**Exhibit99.1**

**Background**

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 approximately345 general merchandise retail locations underthe “ShopKo” and “Pamida” names in both mid-sized to larger cities and small,rural communities across the Midwest, North Central, Rocky Mountain and PacificNorthwest states.  At September30, 2006, Spirit Finance’s real estate leased to these subsidiaries accountedfor approximately one-third of Spirit Finance’s total real estateinvestments.  As Spirit Finance continuesto acquire additional real estate investments, this concentration is expectedto 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 tenantsin relation to Spirit Finance’s total assets at September 30, 2006, included inthis exhibit are the unaudited financial statements of SKO as of July 29, 2006and January 28, 2006 and for the 13 and 26 weeks ended July 29, 2006 and July30, 2005, provided to Spirit Finance by SKO in accordance with the terms of thelease agreements.  SKO also providedSpirit Finance with additional financial information related to its secondquarter and year-to-date operations, which is included within the discussion ofresults below.  These financialstatements and the financial information below should be read in conjunctionwith the audited financial statements of SKO as of January 28, 2006 and January29, 2005 and for the Four Weeks Ended January 28, 2006, the Forty-eight WeeksEnded December 31, 2005, and the Years Ended January 29, 2005 and January 31,2004, included in Spirit Finance’s Form 8-K/A dated May 31, 2006.

**SKO Highlights**

SKO’s secondquarter ended on July 29, 2006; accordingly, SKO’s financial statements forthat period reflect approximately two months of the effect of the PropertyAcquisition by Spirit Finance that occurred on May 31, 2006. The discussion belowcontains additional financial information that was provided to Spirit Financeby SKO:

At the end of itssecond quarter, SKO operated 345 stores consisting of 138 ShopKo Stores and 207Pamida Stores.  At the end of the same period in the prior year, SKOoperated 363 stores consisting of 143 ShopKo Stores and 220 PamidaStores.  For the 13 weeks ended July 29, 2006, consolidated sales werehigher by approximately $3 million, primarily attributable to increases inretail health and main store sales, partially offset by the impact of theclosure of stores. Same store sales for the 13 weeks ended July 29, 2006increased 2.0%.  Gross margin decreasedby approximately $5 million, primarily due to markdowns taken for the liquidationof inventory that did not fit with Pamida’s merchandise strategy and the impactof store closures partially offset by gross margin increases in the ShopKodivision due to improving inventory shrink trends and merchandise mix.   For the 26 weeks ended July 29, 2006,consolidated sales were lower by approximately $13 million, primarilyattributable to the closure of stores partially offset by increases in retailhealth sales.  Same store sales for the26 weeks ended July 29, 2006 

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increased 0.9%.  Gross margin decreased by approximately $10million primarily related to the impact of markdowns at the Pamida division asnoted earlier; the impact of store closures on gross margin for theyear-to-date period was essentially offset by increases in the ShopKo divisiondue to improving inventory shrink trends and merchandise mix.

As described inNote 8 to the accompanying consolidated financial statements of SKO, SKO used aportion of the proceeds from Spirit’s purchase of the ShopKo and Pamidaproperties to repay all of the borrowings outstanding under its secured realestate facility; accordingly, SKO expensed certain items, such as the interestexpense and the amortization of deferred financing costs related to the realestate borrowings, which are reflected in the accompanying statements, that arenot expected to be recurring.

During the secondquarter, in connection with the Property Acquisition, SKO used approximately$93 million of the net proceeds from the sale, after repayment of the securedreal estate borrowings, to reduce amounts outstanding under its lines ofcredit, improving SKO’s short-term liquidity. SKO’s cash balance at the end of the second quarter was $25.8 millionversus $21.0 million at January 28, 2006. The availability under SKO’s lines of credit as of July 29, 2006 was $226.3million, versus $123.5 million at January 28, 2006.

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** **

**SKO GROUP HOLDINGCORP. AND SUBSIDIARIES**

**TABLE OF CONTENTS**
|                                                                                                                                  | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                             |       |     |
| Consolidated  Statements of Operations for the 13 Weeks Ended July 29, 2006 (Successor) and  July 30, 2005 (Predecessor)         |       | 1        |
|                                                                                                                             |       |     |
| Consolidated  Statements of Operations for the 26 Weeks Ended July 29, 2006 (Successor) and  July 30, 2005 (Predecessor)         |       | 2        |
|                                                                                                                             |       |     |
| Consolidated  Balance Sheets as of July 29, 2006 (Successor), July 30, 2005 (Predecessor)  and January 28, 2006 (Successor) |       | 3        |
|                                                                                                                             |       |     |
| Consolidated  Statements of Cash Flows for the 26 Weeks Ended July 29, 2006 (Successor) and  July 30, 2005 (Predecessor)         |       | 4        |
|                                                                                                                             |       |     |
| Consolidated  Statement of Shareholders’ Equity for the 26 Weeks Ended July 29, 2006  (Successor)                           |       | 5        |
|                                                                                                                             |       |     |
| Notes to  Consolidated Financial Statements                                                                                      |       | 6 - 16   |

 

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**SKO GROUPHOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)FOR THE THIRTEEN WEEKS ENDED JULY 29, 2006 (SUCCESSOR)AND JULY 30, 2005 (PREDECESSOR)**

(In thousands)
| ** **                                           | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **July 29, 2006** | ** ** | **July 30, 2005** | ** ** |
| ** **                                           | ** ** | **(13 weeks)**         | ** ** | **(13 weeks)**         | ** ** |
| ** **                                           | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| REVENUES:                                            |       |                        |       |                        |       |
| Net sales                                            |       | $                           | 739,836    |                        | $          | 736,995 |   |
| Licensed department rentals and other income         |       | 3,506                       |       | 3,499                       |       |
| Total revenues                                       |       | 743,342                     |       | 740,494                     |       |
|                                                 |       |                        |       |                        |       |
| COSTS  AND EXPENSES:                                 |       |                        |       |                        |       |
| Cost of sales (before depreciation and amortization) |       | 539,573                     |       | 531,895                     |       |
| Selling, general and administrative expenses         |       | 181,417                     |       | 162,205                     |       |
| Depreciation and amortization expenses               |       | 3,388                       |       | 20,645                      |       |
| Total costs and expenses                             |       | 724,378                     |       | 714,745                     |       |
|                                                 |       |                        |       |                        |       |
| EARNINGS  FROM OPERATIONS                            |       | 18,964                      |       | 25,749                      |       |
|                                                 |       |                        |       |                        |       |
| INTEREST  EXPENSE                                    |       | 40,081                      |       | 7,002                       |       |
|                                                 |       |                        |       |                        |       |
| (LOSS)  INCOME BEFORE INCOME TAXES                   |       | (21,117                     | )          | 18,747                      |       |
|                                                 |       |                        |       |                        |       |
| INCOME  TAX (BENEFIT) PROVISION                      |       | (8,444                      | )          | 7,221                       |       |
|                                                 |       |                        |       |                        |       |
| NET (LOSS) INCOME                                    |       | $                           | (12,673    | )                           | $          | 11,526 |   |

 

1

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**SKO GROUPHOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)**

**FOR THETWENTY SIX WEEKS ENDED JULY 29, 2006 (SUCCESSOR)**

**AND JULY 30, 2005 (PREDECESSOR)**

(In thousands)
| ** **                                            | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **July 29, 2006** | ** ** | **July 30, 2005** | ** ** |
| ** **                                            | ** ** | **(26 weeks)**         | ** ** | **(26 weeks)**         | ** ** |
|                                                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| REVENUES:                                             |       |                        |       |                        |       |
| Net sales                                             |       | $                           | 1,427,351  |                        | $          | 1,440,254 |   |
| Licensed department rentals  and other income         |       | 6,904                       |       | 6,959                       |       |
| Total revenues                                        |       | 1,434,255                   |       | 1,447,213                   |       |
|                                                  |       |                        |       |                        |       |
| COSTS AND EXPENSES:                                   |       |                        |       |                        |       |
| Cost of sales (before  depreciation and amortization) |       | 1,044,595                   |       | 1,047,146                   |       |
| Selling, general and  administrative expenses         |       | 340,782                     |       | 324,398                     |       |
| Depreciation and amortization  expenses               |       | 10,899                      |       | 41,526                      |       |
| Total costs and expenses                              |       | 1,396,276                   |       | 1,413,070                   |       |
|                                                  |       |                        |       |                        |       |
| EARNINGS FROM OPERATIONS                              |       | 37,979                      |       | 34,143                      |       |
|                                                  |       |                        |       |                        |       |
| INTEREST EXPENSE                                      |       | 67,048                      |       | 14,363                      |       |
|                                                  |       |                        |       |                        |       |
| (LOSS) INCOME BEFORE INCOME TAXES                     |       | (29,069                     | )          | 19,780                      |       |
|                                                  |       |                        |       |                        |       |
| INCOME TAX (BENEFIT) PROVISION                        |       | (11,625                     | )          | 7,618                       |       |
|                                                  |       |                        |       |                        |       |
| NET  (LOSS) INCOME                                    |       | $                           | (17,444    | )                           | $          | 12,162 |   |

 

2

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**SKO GROUPHOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AS OF JULY 29, 2006 (SUCCESSOR), JULY 30, 2005 (PREDECESSOR) ANDJANUARY 28, 2006 (SUCCESSOR)**

(In thousands, except share data)
| ** **                                                                                  | ** ** | **Successor**           | ** ** | **Successor**              | ** ** | **Predecessor**         | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                                  | ** ** | **July 29,  2006** | ** ** | **January 28,  2006** | ** ** | **July 30,  2005** | ** ** |
| **ASSETS**                                                                                  | ** ** | ** **              | ** ** | ** **                 | ** ** | ** **              | ** ** |
|                                                                                        |       |                    |       |                       |       |                    |       |
| CURRENT ASSETS:                                                                             |       |                    |       |                       |       |                    |       |
|  Cash and cash equivalents                                                             |       | $                       | 25,821     |                       | $          | 21,018                  |       | $ | 41,431 |   |
|  Receivables (net of allowance for losses of $2,179, $1,956 and $2,055,  respectively) |       | 56,156                  |       | 64,528                     |       | 52,079                  |       |
|  Merchandise inventories                                                               |       | 522,580                 |       | 532,042                    |       | 561,190                 |       |
|  Other current assets                                                                  |       | 8,925                   |       | 10,652                     |       | 9,614                   |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| Total current assets                                                                        |       | 613,482                 |       | 628,240                    |       | 664,314                 |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| PROPERTY AND EQUIPMENT – Net                                                           |       | 89,022                  |       | 855,827                    |       | 696,054                 |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| INTANGIBLE ASSETS – Net                                                                |       | 12,684                  |       | 32,555                     |       | 20,225                  |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| DEFERRED INCOME TAXES                                                                       |       | 59,070                  |       | 22,303                     |       | —                  |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| DEBT ISSUANCE COSTS                                                                         |       | 12,718                  |       | 43,878                     |       | 3,237                   |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| OTHER ASSETS                                                                                |       | 6,061                   |       | 7,513                      |       | 8,788                   |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| TOTAL ASSETS                                                                                |       | $                       | 793,037    |                       | $          | 1,590,316               |       | $ | 1,392,618 |   |
|                                                                                        |       |                    |       |                       |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                               |       |                    |       |                       |       |                    |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| CURRENT LIABILITIES:                                                                        |       |                    |       |                       |       |                    |       |
|  Short-term debt                                                                       |       | $                       | —     |                       | $          | 47,456                  |       | $ | 40,000 |   |
|  Accounts payable – trade                                                         |       | 226,077                 |       | 218,169                    |       | 230,141                 |       |
|  Accrued compensation and related taxes                                                |       | 25,070                  |       | 32,784                     |       | 33,119                  |       |
|  Deferred taxes and other accrued liabilities                                          |       | 100,571                 |       | 121,509                    |       | 99,899                  |       |
|  Accrued income and other taxes                                                        |       | 52,533                  |       | 39,969                     |       | 40,564                  |       |
|  Current portion of long-term debt and  capital lease obligations                      |       | 5,536                   |       | 8,937                      |       | 7,177                   |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| Total current liabilities                                                                   |       | 409,787                 |       | 468,824                    |       | 450,900                 |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS – Less current portion                    |       | 325,189                 |       | 1,055,420                  |       | 234,767                 |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| OTHER LONG-TERM OBLIGATIONS                                                                 |       | 28,765                  |       | 19,332                     |       | 23,214                  |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| DEFERRED INCOME TAXES                                                                       |       | —                  |       | —                     |       | 22,963                  |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| 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)         |       | —                  |       | —                     |       | 321                     |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
|  Successor:                                                                            |       |                    |       |                       |       |                    |       |
| Common stock (par value  $0.001; 1,000 shares authorized and outstanding)                   |       |                    |       |                       |       |                    |       |
|  Additional paid-in capital                                                            |       | 55,000                  |       | 55,000                     |       | 406,539                 |       |
|  Retained earnings                                                                     |       | (25,704                 | )          | (8,260                     | )          | 294,622                 |       |
|  Less treasury stock – at cost                                                    |       | —                  |       | —                     |       | (40,708                 | )          |
|                                                                                        |       |                    |       |                       |       |                    |       |
| Total shareholders’ equity                                                             |       | 29,296                  |       | 46,740                     |       | 660,774                 |       |
|                                                                                        |       |                    |       |                       |       |                    |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                             |       | $                       | 793,037    |                       | $          | 1,590,316               |       | $ | 1,392,618 |   |

 

See notes to consolidated financial statements.

3

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**SKO GROUPHOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH****FLOWS(UNAUDITED)FOR THE TWENTY SIX WEEKS ENDED JULY 29, 2006 (SUCCESSOR) AND JULY 30, 2005(PREDECESSOR)**(In thousands)
| ** **                                                                                      | ** ** | **Successor**               | ** ** | **Predecessor**             | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                      | ** ** | **July 29, 2006** | ** ** | **July 30, 2005** | ** ** |
| ** **                                                                                      | ** ** | **(26 weeks)**         | ** ** | **(26 weeks)**         | ** ** |
|                                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |       |                        |       |                        |       |
|  Net (loss) income                                                                         |       | $                           | (17,444    | )                           | $          | 12,162 |   |
|  Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |       |                        |       |                        |       |
| Depreciation and amortization                                                                   |       | 10,899                      |       | 41,526                      |       |
| Amortization of deferred  financing costs                                                       |       | 31,160                      |       | —                      |       |
| Impairment charges                                                                              |       | —                      |       | 595                         |       |
| Deferred income taxes                                                                           |       | (7,475                      | )          | —                      |       |
| Stock compensation expense                                                                      |       | 70                          |       | —                      |       |
| Gain on sale of property and  equipment                                                         |       | —                      |       | (4,287                      | )          |
| Change in assets and  liabilities – net of effects of the Acquisition:                     |       |                        |       |                        |       |
| Receivables                                                                                     |       | 8,372                       |       | 9,940                       |       |
| Merchandise inventories                                                                         |       | 9,462                       |       | 2,908                       |       |
| Other current assets                                                                            |       | 1,726                       |       | (568                        | )          |
| Other assets                                                                                    |       | 1,403                       |       | 884                         |       |
| Accounts payable and accrued  liabilities                                                       |       | (28,181                     | )          | (12,083                     | )          |
| Other long-term obligations                                                                     |       | 9,362                       |       | 1,238                       |       |
|                                                                                            |       |                        |       |                        |       |
| Net cash provided by operating  activities                                                      |       | 19,354                      |       | 52,315                      |       |
|                                                                                            |       |                        |       |                        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |       |                        |       |                        |       |
|  Capital expenditures                                                                      |       | (5,702                      | )          | (8,291                      | )          |
|  Proceeds from the sale of property and  equipment                                         |       | 774,879                     |       | 17,737                      |       |
|  Acquisitions of pharmacy customer lists                                                   |       | (2,640                      | )          | (3,299                      | )          |
|                                                                                            |       |                        |       |                        |       |
| Net cash provided by investing  activities                                                      |       | 766,537                     |       | 6,147                       |       |
|                                                                                            |       |                        |       |                        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |       |                        |       |                        |       |
|  Repayment of borrowings under revolving  credit facilities                                |       | (100,162                    | )          | —                      |       |
|  Repayment of other debt and capital lease  obligations                                    |       | (703,984                    | )          | (50,434                     | )          |
|  Proceeds from debt borrowings                                                             |       | 23,058                      |       |                        |       |
|  Proceeds from exercise of stock options                                                   |       | —                      |       | 8,336                       |       |
|  Purchase of treasury stock                                                                |       | —                      |       | (43                         | )          |
|                                                                                            |       |                        |       |                        |       |
| Net cash used in financing  activities                                                          |       | (781,088                    | )          | (42,141                     | )          |
|                                                                                            |       |                        |       |                        |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                       |       | 4,803                       |       | 16,321                      |       |
|                                                                                            |       |                        |       |                        |       |
| CASH AND CASH EQUIVALENTS – Beginning of period                                            |       | 21,018                      |       | 25,110                      |       |
|                                                                                            |       |                        |       |                        |       |
| CASH  AND CASH EQUIVALENTS – End of period                                                 |       | $                           | 25,821     |                        | $          | 41,431 |   |

 

See notes to consolidatedfinancial statements.

4

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**SKO GROUPHOLDING CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’****EQUITY(UNAUDITED)FOR THE TWENTY SIX WEEKS ENDED JULY 29, 2006 (SUCCESSOR)**(Inthousands)
| ** **                                  | ** ** | ** **            | ** ** | ** **  | ** ** | **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                                    |       |                  |       |        |       |           |       | (17,444      | )          |       |       | (17,444    | )          |
|                                        |       |                  |       |        |       |           |       |         |       |       |       |       |       |
| BALANCE  – July 29, 2006 (Successor)   |       | 1                     |       | $           | —     |           | $          | 55,000       |       | $          | (25,704    | )          | 1          |   | $ | 29,296 |   |

 

See notes to consolidatedfinancial statements

5

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**SKO GROUP HOLDING CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**1.**                      ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

***Organization***—SKO Group Holding Corp. (the “Company”)was incorporated by an investment fund affiliated with Sun Capital Partners,Inc. (“Sun Capital”) in December 2005 for the purpose of acquiring all ofthe outstanding shares of common stock of ShopKo Stores, Inc. (the“Predecessor”). The Company is a wholly-owned subsidiary of SKO Group HoldingLLC (the “Parent”), which is owned by an affiliate of Sun Capital andother co-investors. On December 28, 2005, the Company acquired all of theissued and outstanding shares of the Predecessor (the “Acquisition”).

The Company has two wholly-ownedoperating subsidiaries, ShopKo Stores Operating Co., LLC (“ShopKo”) and PamidaStores Operating Co., LLC (“Pamida”), which are engaged in providing generalmerchandise and retail health services through two separate, distinct retailformats (ShopKo stores and Pamida stores). ShopKo stores are operated in theMidwest, Western and Pacific Northwest states in mid-sized to larger cities;while Pamida stores are operated in Midwest, North Central and Rocky Mountainstates in small, rural communities.

***Basis of Presentation***—As a result of the Acquisition, theCompany’s financial position, results of operations and cash flows as of July30, 2005 and for the 13 weeks and 26 weeks ended July 30, 2005 are presented asthe “Predecessor.” The Company’s financial position, results of operations andcash flows as of July 29, 2006 and for the 13 weeks and 26 weeks ended July 29,2006 are presented as the “Successor.”

The Acquisition and relatedfinancings were given effect as of the close of business on December 31,2005. The financial information contained herein for the Successor reflectspurchase accounting, and in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 141, *Business Combinations*,the purchase price is allocated to the underlying assets and liabilities basedupon their respective 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 accompanying financialstatements reflect all adjustments (which include only normal recurringadjustments) which are, in the opinion of the Company’s management, necessaryto present fairly the consolidated financial position of the Company as of July29, 2006 and July 30, 2005, and the results of operations for the 13 week and26 week periods then ended.

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.

6

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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 thereto.  The same accountingpolicies are followed in the preparation of interim reports.  The accompanying unaudited consolidatedfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements and notes thereto for the fiscal year endedJanuary 28, 2006.  The Company’sconsolidated financial statements for the fiscal year ended January 28, 2006were included in the Form 8-K/A filed by Spirit Finance Corporation on June 12,2006.

***Reclassifications —***Certainprior year amounts have been reclassified to conform with current periodpresentation.

**2.**                      THE ACQUISITION

The Company acquired the Predecessor pursuant to an Agreement and Planof Merger, dated as of October 18, 2005, as amended (the “MergerAgreement”). Pursuant to the Merger Agreement, each issued and outstandingshare of the Predecessor’s common stock was converted into the right to receive$29.07 in cash and all options to acquire shares of the Predecessor 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 onhand, a capital contribution of $55.0 million from the Parent funded byinvestments from an affiliate of Sun Capital and the co-investors, and borrowingsunder the new senior secured asset-backed revolving credit and bridge loanfacilities (see Note 8). The Acquisition occurred simultaneously with (i) theclosing of the financing transactions and equity contribution described above,(ii) the redemption of $94.3 million principal amount of the Predecessor’soutstanding 9.25% senior unsecured notes, (iii) the redemption of$46.7 million in outstanding mortgage notes payable, and (iv) thetermination of the Predecessor’s revolving credit facility. In connection withthe early redemption of the senior unsecured notes and mortgage notes, theCompany paid a pre-payment premium to noteholders aggregating $33.7 million.

The Acquisition was accounted for as a purchase in accordance with theprovisions 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 eligible non-current assets. In accordance with SFAS No. 141, thepreliminary purchase price allocation is subject to additional adjustmentduring an allocation period (which is generally within one year after theacquisition) as additional information on asset and liability valuations becomesavailable.  During the 13 weeks endedJuly 29, 2006, the Company refined its preliminary purchase price allocationprimarily to adjust the fair values of the real estate assets sold during theperiod (see Note 3) to the amounts realized upon sale, and to reflect theestimated income tax consequences of the sale-leaseback transaction. Theadjustments to the purchase price allocation resulting from the real estatetransaction resulted in a corresponding offsetting adjustment to the remainingamounts allocated to non-current tangible and intangible assets. The purchaseprice allocation is preliminary, and further refinements may be necessary.

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The purchase priceallocation, inclusive of the Acquisition financing activities, is as follows(in millions):

 
| Cash and cash equivalents                                   |   | $       | 21.2   |   |
|-------------------------------------------------------------|--------|---------|--------|--------|
| Receivables                                                 |   | 66.8    |   |
| Merchandise  inventories                                    |   | 542.3   |   |
| Other current  assets                                       |   | 7.6     |   |
| Property and  equipment                                     |   | 869.9   |   |
| Net deferred  income tax assets                             |   | 34.0    |   |
| Intangible  assets                                          |   | 14.2    |   |
| Debt issuance  costs and other assets                       |   | 46.5    |   |
| Total assets acquired                                       |   | 1,602.5 |   |
| Current  liabilities                                        |   | 515.4   |   |
| Acquisition debt                                            |   | 924.6   |   |
| Other long-term  debt and capital lease obligations assumed |   | 107.5   |   |
| Total liabilities assumed                                   |   | 1,547.5 |   |
| Equity contribution                                         |   | $       | 55.0   |   |

 

The Company has allocated approximately $14.2 million to identifiableintangible assets, of which approximately $4.2 million relates to theindefinite-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.

The Company has established reserves for employee severance costs of$9.1 million and for store exit costs of $13.7 million resulting fromdecisions directly related to the Acquisition. As of July 29, 2006, the Companyhad made payments of $4.0 million with respect to employee severance and $0.5 millionwith respect to store exit costs. The Company expects that the actionsnecessary to complete the employee severance and store exits will be completedwithin one year of the Acquisition.

***ProForma Financial Information*** — The following unaudited proforma financial information for the 13 weeks and 26 weeks ended July 30, 2005was prepared as if the Acquisition had occurred at the beginning of fiscal 2005(in millions):

 

|            | ** ** | **13 Weeks Ended  July 30, 2005** | ** ** | **26 Weeks Ended  July 30, 2005** | ** ** |
|------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|
|       |       |                                                  |       |                                                  |       |
| Revenues   |       | $                                                     | 740.5      |                                                  | $          | 1,447.2 |   |
| Net income |       | 7.7                                                   |       | 4.9                                                   |       |
|            |            |                                                       |            |                                                       |            |  |  |

 

Pro forma adjustments have been made to reflect depreciation andamortization using asset values recognized after applying purchase accountingadjustments, interest expense on borrowings used to finance the Acquisition andmanagement fees.  The pro forma financialinformation is presented for informational purposes only and is not indicativeof the results of operations that would have been achieved if the Acquisitionhad taken place at the beginning of fiscal 2005, or that may result in thefuture.

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**3.****         SALE-LEASEBACKTRANSACTION**

On May 31, 2006, the Company consummated a sale-leaseback transactionpursuant to which the Company transferred the ownership of 112 ShopKo and 66Pamida properties (including two corporate headquarters, three distributioncenters, the centralized optical facility and five ground lease properties) toa subsidiary of Spirit Finance Corporation (“Spirit”) for approximately$815.3 million. Spirit acquired the real estate assets by purchasing 100%of the outstanding stock of ShopKo Stores, Inc. The operating assets of ShopKoand Pamida remain with the Company. In addition, the Company entered intomaster leases with Spirit whereby the Company is leasing back the propertiesfrom Spirit for an initial term of 20 years for the ShopKo properties and 15years for the Pamida properties. At the end of the initial lease term, theCompany will have the option to renew the lease term of any individual propertyfor two additional ten-year terms. The master leases provide for base rents ofapproximately $74.4 million per year ($66.4 million ShopKo and $8.0million Pamida) with an escalation provision every three years at the lesser of6% or 1.25 times the product of the base rent and the change in the consumerprice index. ShopKo and Pamida, respectively, as tenants, are responsible forthe payment of all operating expenses of the properties, including insurance,taxes, utilities, and other maintenance expenses.

The sale-leaseback transaction was accounted for in accordance with theprovisions of SFAS Nos. 13 and 98, *Accounting for Leases.*Ofthe 178 properties in the transaction, 172 of the properties (with aggregateproceeds of $774.9 million) were treated as property sales in accordance withSFAS No. 98. Of the 172 properties accounted for as property sales, all but oneof the leasebacks qualified as an operating lease in accordance with SFAS No.13 with the remaining leaseback accounted for as a capital lease. The remaining6 leasebacks did not qualify for sale-leaseback accounting under SFAS No. 98,due to the leaseback containing certain elements of continuing involvement onthe part of the seller-lessee. The proceeds from the sale of these 6properties, which aggregated approximately $23.5 million, have been accountedfor as a financing by the Company.  Thenature of the Company’s continuing involvement could change in the future atwhich time the property will be accounted for as a sale with the relatedreduction in long term debt.

The proceeds from the sale-leaseback transaction (netof selling costs of approximately $18 million) were used to repay theoutstanding borrowings under the Real Estate facility and for general corporatepurposes.

**4.****         INCOME TAXES**

Prior to January 28, 2006, the Company effected alegal entity restructuring of certain wholly-owned subsidiaries, whereby theCompany’s owned real property was segregated in a subsidiary which the Companysubsequently sold to a third party.  Inaccordance with SFAS No. 109 *“Accounting for IncomeTaxes”*, a deferred tax asset was recognized at January 28, 2006 forthe excess of the tax basis over the financial reporting basis of theinvestment in the Company’s subsidiary that was expected to reverse uponconsummation of the sale-leaseback transaction described in Note 3. During the13 weeks ended July 29, 2006, the Company completed the sale-leasebacktransaction and sold the subsidiary. The Company has prepared a preliminaryanalysis of the tax consequences of the sale-leaseback transaction, and hasadjusted its current and deferred tax assets and liabilities accordingly.  

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In connection therewith, theCompany has reduced its valuation allowance against deferred income tax assetsfrom $39.8 million at January 28, 2006 to $5.7 million at July 29, 2006.  The valuation allowance at July 29, 2006 hasbeen determined pursuant to the provisions of SFAS No. 109, including theCompany’s estimation of future taxable income, and the Company believes it isadequate to reduce the total deferred tax asset to an amount that will morelikely than not be realized. The tax consequences of the sale-leasebacktransaction are included in the Company’s purchase price allocation.  Further adjustments to the amount of currentand deferred income taxes, and the related valuation allowance, may benecessary during the purchase price allocation period.

**5.**                  RELATED PARTY TRANSACTIONS

***Management Agreement —***The Company and anaffiliate of Sun Capital (the “Manager”) are parties to a ten-year managementservices agreement (the “Management Agreement”), whereby the Manager providesthe Company with financial and management consulting services.  For the services to be rendered by theManager, the Company shall pay the Manager an annual fee of $4.0 million, plusreimbursement of out of-pocket expenses. Payment of the annual fee may be limited by certain covenants in theRevolving Credit Facility (see Note 8). The covenant restrictions provide for the quarterly payment of $500,000plus out-of-pocket expenses (not to exceed $1.5 million) as long as certainavailability thresholds are met.  Theremaining $2.0 million is payable only if certain cash flows are attained.  Included in selling, general andadministrative expenses for the 13 and 26 week periods  ended July 29, 2006 were $1.1 and $2.3million, respectively, of fees incurred in connection with the ManagementAgreement.  In addition, the ManagementAgreement also provides that, in the event of certain events (including and withoutlimitation to refinancings, restructurings, equity or debt offerings,acquisitions, mergers and divestitures), the Company shall pay to the Manager afee for its consulting services equal to 1% of the aggregate consideration paidto or by the Company in connection with such event.  In connection with the sale-leasebacktransaction with Spirit, the Company paid to the Manager and an affiliate ofthe co-investors an aggregate fee of $5.2 million in accordance with the termsof the Management Agreement.  Of thetotal fee, $4.1 million was paid to the Manager, an affiliate of Sun Capital,and $1.1 million was paid to Manchester Securities Corp. (“Manchester”).  Sun Capital and Manchester or theirrespective affiliates own 80% and 20%, respectively, of the Parent.

***Real Estate Advisory Services Agreement —***OnMarch 21, 2006, the Company entered into a one-year agreement withKLA-Shopko, LLC (KLA) whereby KLA will provide advisory and other services tothe Company in relation to the Company’s real estate assets (the “Real EstateAdvisory Agreement”). For the services to be rendered by KLA, the Company shallpay to KLA an advisory fee of $1.2 million, plus out-of-pocket expenses,during the twelve month period ending on March 21, 2007. To the extent KLAprovides material services in connection with the sale of any of the Company’sreal estate assets, KLA is entitled to receive a fee of 0.5% of the gross saleprice of such assets. To the extent KLA provides material services inconnection with any financing or refinancing arrangements with respect to theCompany’s real estate assets, KLA is entitled to receive a fee of 0.25% of thegross amount of such financing up to $700.0 million, and 0.75% of theexcess, if any, of any financing over that amount.  Pursuant to this agreement, KLA received afee related to the Spirit Finance Corporation sale-leaseback transaction in theamount of $4.1 million.  KLA or itsrespective affiliates own 10% of the Parent.

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**6.**                  PROPERTY AND EQUIPMENT

Propertyand equipment as of July 29, 2006 and July 30, 2005 includes (in thousands):

|                                                 | ** ** | **Successor**           | ** ** | **Predecessor**         | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **July 29,  2006** | ** ** | **July 30,  2005** | ** ** |
|                                            |       |                    |       |                    |       |
| Property and equipment – at cost:          |       |                    |       |                    |       |
| Land                                            |       | $                       | 27,690     |                    | $          | 114,239 |   |
| Buildings                                       |       | 53,475                  |       | 670,123                 |       |
| Equipment                                       |       | 5,775                   |       | 580,582                 |       |
| Leasehold improvements                          |       | 4,114                   |       | 73,894                  |       |
| Property under capital leases                   |       | 2,237                   |       | 119,325                 |       |
|                                            |       |                    |       |                    |       |
| Total property and equipment                    |       | 93,291                  |       | 1,558,163               |       |
|                                            |       |                    |       |                    |       |
| Less accumulated depreciation and amortization: |       | (4,269                  | )          | (862,109                | )          |
|                                            |       |                    |       |                    |       |
| Property  and equipment – net              |       | $                       | 89,022     |                    | $          | 696,054 |   |

 

**7.**                      INTANGIBLE ASSETS

Intangibleassets as of July 29, 2006 and July 30, 2005 are as follows (in thousands): 

|                                | ** ** | **Successor**           | ** ** | **Predecessor**         | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **July 29,  2006** | ** ** | **July 30,  2005** | ** ** |
|                           |       |                    |       |                    |       |
| Intangible assets:             |       |                    |       |                    |       |
| Customer relationships         |       | $                       | 9,658      |                    | $          | 29,984 |   |
| Indefinite lived tradenames    |       | 4,175                   |       | 1,493                   |       |
| Other                          |       | 339                     |       | (1,272                  | )          |
|                           |       |                    |       |                    |       |
| Total intangible assets        |       | 14,172                  |       | 30,205                  |       |
|                           |       |                    |       |                    |       |
| Less accumulated amortization: |       | (1,488                  | )          | (9,980                  | )          |
|                           |       |                    |       |                    |       |
| Intangible  assets – net  |       | $                       | 12,684     |                    | $          | 20,225 |   |

 

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**8.**                  DEBT

The components of theCompany’s debt as of July 29, 2006 and July 30, 2005 are as follows (inthousands): 

|                                                                               | ** ** | **Successor**           | ** ** | **Predecessor**         | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                    | ** ** | **July 29,  2006** | ** ** | **July 30,  2005** | ** ** |
|                                                                          |       |                    |       |                    |       |
| Revolving credit facilities                                                   |       | $                       | 232,916    |                    | $          | 40,000 |   |
| Senior unsecured notes, 9.25% due March 15, 2022                              |       | 5,668                   |       | 99,682                  |       |
| Mortgage and other obligations                                                |       | 23,524                  |       | 50,819                  |       |
| Capital lease obligations                                                     |       | 68,617                  |       | 91,293                  |       |
|                                                                          |       |                    |       |                    |       |
|                                                                          |       | 330,725                 |       | 281,794                 |       |
|                                                                          |       |                    |       |                    |       |
| Less – current portion of long-term debt and capital lease obligations   |       | (5,536                  | )          | (7,027                  | )          |
| Less – portion of revolving credit facility presented as short-term debt |       | —                  |       | (40,000                 | )          |
|                                                                          |       |                    |       |                    |       |
| Long-term  debt and capital lease obligations                                 |       | $                       | 325,189    |                    | $          | 234,767 |   |

 

***Revolving Credit Facility***—At the time of theAcquisition, the Company obtained a new senior secured asset-based revolvingcredit facility (the “Revolving Credit Facility”). The Revolving CreditFacility, which terminates on December 28, 2010, provides revolving creditloans of up to $660.0 million. The Revolving Credit Facility consists oftwo components, Revolver A and Revolver B, both of which are subject toborrowing base calculations based primarily on a percentage of inventory andaccounts receivable. Revolver B loans are deemed to be the first loans made andthe last loans repaid.  Interest for bothRevolver A and B is payable monthly. The Revolving Credit Facility isessentially secured by all the assets of the Company excluding real propertyand equipment. The Revolving Credit Facility limits the number of storeclosings, payment of dividends, incurring new indebtedness, repurchase ofcommon stock, capital expenditures and transactions with affiliates, includingpayment of management fees, and also requires the Company to meet certainfinancial performance covenants. The Company was in compliance with allcovenants as of July 29, 2006.

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 (6.9% at July 29, 2006). At July 29, 2006, there wereborrowings of $189.6 million under Revolver A with $226.3 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 (11.8%at July 29, 2006). At July 29, 2006 there were borrowings of $43.3 millionunder Revolver B with no additional borrowings available.

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 of July29, 2006 and July 30, 2005, the Company had outstanding stand-by letters ofcredit of $23.3 million and $19.3 million, respectively, andoutstanding documentary letters of credit of $26.7 million and $29.5 million,respectively.

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At July 30, 2005, the Company had $40 million under its priorsenior secured credit facility that was terminated at the time of theAcquisition. The related weighted average interest rate on outstandingborrowings 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. In connection with the sale-leaseback transaction described in Note 3,on May 31, 2006, the Company repaid all borrowings and retired the Real EstateFacility.

Interest expense for the 13 weeks ended July 29, 2006 includes $24.8million due to the write-off of unamortized Real Estate Facility debt issuancecosts.

***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 PredecessorCompany’s senior unsecured notes were repaid on December 28, 2005.

***Mortgage and Other Obligations***—In connection withthe sale-leaseback transaction described in Note 3, the Company recognized$23.5 million of the proceeds received in the sale-leaseback as financingobligations, pursuant to the requirements of SFAS No. 98, due to the Company’s continuinginvolvement with six properties.  Thenature of the Company’s continuing involvement could change in the future atwhich time the property will be accounted for as a sale with the relatedreduction in long term debt.

At July 30, 2005, the Company had a real estate mortgage of$46.9 million. In connection with the Acquisition, the outstandingprincipal amount of $46.7 million was repaid.

**9.**                      BENEFIT PLANS

***Stock – Based Compensation-***On January 29, 2006, theCompany adopted SFAS No. 123R, *Share-Based Payment,*whichrequires that the cost resulting from all share-based payment transactions berecognized as compensation cost over the vesting period based on the fair valueof the instrument on the date of grant. SFAS No. 123R revises SFAS No. 123, *Accounting for Stock-Based Compensation,*which previouslyallowed pro-forma disclosure of certain share-based compensation expense.Further, SFAS 123R supercedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees,*which previously allowed the intrinsicmethod of accounting for stock options.

Prior to the Acquisition,the Predecessor Company had various stock-based employee compensation plans,which were accounted for under the intrinsic method. Under this method,compensation expense is recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price. Nostock-based employee compensation cost is reflected in the results ofoperations for the 13 weeks and 26 weeks ended July 30, 2005 for stock optionawards as all options granted under those plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. Thefollowing pro forma information illustrates the effect on net income as if theCompany had applied the fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, in accounting forits employee stock options (in thousands).

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|                                                                                                               | ** ** | **Predecessor**                                   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **13 Weeks  Ended  July 30, 2005** | ** ** | **26 Weeks  Ended  July 30, 2005** | ** ** |
|                                                                                                          |       |                                              |       |   |   |
| Net income as reported                                                                                        |       | $                                                 | 11,526     |   | $ | 12,162 |   |
| Add – Stock-based employee compensation expense included in reported  net amounts – net of tax      |       | 40                                                |       | 57 |   |
| Deduct – Stock-based employee compensation expense determined under  fair value method – net of tax |       | (376                                              | )          | (614 | ) |
|                                                                                                          |       |                                              |       |   |   |
|  Pro forma net income                                                                                    |       | $                                                 | 11,190     |   | $ | 11,605 |   |

 

In connection with the Acquisition, alloutstanding stock options in the Predecessor were cancelled.

During May 2006, theCompany adopted two stock option plans which provide for the granting ofnon-qualified stock options to various officers, directors and affiliates oftwo of the Company’s wholly-owned subsidiaries, ShopKo Holding Company, Inc.and Pamida Holding Company, Inc. The options granted under the respective plans have a term of ten yearsand generally vest over five years.  Alsoduring May 2006, the Company granted stock options to employees under thesestock option plans. The options were awarded at the estimated fair market valueat the date of grant.  A summary ofinformation related to the subsidiary stock options granted is as follows:

 
| Subsidiary | ** ** | **Shares  Outstanding** | ** ** | **Reserved for  Option Grant** | ** ** | **Stock Options  Granted** | ** ** | **Exercise  Price** | ** ** | **Fair Value  At Grant** | ** ** |
|------------|------------|-------------------------|------------|------------------------------------------|------------|---------------------------------|------------|---------------------|------------|------------------------------------|------------|
| ShopKo     |       | 10,000,000              |       | 700,000                                  |       | 335,000                         |       | $                   | 5.15       |                               | $          | 2.23 |   |
| Pamida     |       | 10,000,000              |       | 710,000                                  |       | 650,000                         |       | $                   | 1.43       |                               | $          | 0.62 |   |

 

Stock-based compensationexpense of $70 was recognized under SFAS No. 123R for the 13 and 26 weeks endedJuly 29, 2006. As of July 29, 2006, there was $1.1 million of totalunrecognized compensation cost related to non-vested share-based compensationplans, which is expected to be recognized over a weighted average period of 6.5years. The fair value of the options granted was estimated using theBlack-Scholes option pricing model based on the estimated market value of therespective subsidiaries at the grant date and the weighted average assumptionsspecific to the underlying options granted in the second quarter of 2006, asfollows:

 
| Risk-free interest rate      | ** ** | 5.0  | %      |
|------------------------------|------------|------|--------|
| Expected  volatility         |       | 32.7 | %      |
| Dividend yield               |       | 0.0  | %      |
| Expected option  life(years) |       | 6.5  |   |

 

***Defined Contribution******Plan***—Substantially all employees of the Companyare covered by a defined contribution profit sharing plan. The planhistorically provided for two types of company contributions: adiscretionary amount determined annually by the Board of Directors and anemployer matching contribution equal to 100% of the first three percent and 50%of the next 2% of compensation contributed by participating employees. Employermatching contributions were $1.8 million and $3.9 million for the 13 weeks and26 weeks ended July 29, 2006, respectively, and $1.8 million and $3.8 millionfor the 13 weeks and 26 weeks ended July 30, 2005, respectively.

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***Other Benefits***—TheCompany also provides certain supplemental retirement and postretirementbenefits, other than pensions. Costs associated with these benefits are accruedduring the employee’s service period. The annual cost and accumulated benefitobligation associated with these benefits are not material.

**10.**               SEGMENT INFORMATION

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 consolidated financial statements referred to in Note 1.The Company evaluates performance based on operating earnings of the respectivebusiness segments.

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing table (in thousands):

 
|                                  | ** ** | **Second Quarter (13 Weeks)  Ended** | ** ** | **Year to Date (26 Weeks)  Ended** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **Successor**                                       | ** ** | **Predecessor**                                        | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                       | ** ** | **July 29,  2006**                             | ** ** | **July 30,  2005**                                | ** ** | **July 29,  2006** | ** ** | **July 30,  2005** | ** ** |
| Net Sales                        |       |                                                |       |                                                   |       |   |   |   |   |
| ShopKo retail                    |       | $                                                   | 523,207    |                                                   | $          | 533,257 |   | $ | 1,027,824 |   | $ | 1,051,108 |   |
| Pamida retail                    |       | 216,629                                             |       | 203,738                                                |       | 399,527 |   | 389,146 |   |
|                             |       |                                                |       |                                                   |       |   |   |   |   |
| Total net sales                  |       | $                                                   | 739,836    |                                                   | $          | 736,995 |   | $ | 1,427,351 |   | $ | 1,440,254 |   |
|                             |       |                                                |       |                                                   |       |   |   |   |   |
| Earnings (loss)  from operations |       |                                                |       |                                                   |       |   |   |   |   |
| ShopKo retail                    |       | $                                                   | 25,460     |                                                   | $          | 25,575 |   | $ | 48,957 |   | $ | 41,255 |   |
| Pamida retail                    |       | 1,745                                               |       | 9,493                                                  |       | 2,574 |   | 9,514 |   |
| Corporate                        |       | (8,241                                              | )          | (9,319                                                 | )          | (13,552 | ) | (16,626 | ) |
|                             |       |                                                |       |                                                   |       |   |   |   |   |
| Total earnings from  operations  |       | $                                                   | 18,964     |                                                   | $          | 25,749 |   | $ | 37,979 |   | $ | 34,143 |   |

 

**11.**               LITIGATION

In connection with the Predecessor Company’s cashtender offer to purchase its 9.25% senior notes, certain of the holders of suchnotes filed a lawsuit in United States District Court, Southern District of NewYork, Federated Bond Fund, et al. v. ShopKo Stores, Inc., Sun Capital PartnersGroup IV, 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 the Company’s obligation to performthe tender, made it impossible to satisfy such condition; that the Company 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, the Company waived all conditions to the tender offer and 

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purchased all tendered bonds. Each of the plaintiffstendered their bonds while reserving their rights. The Company believes thelitigation is without merit and plans to defend it vigorously. The Companyfiled a motion to dismiss on February 16, 2006. Oral arguments were heldon 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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