**Exhibit 99.1**

 

On May 31, 2006,Spirit Finance Corporation (“Spirit Finance”) acquired 178 real estateproperties from SKO Group Holding Corp. (“SKO”) for $815.3 million (the“Property Acquisition”).  In conjunctionwith the Property Acquisition, Spirit Finance entered into long-term triple-netmaster lease agreements with two wholly-owned subsidiaries of SKO.  The SKO subsidiaries operate over 350 generalmerchandise retail locations under the“ShopKo” and “Pamida” names in both mid-sized to larger cities and small, ruralcommunities across the Midwest, North Central, Rocky Mountain and PacificNorthwest states.  At June 30,2006, Spirit Finance’s real estate leased to these subsidiaries accounted forapproximately one-third of Spirit Finance’s total real estate investments.  As Spirit Finance continues to acquireadditional real estate investments, this concentration is expected to decrease.

The SKOsubsidiaries are required to furnish Spirit Finance various financialstatements and other financial information under their lease agreements.  Due to the concentration of these two tenantsat June 30, 2006 in relation to Spirit Finance’s total assets, included in thisexhibit are the unaudited financial statements of SKO as of April 29, 2006 andJanuary 28, 2006 and for the 13 weeks ended April 29, 2006 and April 30, 2005,provided to Spirit Finance by SKO in accordance with the terms of the leaseagreements.  SKO also provided SpiritFinance with additional financial information related to its first quarteroperations, which is included within the discussion of results below.  These financial statements and the financialinformation below should be read in conjunction with the audited financialstatements of SKO as of January 28, 2006 and January 29, 2005 and for the FourWeeks Ended January 28, 2006, the Forty-eight Weeks Ended December 31, 2005,and the Years Ended January 29, 2005 and January 31, 2004, included in SpiritFinance’s Form 8-K/A dated May 31, 2006.

SKO’s firstquarter ended on April 29, 2006; accordingly, SKO’s financial statements forthat period do not reflect the Property Acquisition by Spirit Finance thatoccurred on May 31, 2006. The following discussion contains additionalfinancial information that was provided by SKO:

At the end of itsfirst quarter, SKO operated 355 stores consisting of 138 ShopKo Stores and 217Pamida Stores.  At the end of the same period in the prior year, SKOoperated 366 stores consisting of 143 ShopKo Stores and 223 PamidaStores.  For the 13 weeks ended April 29, 2006, consolidated sales werelower by approximately $16 million, mainly attributable to the closure ofstores.  Same store sales at the locations operating at April 29, 2006were relatively flat, posting a slight decrease of 0.5 %.  Gross margin decreased by approximately $6million, of which approximately half is related to the store closures. Thebalance is related primarily to markdowns taken for the liquidation of inventorythat did not fit with Pamida’s merchandise strategy.

As described inNote 10 to the accompanying consolidated financial statements of SKO, SKO usedthe proceeds from Spirit’s purchase of the ShopKo and Pamida properties torepay its outstanding secured real estate borrowings; accordingly, certainexpenses, such as the interest expense and the amortization of deferredfinancing costs related to the real estate borrowings, which are reflected inthe accompanying statements, are not expected to be recurring.  Subsequent to the end of the first quarter,in connection with the Property Acquisition, SKO used approximately $93 millionof the net proceeds from the sale, after repayment of the secured real estateborrowings, to reduce amounts outstanding under its lines of credit, improvingSKO’s liquidity.  SKO’s cash balance atthe end of the first quarter was $23.0 million versus $21.0 million at January28, 2006.  The availability under SKO’slines of credit as of April 29, 2006 was $131.5 million, versus $123.5 millionat January 28, 2006.

 

 

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** **

**SKO GROUP HOLDING CORP. ANDSUBSIDIARIES**

**TABLE OF CONTENTS**

 
|                                                                                                                                    | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                               |       |       |
| Consolidated Statements of Operations for the 13  Weeks Ended April 29, 2006 (Successor) and April 30, 2005 (Predecessor)          |       | 1          |
|                                                                                                                               |       |       |
| Consolidated Balance Sheets as of April 29, 2006  (Successor), April 30, 2005 (Predecessor) and January 28, 2006  (Successor) |       | 2          |
|                                                                                                                               |       |       |
| Consolidated Statements of Cash Flows for the 13  Weeks Ended April 29, 2006 (Successor) and April 30, 2005 (Predecessor)          |       | 3          |
|                                                                                                                               |       |       |
| Consolidated Statement of Shareholders’ Equity for  the 13 Weeks Ended April 29, 2006 (Successor)                             |       | 4          |
|                                                                                                                               |       |       |
| Notes to Consolidated Financial Statements                                                                                         |       | 5          |

 

 

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**SKOGROUP HOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THETHIRTEEN WEEKS ENDED APRIL 29, 2006 (SUCCESSOR) AND**

**APRIL30, 2005 (PREDECESSOR)**

**(Inthousands)**

 
| ** **                                           | ** ** | **Successor**                                 | ** ** | **Predecessor**                               | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **April 29, 2006  (13 weeks)** | ** ** | **April 30, 2005  (13 weeks)** | ** ** |
| REVENUES:                                            |       |                                          |       |                                          |       |
| Net sales                                            |       | $                                             | 687,515    |                                          | $          | 703,259 |   |
| Licensed department rentals and other income         |       | 3,398                                         |       | 3,460                                         |       |
| Total Revenues                                       |       | 690,913                                       |       | 706,719                                       |       |
|                                                 |       |                                          |       |                                          |       |
| COSTS AND EXPENSES:                                  |       |                                          |       |                                          |       |
| Cost of sales (before depreciation and amortization) |       | 505,023                                       |       | 515,251                                       |       |
| Selling, general and administrative expenses         |       | 159,364                                       |       | 162,193                                       |       |
| Depreciation and amortization expenses               |       | 7,511                                         |       | 20,881                                        |       |
| Total costs and expenses                             |       | 671,898                                       |       | 698,325                                       |       |
|                                                 |       |                                          |       |                                          |       |
| EARNINGS FROM  OPERATIONS                            |       | 19,015                                        |       | 8,394                                         |       |
|                                                 |       |                                          |       |                                          |       |
| INTEREST EXPENSE                                     |       | 26,967                                        |       | 7,361                                         |       |
|                                                 |       |                                          |       |                                          |       |
| (LOSS) INCOME  BEFORE INCOME TAXES                   |       | (7,952                                        | )          | 1,033                                         |       |
| ** **                                           | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| INCOME TAX  (BENEFIT) PROVISION                      |       | (3,181                                        | )          | 397                                           |       |
| ** **                                           | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| NET (LOSS) INCOME                                    |       | $                                             | (4,771     | )                                             | $          | 636 |   |

 

1

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**SKO GROUP HOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OF APRIL 29, 2006 (SUCCESSOR), APRIL 30, 2005(PREDECESSOR) AND JANUARY 28, 2006 (SUCCESSOR)(In thousands, except share data)**
| ** **                                                                           | ** ** | **Successor**       | ** ** | **Predecessor**     | ** ** | **Successor**         | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|-----------------------|------------|
|                                                                                 | ** ** | **April 29,  2006** | ** ** | **April 30,  2005** | ** ** | **January 28,  2006** |       |
|                                                                                 | ** ** | ** **          | ** ** | ** **          | ** ** | ** **            |       |
| ASSETS                                                                               |       |                |       |                |       |                  |       |
|                                                                                 |       |                |       |                |       |                  |       |
| CURRENT ASSETS:                                                                      |       |                |       |                |       |                  |       |
| Cash and cash equivalents                                                            |       | $                   | 22,963     |                | $          | 26,800                |       | $ | 21,018 |   |
| Receivables, net of allowance for losses of $2,146,  $1,947 and $2,055, respectively |       | 56,974              |       | 51,307              |       | 64,528                |       |
| Merchandise inventories                                                              |       | 566,970             |       | 597,322             |       | 532,042               |       |
| Other current assets                                                                 |       | 10,094              |       | 10,879              |       | 10,652                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| Total current assets                                                                 |       | 657,001             |       | 686,308             |       | 628,240               |       |
|                                                                                 |       |                |       |                |       |                  |       |
| PROPERTY AND  EQUIPMENT—Net                                                     |       | 848,881             |       | 724,456             |       | 855,827               |       |
|                                                                                 |       |                |       |                |       |                  |       |
| INTANGIBLE ASSETS—Net                                                           |       | 32,094              |       | 19,163              |       | 32,555                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| DEFERRED INCOME  TAXES                                                               |       | 22,303              |       | —              |       | 22,303                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| DEBT ISSUANCE  COSTS                                                                 |       | 39,426              |       | 3,492               |       | 43,878                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| OTHER ASSETS                                                                         |       | 6,837               |       | 9,182               |       | 7,513                 |       |
|                                                                                 |       |                |       |                |       |                  |       |
| TOTAL                                                                                |       | $                   | 1,606,542  |                | $          | 1,442,601             |       | $ | 1,590,316 |   |
|                                                                                 |       |                |       |                |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                           |       |                |       |                |       |                  |       |
|                                                                                 |       |                |       |                |       |                  |       |
| CURRENT LIABILITIES:                                                                 |       |                |       |                |       |                  |       |
| Short-term debt                                                                      |       | $                   | 73,449     |                | $          | 78,242                |       | $ | 47,456 |   |
| Accounts payable—trade                                                          |       | 240,699             |       | 257,593             |       | 218,169               |       |
| Accrued compensation and related taxes                                               |       | 19,823              |       | 31,223              |       | 32,784                |       |
| Deferred taxes and other accrued liabilities                                         |       | 107,626             |       | 102,570             |       | 121,509               |       |
| Accrued income and other taxes                                                       |       | 27,044              |       | 38,333              |       | 39,969                |       |
| Current portion of long-term debt and capital lease  obligations                     |       | 9,193               |       | 7,688               |       | 8,937                 |       |
|                                                                                 |       |                |       |                |       |                  |       |
| Total current liabilities                                                            |       | 477,834             |       | 515,649             |       | 468,824               |       |
|                                                                                 |       |                |       |                |       |                  |       |
| LONG-TERM DEBT  AND CAPITAL LEASE OBLIGATIONS—Less current portion              |       | 1,059,473           |       | 236,767             |       | 1,055,420             |       |
|                                                                                 |       |                |       |                |       |                  |       |
| OTHER LONG-TERM  OBLIGATIONS                                                         |       | 27,266              |       | 20,927              |       | 19,332                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| DEFERRED INCOME  TAXES                                                               |       | —              |       | 22,963              |       | —                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                                       |       | —              |       | —              |       | —                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                           |       |                |       |                |       |                  |       |
| Predecessor:                                                                         |       |                |       |                |       |                  |       |
| Preferred stock (par value $0.01; 20,000,000 shares  authorized, none issued)        |       | —              |       | —              |       | —                |       |
| Common stock (par value $0.01; 75,000,000 shares  authorized and 31,580,000 issued)  |       | —              |       | 320                 |       | —                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| Successor:                                                                           |       |                |       |                |       |                  |       |
| Common stock  (par value $0.001; 1,000 shares authorized, issued and outstanding)    |       |                |       |                |       |                  |       |
| Additional paid-in capital                                                           |       | 55,000              |       | 403,613             |       | 55,000                |       |
| Retained earnings                                                                    |       | (13,031             | )          | 283,030             |       | (8,260                | )          |
| Less treasury stock—at cost                                                     |       | —              |       | (40,668             | )          | —                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| Total shareholders’ equity                                                      |       | 41,969              |       | 646,295             |       | 46,740                |       |
|                                                                                 |       |                |       |                |       |                  |       |
| TOTAL                                                                                |       | $                   | 1,606,542  |                | $          | 1,442,601             |       | $ | 1,590,316 |   |

 

See notes to consolidatedfinancial statements.

 

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**SKO GROUP HOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2006 (SUCCESSOR) AND**

**APRIL 30, 2005 (PREDECESSOR)**

**(In thousands)**

 
| ** **                                                                                | ** ** | **Successor**       | ** ** | **Predecessor**     | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                | ** ** | **April 29,**  | ** ** | **April 30,**  | ** ** |
| ** **                                                                                | ** ** | **2006**            | ** ** | **2005**            | ** ** |
| ** **                                                                                | ** ** | **(13 weeks)** | ** ** | **(13 weeks)** | ** ** |
|                                                                                      |       |                |       |                |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |                |       |                |       |
| Net (loss) income                                                                         |       | $                   | (4,771     | )                   | $          | 636 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |                |       |                |       |
| Depreciation and amortization                                                             |       | 7,511               |       | 20,881              |       |
| Amortization of deferred financing costs                                                  |       | 4,452               |       | —              |       |
| Gain on the sale of property and equipment                                                |       | —              |       | (177                | )          |
| Change in assets  and liabilities—net of effects of the Acquisition:                 |       |                |       |                |       |
| Receivables                                                                               |       | 7,554               |       | 10,712              |       |
| Merchandise inventories                                                                   |       | (34,927             | )          | (33,223             | )          |
| Other current assets                                                                      |       | 558                 |       | (1,833              | )          |
| Other assets                                                                              |       | 662                 |       | 72                  |       |
| Accounts payable and accrued liabilities                                                  |       | (17,654             | )          | 13,386              |       |
| Other long-term obligations                                                               |       | 7,934               |       | (1,049              | )          |
|                                                                                      |       |                |       |                |       |
| Net cash (used in) provided by operating activities                                       |       | (28,681             | )          | 9,405               |       |
|                                                                                      |       |                |       |                |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |                |       |                |       |
| Capital expenditures                                                                      |       | (96                 | )          | (2,806              | )          |
| Proceeds from the sale of property and equipment                                          |       | 420                 |       | 321                 |       |
| Payments for pharmacy customer lists                                                      |       | —              |       | (1,552              | )          |
|                                                                                      |       |                |       |                |       |
| Net cash (used in) provided by investing activities                                       |       | 324                 |       | (4,037              | )          |
|                                                                                      |       |                |       |                |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |                |       |                |       |
| Borrowings (repayments) under revolving credit  facilities                                |       | 33,651              |       | —              |       |
| Borrowings (repayments) of other debt and capital  lease obligations                      |       | (3,349              | )          | (9,681              | )          |
| Proceeds from exercise of stock options                                                   |       | —              |       | 6,007               |       |
| Purchase of treasury stock                                                                |       | —              |       | (4                  | )          |
|                                                                                      |       |                |       |                |       |
| Net cash provided by (used in) financing activities                                       |       | 30,302              |       | (3,678              | )          |
|                                                                                      |       |                |       |                |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                |       | 1,945               |       | 1,690               |       |
|                                                                                      |       |                |       |                |       |
| CASH AND CASH  EQUIVALENTS—Beginning of period                                       |       | 21,018              |       | 25,110              |       |
|                                                                                      |       |                |       |                |       |
| CASH AND CASH  EQUIVALENTS—End of period                                             |       | $                   | 22,963     |                | $          | 26,800 |   |

 

See notes to consolidatedfinancial statements

 

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**SKO GROUP HOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY**

**FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2006 (SUCCESSOR)**

**(In thousands)**

 
| ** **                                      | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Total**    | ** ** |
| ** **                                      | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                                            |       |                  |       |        |       |           |       |         |       |       |       |       |       |
| BALANCE—January 28,  2006 (Successor) |       | 1                     |       | $           | —     |           | $          | 55,000       |       | $          | (8,260     | )          | 1          |   | $ | 46,740 |   |
|                                            |       |                  |       |        |       |           |       |         |       |       |       |       |       |
| Net loss                                        |       |                  |       |        |       |           |       | (4,771       | )          |       |       | (4,771     | )          |
|                                            |       |                  |       |        |       |           |       |         |       |       |       |       |       |
| BALANCE—April  29, 2006 (Successor)        |       | 1                     |       | $           | —     |           | $          | 55,000       |       | $          | (13,031    | )          | 1          |   | $ | 41,969 |   |

 

Seenotes to consolidated financial statements.

 

4

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**SKO GROUP HOLDINGCORP. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**1.      ORGANIZATION, BASIS OF PRESENTATION ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Organization***—SKOGroup Holding Corp. (the “Company”) was incorporated by an investment fundaffiliated with Sun Capital Partners, Inc. (“Sun Capital”) in December 2005 forthe purpose of acquiring all of the outstanding shares of common stock ofShopKo Stores, Inc. (“ShopKo”). The Company is a wholly-owned subsidiary of SKOGroup Holding LLC (the “Parent”), which is owned by an affiliate of Sun Capitaland other co-investors. On December 28, 2005, the Company acquired all of theissued and outstanding shares of ShopKo (the “Acquisition”). The Company doesnot conduct significant activities apart from its investment in ShopKo.References to the “Company” and “ShopKo” are used interchangeably herein.

The Company has two wholly-owned operatingsubsidiaries, ShopKo and Pamida, Inc. (“Pamida”), which are engaged inproviding general merchandise and retail health services through two separate,distinct retail formats. ShopKo stores are operated in the Midwest, Western andPacific Northwest states in mid-sized to larger cities; while Pamida stores areoperated in Midwest, North Central and Rocky Mountain states in small, ruralcommunities.

***Basis of Presentation***—Asa result of the Acquisition, the Company’s financial position, results ofoperations and cash flows as of and for the 13 weeks ended April 30, 2005 arepresented as the “Predecessor.” The Company’s financial position, results ofoperations and cash flows as of and for the 13 weeks ended April 29, 2006 arepresented as the “Successor.”

The Acquisition and related financings were giveneffect as of the close of business on December 31, 2005. The financialinformation contained herein for the Successor reflects purchase accounting,and in accordance with Statement of Financial Accounting Standards (“SFAS”) No.141, *Business Combinations*, the purchaseprice is allocated to the underlying assets and liabilities based upon theirrespective estimated fair values.

***Interim Financial Statements -***TheCompany operates on a 52/53-week fiscal year basis.  The 2006 fiscal year (53 weeks) will end onFebruary 3, 2007 and the 2005 fiscal year (52 weeks) ended January 28,2006.  The accompanying consolidatedfinancial statements have been prepared by the Company without audit.  However, the foregoing financial statementsreflect all adjustments (which include only normal recurring adjustments) whichare, in the opinion of Company Management, necessary to present fairly theconsolidated financial position of the Company as of April 29, 2006 and April30, 2005, and the results of operations for the then ended 13 week periods.

These interim results are not necessarily indicativeof the results of the fiscal years as a whole because the operations of theCompany are highly seasonal.  The fourthfiscal quarter has historically contributed a significant part of the Company’searnings due to the Christmas selling season.

5

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Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted.  The Company’sfiscal 2005 audited financial statements contain a summary of significantaccounting policies and include the consolidated financial statements and thenotes to the consolidated financial statements. The same accounting policies are followed in the preparation of interim reports.  The accompanying un-audited consolidatedfinancial statements should be read in conjunction with the Company’sconsolidated financial statements and notes thereto for the fiscal year endedJanuary 28, 2006.  The Company’sconsolidated financial statements were included in the Form 8-K/A filed bySpirit Finance Corporation on June 12, 2006.

**2.      THE ACQUISITION**

The Company acquired ShopKo pursuant to an Agreementand Plan of Merger, dated as of October 18, 2005, as amended (the “MergerAgreement”). Pursuant to the Merger Agreement, each issued and outstandingshare of ShopKo common stock was converted into the right to receive $29.07 incash and all options to acquire shares of ShopKo common stock outstanding werecancelled in exchange for a cash payment. Including transaction costs of $5.0million, the total consideration paid to existing common share and optionholders was $905.5 million. The Acquisition was financed with cash on hand, acapital contribution of $55.0 million from the Parent funded by investmentsfrom an affiliate of Sun Capital and the co-investors, and borrowings under thenew senior secured asset-backed revolving credit and bridge loan facilities(see Note 6). The Acquisition occurred simultaneously with (i) the closing ofthe financing transactions and equity contribution described above, (ii) theredemption of $94.3 million principal amount of outstanding 9.25% seniorunsecured notes, (iii) the redemption of $46.7 million in outstanding mortgagenotes payable, and (iv) the termination of the previous revolving creditfacility. In connection with the early redemption of the senior unsecured notesand mortgage notes, the Company paid a pre-payment premium to noteholdersaggregating $33.7 million.

The Acquisition was accounted for as a purchase inaccordance with the provisions of SFAS No. 141, Business Combinations.Accordingly, the total acquisition cost was allocated to the respective assetsand liabilities based upon their estimated fair values on the date of theAcquisition. At the date of Acquisition, the preliminary appraised fair marketvalue of net assets acquired exceeded the purchase price; therefore, nogoodwill is reflected in the consolidated balance sheet. The excess ofestimated fair market value of net assets acquired over purchase price wasallocated to non-current assets. The Company’s purchase price allocation ispreliminary and further refinements may be necessary. The preliminary purchaseprice allocation, inclusive of the Acquisition financing activities, is as follows(in millions):

6

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| Cash and cash  equivalents                                  |   | $       | 21.2   |   |
|-------------------------------------------------------------|--------|---------|--------|--------|
| Receivables                                                 |   | 66.8    |   |
| Merchandise  inventories                                    |   | 542.3   |   |
| Other current  assets                                       |   | 7.6     |   |
| Property and  equipment                                     |   | 859.4   |   |
| Intangible  assets                                          |   | 32.4    |   |
| Debt issuance  costs and other assets                       |   | 46.5    |   |
| Total assets acquired                                       |   | 1,576.2 |   |
| Current  liabilities                                        |   | 489.1   |   |
| Acquisition debt                                            |   | 924.6   |   |
| Other long-term  debt and capital lease obligations assumed |   | 107.5   |   |
| Total liabilities assumed                                   |   | 1,521.2 |   |
| Equity contribution                                         |   | $       | 55.0   |   |

 

The Company has allocated approximately $32.4 millionto identifiable intangible assets, of which approximately $11.7 million relatesto the indefinite-lived tradenames of ShopKo and Pamida. These indefinite-livedtradenames are not subject to amortization as management expects thesetradenames to generate cash flows indefinitely. The remaining intangible assetsrepresent primarily customer relationships, and will be amortized over theirestimated useful life of 10 years.

As discussed in Note 10, the Company has entered intoan agreement with a third party to sell 173 owned properties and five groundleased properties. The Company has allocated approximately $815.3 million tothe fair value of these properties in the preliminary purchase priceallocation.

The Company has established reserves for employeeseverance costs of $8.1 million and for store exit costs of $13.7 millionresulting from decisions directly related to the Acquisition. As of April 29,2006, the Company had made payments of $1.9 million with respect to employeeseverance and no payments with respect to store exit costs. The Company expectsthat the actions necessary to complete the employee severance and store exitswill be completed within one year of the Acquisition.

***Pro Forma Financial Information —***The following unaudited pro forma financial informationfor the 13 weeks ended April 30, 2005 was prepared as if the Acquisition hadoccurred at the beginning of fiscal 2005:

| (In millions) | ** ** | **13 Weeks Ended  April 30, 2005** | ** ** |
|--------------------|------------|--------------------------------------------------------|------------|
| Revenues           |       | $                                                      | 706.7      |   |
| Net loss           |       | (2.8                                                   | )          |
|                    |            |                                                        |            |  |

 

Pro forma adjustments have been made to reflectdepreciation and amortization using asset values recognized after applyingpurchase accounting adjustments, interest expense on borrowings used to financethe Acquisition and management fees.  Thepro forma financial information is presented for informational purposes onlyand is not indicative of the results of operations that would have beenachieved if the Acquisition had taken place at the beginning of fiscal 2005, orthat may result in the future.

7

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**3.      RELATED PARTY TRANSACTIONS**

Real Estate Advisory Services Agreement—On March 21,2006, the Company entered into a one-year agreement with KLA-Shopko, LLC (KLA)whereby KLA will provide advisory and other services to the Company in relationto the Company’s real estate assets (the “Real Estate Advisory Agreement”). Forthe services to be rendered by KLA, the Company shall pay to KLA an advisoryfee of $1.2 million, plus out-of-pocket expenses, during the twelve monthperiod ending on March 21, 2007. To the extent KLA provides material servicesin connection with the sale of any of the Company’s real estate assets, KLA isentitled to receive a fee of 0.5% of the gross sale price of such assets. Tothe extent KLA provides material services in connection with any financing orrefinancing arrangements with respect to the Company’s real estate assets, KLAis entitled to receive a fee of 0.25% of the gross amount of such financing upto $700.0 million, and 0.75% of the excess, if any, of any financing over thatamount.

**4.      PROPERTY AND EQUIPMENT**

Property and equipment as of April 29, 2006 and April30, 2005 includes (in thousands):

|                                                 | ** ** | **Successor**            | ** ** | **Predecessor**          | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **April 29,  2006** | ** ** | **April 30,  2005** | ** ** |
| Property and  equipment—at cost:           |       |                     |       |                     |       |
| Land                                            |       | $                        | 283,285    |                     | $          | 118,311 |   |
| Buildings                                       |       | 541,658                  |       | 682,813                  |       |
| Equipment                                       |       | 22,836                   |       | 577,734                  |       |
| Leasehold improvements                          |       | 4,362                    |       | 73,966                   |       |
| Property under construction                     |       | 446                      |       |                     |       |
| Property under capital leases                   |       | 5,260                    |       | 120,653                  |       |
|                                            |       |                     |       |                     |       |
| Total property and equipment                    |       | 857,847                  |       | 1,573,477                |       |
|                                            |       |                     |       |                     |       |
| Less accumulated  depreciation and amortization |       | (8,966                   | )          | (849,021                 | )          |
|                                            |       |                     |       |                     |       |
| Property and  equipment—net                |       | $                        | 848,881    |                     | $          | 724,456 |   |

 

On May 9, 2006, the Company entered into an agreementto sell real properties with a net book value at April 29, 2006 of approximately$807.4 million (see Note 10).

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**5.**                      INTANGIBLEASSETS

Intangible assets as of April 29, 2006 and April 30,2005 are as follows (in thousands):

|                                | ** ** | **Successor**      | ** ** | **Predecessor**    | ** ** |
|--------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                     | ** ** | **April 29,** | ** ** | **April 30,** | ** ** |
| ** **                     | ** ** | **2006**           | ** ** | **2005**           | ** ** |
|                           |       |               |       |               |       |
| Intangible assets:             |       |               |       |               |       |
| Customer relationships         |       | $                  | 20,777     |               | $          | 28,237 |   |
| Indefinite lived tradenames    |       | 11,653             |       | 3,176              |       |
| Other                          |       | 606                |       | (2,983             | )          |
| Total intangible assets        |       | 33,036             |       | 28,430             |       |
| Less accumulated  amortization |       | (942               | )          | (9,267             | )          |
| Intangible assets—net     |       | $                  | 32,094     |               | $          | 19,163 |   |

 

**6.**                      DEBT

The components of the Company’s debt as of April 29, 2006 andApril 30, 2005 are as follows (in thousands):

 

|                                                                              | ** ** | **Successor**      | ** ** | **Predecessor**    | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                   | ** ** | **April 29,** | ** ** | **April 30,** | ** ** |
| ** **                                                                   | ** ** | **2006**           | ** ** | **2005**           | ** ** |
|                                                                         |       |               |       |               |       |
| Revolving credit  facilities                                                 |       | $                  | 366,449    |               | $          | 78,242 |   |
| Real estate  facility                                                        |       | 699,163            |       | 0                  |       |
| Senior unsecured  notes, 9.25% due March 15, 2022                       |       | 5,667              |       | 99,677             |       |
| Mortgage and  other obligations                                              |       | 924                |       | 51,834             |       |
| Capital lease  obligations                                                   |       | 69,912             |       | 92,944             |       |
|                                                                         |       | 1,142,115          |       | 322,697            |       |
| Less—current  portion of long-term debt and capital lease obligations   |       | (9,193             | )          | (7,688             | )          |
| Less—portion of  revolving credit facility presented as short-term debt |       | (73,449            | )          | (78,242            | )          |
| Long-term debt and  capital lease obligations                                |       | $                  | 1,059,473  |               | $          | 236,767 |   |

 

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***Revolving Credit Facility***—At the time of the Acquisition,the Company obtained a new senior secured asset-based revolving credit facility(the “Revolving Credit Facility”). The Revolving Credit Facility, whichterminates on December 28, 2010, provides revolving credit loans of up to$660.0 million. The Revolving Credit Facility consists of two components,Revolver A and Revolver B, both of which are subject to borrowing basecalculations based primarily on a percentage of inventory and accountsreceivable. Revolver B loans are deemed to be the first loans made and the lastloans repaid.  Interest for both RevolverA and B is payable monthly. The Revolving Credit Facility is essentiallysecured by all the assets of the Company excluding real property and equipment.The Revolving Credit Facility limits the number of store closings, payment ofdividends, incurring new indebtedness, repurchase of common stock, capitalexpenditures and transactions with affiliates, including payment of managementfees, and also requires the Company to meet certain financial performancecovenants. The Company was in compliance with all covenants as ofApril 29, 2006.

As of April 29, 2006, the Company has $366.4 million of borrowingsoutstanding under the Revolving Credit Facility.  Of the total borrowings outstanding, $73.4 millionis classified as short-term debt, which represents the Company’s estimate ofthe amount of principal repayment under this facility during fiscal 2006.

The Company issues documentary letters of credit during the ordinarycourse of business as required by certain foreign vendors, as well as stand-byletters of credit as required by certain insurers and other parties. As ofApril 29, 2006 and April 30, 2005, the Company had outstanding stand-by lettersof credit of $26.9 million and $19.3 million, respectively, andoutstanding documentary letters of credit of $4.3 million and $6.9 million,respectively.

Revolver A has maximum available borrowings and letters of credit up to$600.0 million. The total outstanding letters of credit is limited to$200.0 million. Borrowings bear interest at a variable rate based on acertain formula (6.5% at April 29, 2006). At April 29, 2006, there wereborrowings of $321.0 million under Revolver A with $131.5 million of additionalborrowings available.

Revolver B has maximum available borrowings up to $60.0 million.Borrowings bear interest at a variable rate based on a certain formula (11.2%at April 29, 2006). At April 29, 2006 there were borrowings of $45.5 millionunder Revolver B with no additional borrowings available.

At April 30, 2005, the Company had $78.2 million under therevolving credit portion of its prior senior secured credit facility that wasterminated at the time of the Acquisition. The related weighted averageinterest rate on outstanding borrowings was 4. 8%.

***Real Estate Facility***—On January 27, 2006,the Company, utilizing special purpose subsidiaries formed to hold its realestate assets, obtained $700.0 million in private placement mortgagefinancing (the “Real Estate Facility”). The full amount of the Real EstateFacility was borrowed on January 27, 2006. The Real Estate Facility has aterm of two years with a one year renewal option subject to certain conditionsand fees. Of the total Real Estate Facility, $650.0 million bears interestat the LIBOR rate plus 2.527% and $50.0 million bears interest at LIBORrate plus 7.75%. The Real Estate Facility is secured by most of the realproperty of the Company. Principal payments of $250,000 and related interestare due monthly in fiscal 2006 and principal payments of $500,000 and relatedinterest are due monthly in fiscal 2007 with a balloon payment due when theagreement expires. There is no penalty for pre-payment 

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of principal. The agreement required the Company to obtain an InterestRate Cap Agreement (the “Interest Rate Cap”) for the term of the loan andhas a notional amount equal to the principal balance of the loan and a strikerate of 6%. The carrying value of the Interest Rate Cap, and its fair marketvalue at April 29, 2006, was $460,000.

***Senior Unsecured Notes***—In connection with theAcquisition, and pursuant to a cash tender offer commenced in June 2005,approximately $94.3 million (principal amount) of the Company’s seniorunsecured notes were repaid on December 28, 2005. In connection with theearly repayment of these notes, the Company paid a pre-payment premium ofapproximately $18.6 million.

***Mortgage and Other Obligations***—At April 30, 2005,the Company had a real estate mortgage of $47.4 million. In connectionwith the Acquisition, the outstanding principal amount of $46.7 millionwas repaid.

**7.**                      BENEFITPLANS

***Defined Contribution******Plan***—Substantially all employees of theCompany are covered by a defined contribution profit sharing plan. The planhistorically provided for two types of company contributions: a discretionaryamount determined annually by the Board of Directors and an employer matchingcontribution equal to 100% of the first three percent and 50% of the next 2% ofcompensation contributed by participating employees. The Company did not make adiscretionary contribution during the first quarter of fiscal 2006 with respectto fiscal 2005 operations.  Employermatching contributions were $ 2.1 million for the thirteen week periodended April 29, 2006, and $2.0 million for the thirteen week period ended April30, 2005.

***Other Benefits***—The Company also provides certainsupplemental retirement and postretirement benefits, other than pensions. Costsassociated with these benefits are accrued during the employee’s serviceperiod. The annual cost and accumulated benefit obligation associated withthese benefits are not material.

**8.**                      SEGMENTINFORMATION

The Company’s reportable segments are based on theCompany’s strategic business operating units, and include a ShopKo Retailsegment and a Pamida Retail segment.

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies in theCompany’s fiscal 2005 Annual Report. The Company evaluates performance based onoperating earnings of the respective business segments.

Summarized financial information concerning the Company’s reportablesegments is shown in the following table (in thousands):

 

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|                                  | ** ** | **First Quarter (13 Weeks) Ended** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **April 29,  2006**                               | ** ** | **April 30,  2005** | ** ** |
| Net Sales                        |       |                                                   |       |   |   |
| ShopKo retail                    |       | $                                                      | 504,617    |   | $ | 517,851 |   |
| Pamida retail                    |       | 182,898                                                |       | 185,408 |   |
|                             |       |                                                   |       |   |   |
| Total net sales                  |       | $                                                      | 687,515    |   | $ | 703,259 |   |
|                             |       |                                                   |       |   |   |
| Earnings (loss) from  operations |       |                                                   |       |   |   |
| ShopKo retail                    |       | $                                                      | 23,498     |   | $ | 15,680 |   |
| Pamida retail                    |       | 829                                                    |       | 21 |   |
| Corporate                        |       | (5,312                                                 | )          | (7,307 | ) |
|                             |       |                                                   |       |   |   |
| Total earnings from  operations  |       | $                                                      | 19,015     |   | $ | 8,394 |   |

 

**9.**                      LITIGATION

In connection with the Badger Merger Agreement, alawsuit alleging breach of fiduciary duties was filed against ShopKo and itsboard of directors. This lawsuit was settled subsequent to the termination ofthe merger agreement and prior to the Acquisition for an immaterial amount.

In connection with ShopKo’s cash tender offer topurchase its 9.25% senior notes, certain of the holders of such notes filed alawsuit in United States District Court, Southern District of New York,Federated Bond Fund, et al. v. ShopKo Stores, Inc., Sun Capital Partners GroupIV, Inc., Sun Capital Partners IV, LP, SKO Group Holding Corp., and SKOAcquisition Corp. The plaintiffs allege, among other things, the defendantsviolated certain federal securities laws in obtaining consent solicitations inconnection with the tender offer, committed fraud and made materialmisrepresentations. Plaintiffs claim the solicitation of consents wasimproperly extended; that the termination of the Badger Merger Agreement, theconsummation of which was a condition to ShopKo’s obligation to perform thetender, made it impossible to satisfy such condition; that ShopKo mademisrepresentations and failed to disclose material information necessary forbondholders to make an informed decision; and that defendants manipulatedevents in a deceptive and fraudulent manner. In connection with theAcquisition, ShopKo waived all conditions to the tender offer and purchased alltendered bonds. Each of the plaintiffs tendered their bonds while reservingtheir rights. The Company believes the litigation is without merit and plans todefend it vigorously. The Company filed a motion to dismiss onFebruary 16, 2006. Oral arguments were held on May 12, 2006.

In the normal course of business, the Company has beennamed as a defendant in various lawsuits. Some of these lawsuits involve claimsfor substantial amounts. Although the ultimate outcome of these lawsuits cannotbe ascertained at this time, it is the opinion of management, afterconsultation with counsel, that the resolution of such suits will not have amaterial adverse effect on the consolidated financial statements of theCompany.

 

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**10.**               SUBSEQUENT EVENT

On May 9, 2006, the Company entered into an agreementto sell 112 ShopKo and 66 Pamida properties (including the corporateheadquarters, three distribution centers, the centralized optical facility andfive ground lease properties) to a subsidiary of Spirit Finance Corporation (“Spirit”)for approximately $815.3 million. Spirit will acquire the real estateassets by purchasing 100% of the outstanding stock of ShopKo Stores, Inc. Theoperating assets of ShopKo and Pamida will remain with the Company. Inaddition, the Company has agreed to enter into master lease arrangements withSpirit whereby the Company will lease back the properties from Spirit for aninitial term of 20 years for the ShopKo properties and 15 years for the Pamidaproperties. At the end of the initial lease term, the Company will have theoption to renew the lease term of any individual property for two additionalten-year terms. The master lease arrangement provides for base rent ofapproximately $74.4 million per year, with an escalation provision everythree years at the lesser of 6% or 1.25 times the product of the base rent andthe increase in the consumer price index. ShopKo and Pamida, respectively, astenants, will also be responsible for the payment of all operating expenses ofthe properties, including insurance, taxes, utilities, and other maintenanceexpenses. The sale-leaseback transaction closed on May 31, 2006 during theCompany’s second fiscal quarter.  Theproceeds from the transaction were used to repay the outstanding borrowingsunder the Real Estate facility plus accrued interest ($703.0 million), to payclosing costs related to the transaction estimated at $19.3 million, and forgeneral corporate purposes.

******

 

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