, 2005 (File No. 001-13927).
	10	.38	Summary of Executive Compensation Agreements, incorporated herein by reference to Exhibit 10.36 of our Annual Report on Form 10-K, filed on May 2, 2005 (File No. 001-13927).†
	10	.39	Waiver, dated as of May 1, 2005, to the Amended and Restated Credit Agreement, dated as of January 16, 2004, among CSK AUTO, INC., the several banks and other financial institutions or entities from time to time party thereto (the ‘‘Lenders”), the Syndication Agent and the Co-Documentation Agents named therein, and JPMorgan Chase Bank, as administrative agent for the Lenders, incorporated herein by reference to Exhibit 10.37 of our Annual Report on Form 10-K, filed on May 2, 2005 (File No. 001-13927).
	10	.40	Amended and Restated Outside Director Compensation Policy, incorporated herein by reference to our Current Report on Form 8-K, filed on May 18, 2005 (File No. 001-13927).†
	10	.41	Long-Term Incentive Plan, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on July 1, 2005 (File No. 001-13927).†
	10	.42	Form of Incentive Bonus Unit Award Agreement, incorporated herein by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed on July 1, 2005 (File No. 001-13927).†

159


Exhibit
Number			Description of Exhibits

	10	.43	Second Amended and Restated Credit Agreement, dated as of July 25, 2005, among CSK Auto, Inc., the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and J.P. Morgan Securities, Inc., as Sole Bookrunner and Sole Lead Arranger, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on July 29, 2005 (File No. 001-13927).
	10	.43.1	First Amendment to Second Amended and Restated Credit Agreement, dated as of December 16, 2005, among CSK Auto, Inc., the several lenders from time to time parties thereto, JPMorgan Chase Bank N.A., as administrative agent, and the co-syndication agents and co-documentation agents party thereto, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on December 20, 2005 (File No. 001-13927).
	10	.44	Amended and Restated Guarantee and Collateral Agreement, dated as of July 29, 2005, among CSK Auto, Inc., CSKAUTO.COM, Inc., CSK Auto Corporation, and JPMorgan Chase Bank, N.A., as administrative agent, incorporated herein by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed on July 29, 2005 (File No. 001-13927).
	10	.45	Term Credit Agreement, dated as of June 30, 2006, among CSK Auto, Inc., the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Lehman Commercial Paper Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on July 7, 2006 (File No. 001-13927).
	10	.45.1	Amendment, dated as of August 3, 2006, to the Credit Agreement dated as of June 30, 2006, among CSK Auto, Inc., the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Lehman Commercial Paper Inc. and Wachovia Bank, National Association, as Co-Syndication Agents, incorporated by reference to Exhibit 10.50.1 of our Annual Report on Form 10-K, filed on May 1, 2007 (File No. 001-13927).
	10	.45.2	Second Amendment, dated as of April 27, 2007, among CSK Auto, Inc., the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and Lehman Commercial Paper Inc. and Wachovia Bank, National Association, as Co-Syndication Agents, incorporated by reference to Exhibit 10.50.2 of our Annual Report on Form 10-K, filed on May 1, 2007 (File No. 001-13927).
	10	.46	Form of Letter Agreement between CSK Auto Corporation and Maynard Jenkins amending March 17, 1998 Stock Option Grant, incorporated herein by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed on April 18, 2007 (File No. 001-13927).†
	10	.47	Form of Letter Agreement between CSK Auto Corporation and Maynard Jenkins amending March 18, 1999 Stock Option Grant, incorporated herein by reference to Exhibit 10.3 of our Current Report on Form 8-K, filed on April 18, 2007 (File No. 001-13927).†
	10	.48	Form of Letter Agreement between CSK Auto Corporation and Maynard Jenkins amending December 21, 1999 Stock Option Grant, incorporated herein by reference to Exhibit 10.4 of our Current Report on Form 8-K, filed on April 18, 2007 (File No. 001-13927).†
	10	.49	Form of Letter Agreement between CSK Auto Corporation and Maynard Jenkins amending April 5, 2002 Stock Option Grant, incorporated herein by reference to Exhibit 10.5 of our Current Report on Form 8-K, filed on April 18, 2007 (File No. 001-13927).†
	10	.50	Form of Election Agreement between Optionee and CSK Auto Corporation, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on December 22, 2006 (File No. 001-13927).†
	10	.51	Form of Second Amended and Restated Severance and Retention Agreement between CSK Auto, Inc. and each of its then senior executive officers (other than Maynard Jenkins), incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 27, 2007 (File No. 001-13927).†
	10	.52	Employment Agreement, dated as of June 7, 2007, by and between CSK Auto, Inc., and Lawrence N. Mondry, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on June 13, 2007 (File No. 001-13927).†

160


Exhibit
Number			Description of Exhibits

	10	.53	Form of Interim Executive Services Agreement between CSK Auto, Inc. and Tatum, LLC, incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on June 26, 2007 (File No. 001-13927).†
	10	.54	Form of Indemnification Agreement for Interim Executive among CSK Auto Corporation, CSK Auto, Inc., CSKAUTO.COM, Inc. and Steven L. Korby, incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed on June 26, 2007 (File No. 001-13927).
	21	.01*	Subsidiaries of the Company.

	24	.01*	Power of Attorney (included on signature page to this Annual Report).
	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	Waiver, dated as of May 4, 2006, to Second Amended and Restated Credit Agreement, dated as of July 25, 2005, among CSK Auto, Inc., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, incorporated herein by reference to Exhibit 99.2 of our Current Report on Form 8-K, filed on May 23, 2006 (File No. 001-13927).
	99	.01.1	Second Waiver, dated as of June 16, 2006, to the Second Amended and Restated Credit Agreement, dated as of July 25, 2005, among CSK Auto, Inc., the Lenders party thereto, the Co-Syndication Agents and the Co-Documentation Agents party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated herein by reference to Exhibit 99.3 of our Current Report on Form 8-K, filed on June 19, 2006 (File No. 001-13927).
	99	.01.2	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, the Co-Syndication Agents and the Co-Documentation Agents party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated herein by reference to Exhibit 99.1 of our Current Report on Form 8-K, filed on June 13, 2007 (File No. 001-13927).


*		Filed herewith.

†		Executive compensation plans or arrangements.

161


Note 15 —	Transactions and Relationships with Related Parties


	Fiscal Year 2005(1)
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(In thousands, except share and per share data)

Results of operations
Net sales	$	405,277	$	426,604	$	415,919	$	403,485
Gross profit	$	188,540	$	199,298	$	195,302	$	203,471
Operating profit	$	30,202	$	37,584	$	33,258	$	29,193
Interest expense	$	8,726	$	8,439	$	7,554	$	8,880
Loss on debt retirement	$	—	$	1,600	$	—	$	—
Net income	$	13,058	$	16,749	$	15,664	$	12,319
Basic earnings per share:	$	0.29	$	0.37	$	0.36	$	0.28
Diluted earnings per share:	$	0.29	$	0.37	$	0.36	$	0.28
Shares used in EPS calculation Basic		45,130		45,135		43,787		43,816
Diluted		45,494		45,539		44,121		44,086


/s/ WILLIAM A. SHUTZER William A. Shutzer				Director

/s/ STEVEN L. KORBY Steven L. Korby				Senior Vice President and Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


NAME	JURISDICTION OF INCORPORATION	ALSO DOES BUSINESS AS
Subsidiaries of Registrant:
CSK Auto, Inc. (“Auto”)	Arizona	Checker Auto Parts, Kragen Auto
		Parts, Schuck’s Auto Supply,
		Murray’s Discount Auto Stores

Subsidiaries of Auto:
CSK AUTO.COM, Inc.	Delaware


Date: July 6, 2007
		/s/ Maynard L. Jenkins

		Maynard L. Jenkins
		Chief Executive Officer


Date: July 6, 2007
		/s/ Steven L. Korby

		Steven L. Korby
		Interim Chief Financial Officer

(1)		The Report fully complies with the requirements of section 13(a) or 15(d) of the Exchange Act; and

(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CSK.