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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 29, 2007
 Commission File Number 1-11681
 FOOTSTAR, INC.
  Delaware
    
    22-3439443(State of incorporation)
    
    (IRS Employer Identification No.)
 933 MacArthur Blvd., Mahwah, New Jersey 07430
  (201) 934-2000
 Securities registered pursuant to Section 12(b) of the Act:
 None
 Securities registered pursuant to Section 12(g) of the Act:
 Common Stock (par value $.01 per share)
  o þ
 o þ
  þ o
 o
  Large Accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
  þ o
   Documents Incorporated by Reference




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##### 



FOOTSTAR, INC  ANNUAL REPORT ON FORM 10-K
 TABLE OF CONTENTS
 PART I
    
    
    3Introductory Note
    
    
    3Item 1. Business
    
    
    4General
    
    
    4Competitive Environment
    
    
    5Merchandising
    
    
    5Marketing
    
    
    5Trademarks and Service Marks
    
    
    6Employees
    
    
    6Executive Officers of the Registrant
    
    
    6Available Information
    
    
    7Item 1A. Risk Factors
    
    
    7Item 1B. Unresolved Staff Comments
    
    
    11Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART II
    
    
    13Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    13Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    36Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    37Item 9A. Controls and Procedures
    
    
    37Item 9B. Other Information
    
    
    39PART III
    
    
    39Item 10. Directors, Executive Officers and Corporate Governance
    
    
    39Item 11. Executive Compensation
    
    
    40Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    41Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    41Item 14. Principal Accountant Fees and Services
    
    
    42PART IV
    
    
    43Item 15. Exhibits and Financial Statement Schedules
    
    
    43EX-21.1: SUBSIDIARIESEX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
 Footstar, the Footstar logo, Just For Feet, Thom McAn, Cobbie Cuddlers, Texas Steer and Cara Mia
are, or were as of December 29, 2007, trademarks and/or service marks of Footstar, Inc.s
subsidiaries or affiliates. All other trademarks mentioned in this report are the property of
their respective owners.
  2




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PART I
 
 INTRODUCTORY NOTE
        3




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
    
    Our Boards continued review and consideration of courses of action to resolve
the Companys future, including a liquidation and dissolution of our business following
the termination of our Kmart business;
    
    The terms of the existing Kmart Agreement which unless the parties agree
otherwise will govern the rights and obligations of Footstar and Kmart on the
termination of the Kmart Agreement at the scheduled December 31, 2008 expiration date;
and
    
    Certain other matters in connection with future events, circumstances and
uncertainties impacting the Company.
 
 ITEM 1. BUSINESS
 
 GENERAL
    Beginning of Year
    
    Opened
    
    Closed
    
    End of YearFiscal 2007Kmart
    
    
    1,392
    
    
    
    
    
    
    
    (4
    )
    
    
    1,388Rite Aid
    
    
    854
    
    
    
    16
    
    
    
    (11
    )
    
    
    859Fiscal 2006Kmart
    
    
    1,421
    
    
    
    
    
    
    
    (29
    )
    
    
    1,392Rite Aid
    
    
    859
    
    
    
    9
    
    
    
    (14
    )
    
    
    854Fiscal 2005Kmart
    
    
    1,482
    
    
    
    
    
    
    
    (61
    )
    
    
    1,421Rite Aid
    
    
    858
    
    
    
    8
    
    
    
    (7
    )
    
    
    859
  4




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COMPETITIVE ENVIRONMENT
   
 MERCHANDISING
    
 MARKETING
  5




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TRADEMARKS AND SERVICE MARKS
   
 EMPLOYEES
  
 EXECUTIVE OFFICERS OF THE REGISTRANT
      6




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AVAILABLE INFORMATION
 www.footstar.com
 www.sec.gov
  
 ITEM 1A. RISK FACTORS
  7




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Anticipated wind-down of our current footwear business by not later than the end of 2008
 Our operation of the footwear departments in Kmart stores accounts for substantially all of our net
sales and net profits. Our agreement with Kmart provides for the termination of this business by
no later than December 31, 2008 (subject to any earlier termination by mutual agreement of Kmart
and the Company or, in certain particular circumstances provided for in the Kmart Agreement,
unilaterally by a party pursuant to the existing early termination or default terms of the Kmart
Agreement) at which time Kmart is obligated to purchase our inventory, as defined in that
agreement. There can be no assurance that we will not have issues and disputes with Kmart in
winding up our business with Kmart.
  Our April 30, 2007 declaration and payment of a special cash distribution may impact our future
cash requirements and liquidity needs.
   We may be unable to retain talented personnel.
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We rely on key vendors and third parties to manufacture, warehouse and distribute our products.
    We may be unable to adjust to constantly changing fashion trends.
   9




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We must provide consumers with seasonally appropriate merchandise, making our sales highly
dependent on seasonal weather conditions.
  Declines in our sales will have a magnified impact on profitability because of our fixed costs.
  We operate in the highly competitive footwear retailing industry.
  There are risks associated with our importation of products.
   10




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The footwear retailing industry is heavily influenced by general economic cycles.
  See Forward-Looking Statements in Item 7 for additional risk factors to consider.
 
 ITEM 1 B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
    11




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ITEM 3. LEGAL PROCEEDINGS
  LITIGATION MATTERS
 Adidas America, Inc. and Adidas Salomon AG v. Kmart
Corporation and Footstar, Inc.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
  HIGH
    
    LOW2006First Quarter
    
    $
    4.75
    
    
    $
    3.35Second Quarter
    
    $
    5.95
    
    
    $
    4.25Third Quarter
    
    $
    5.45
    
    
    $
    4.15Fourth Quarter
    
    $
    6.60
    
    
    $
    4.752007First Quarter
    
    $
    8.50
    
    
    $
    6.10Second Quarter
    
    $
    9.12
    
    
    $
    4.10Third Quarter
    
    $
    4.72
    
    
    $
    4.00Fourth Quarter
    
    $
    4.92
    
    
    $
    4.20
  13




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Stock Performance Graph
  COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
 
  14




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ITEM 6. SELECTED FINANCIAL DATA  FIVE-YEAR HISTORICAL FINANCIAL SUMMARY
 (dollars in millions except per share data)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Statement of Operations DataNet sales
    
    $
    637.0
    
    
    $
    666.7
    
    
    $
    715.4
    
    
    $
    800.2
    
    
    $
    962.4Cost of sales
    
    
    427.4
    
    
    
    452.1
    
    
    
    490.4
    
    
    
    535.8
    
    
    
    650.3Gross profit
    
    
    209.6
    
    
    
    214.6
    
    
    
    225.0
    
    
    
    264.4
    
    
    
    312.1Store operating, selling, general and administrative
expenses
    
    
    148.6
    
    
    
    160.6
    
    
    
    183.1
    
    
    
    236.1
    
    
    
    250.7Depreciation and amortization
    
    
    8.1
    
    
    
    8.8
    
    
    
    7.7
    
    
    
    21.7
    
    
    
    19.0Restructuring, asset impairment and other
charges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.5Loss on Kmart Settlement (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.3
    
    
    
    Other income
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (9.2
    )
    
    
    (5.4
    )Interest expense
    
    
    1.2
    
    
    
    1.6
    
    
    
    4.6
    
    
    
    11.0
    
    
    
    23.4Interest income
    
    
    (2.6
    )
    
    
    (3.8
    )
    
    
    
    
    
    
    
    
    
    
    (1.1
    )Income (loss) before reorganization items,
income taxes, minority interests and
discontinued operations
    
    
    54.9
    
    
    
    47.4
    
    
    
    29.6
    
    
    
    (1.5
    )
    
    
    23.0Reorganization items (2)
    
    
    
    
    
    
    
    
    
    
    (14.6
    )
    
    
    (37.1
    )
    
    
    Income (loss) before income taxes, minority interests
and discontinued operations
    
    
    54.9
    
    
    
    47.4
    
    
    
    15.0
    
    
    
    (38.6
    )
    
    
    23.0(Provision) benefit for income taxes (3)
    
    
    (2.1
    )
    
    
    (1.4
    )
    
    
    (4.2
    )
    
    
    2.9
    
    
    
    (10.0
    )Income (loss) before minority interests and discontinued
operations
    
    
    52.8
    
    
    
    46.0
    
    
    
    10.8
    
    
    
    (35.7
    )
    
    
    13.0Minority interests in net loss (income)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.0
    
    
    
    (17.3
    )Income (loss) from continuing operations
    
    
    52.8
    
    
    
    46.0
    
    
    
    10.8
    
    
    
    (24.7
    )
    
    
    (4.3
    )(Loss) income from discontinued operations,
net of tax (4)
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    4.7
    
    
    
    (66.7
    )
    
    
    (50.1
    )Gain from disposal of discontinued operations, net of tax
    
    
    
    
    
    
    0.1
    
    
    
    8.9
    
    
    
    21.4
    
    
    
    Net income (loss)
    
    $
    52.0
    
    
    $
    45.3
    
    
    $
    24.4
    
    
    $
    (70.0
    )
    
    $
    (54.4
    )Basic income (loss) per share from continuing operations
    
    $
    2.56
    
    
    $
    2.23
    
    
    $
    0.53
    
    
    $
    (1.20
    )
    
    $
    (0.21
    )Diluted income (loss) per share from continuing
operations
    
    $
    2.52
    
    
    $
    2.21
    
    
    $
    0.53
    
    
    $
    (1.20
    )
    
    $
    (0.21
    )
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ITEM 6. SELECTED FINANCIAL DATA, cont.
 FIVE-YEAR HISTORICAL FINANCIAL SUMMARY
 (dollars in millions)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Balance Sheet DataCurrent assets:Cash and cash equivalents
    
    $
    53.8
    
    
    $
    101.3
    
    
    $
    196.1
    
    
    $
    189.6
    
    
    $
    1.1Inventories
    
    
    86.7
    
    
    
    92.0
    
    
    
    89.2
    
    
    
    98.9
    
    
    
    179.7Other
    
    
    15.8
    
    
    
    18.5
    
    
    
    30.3
    
    
    
    50.5
    
    
    
    39.7Assets related to discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    6.2
    
    
    
    284.5Total current assets
    
    
    156.3
    
    
    
    211.8
    
    
    
    315.7
    
    
    
    345.2
    
    
    
    505.0Property and equipment, net
    
    
    20.7
    
    
    
    25.2
    
    
    
    28.9
    
    
    
    35.4
    
    
    
    147.2Other assets
    
    
    4.6
    
    
    
    8.3
    
    
    
    12.1
    
    
    
    13.5
    
    
    
    12.5Total assets
    
    $
    181.6
    
    
    $
    245.3
    
    
    $
    356.7
    
    
    $
    394.1
    
    
    $
    664.7Notes payable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    198.0Amount due under Kmart Settlement (1)
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    45.0
    
    
    
    Other current liabilities
    
    
    69.9
    
    
    
    78.5
    
    
    
    107.8
    
    
    
    98.0
    
    
    
    133.2Liabilities related to discontinued operations
    
    
    0.9
    
    
    
    2.3
    
    
    
    7.4
    
    
    
    3.5
    
    
    
    110.5Liabilities subject to compromise
    
    
    0.5
    
    
    
    1.2
    
    
    
    125.5
    
    
    
    152.3
    
    
    
    Total current liabilities
    
    
    76.4
    
    
    
    82.0
    
    
    
    240.7
    
    
    
    298.8
    
    
    
    441.7Other long term liabilities
    
    
    26.1
    
    
    
    26.6
    
    
    
    35.0
    
    
    
    38.5
    
    
    
    58.9Amount due under Kmart Settlement (1)
    
    
    
    
    
    
    5.2
    
    
    
    5.5
    
    
    
    5.5
    
    
    
    Minority interests in subsidiaries (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42.2Total liabilities
    
    
    102.5
    
    
    
    113.8
    
    
    
    281.2
    
    
    
    342.8
    
    
    
    542.8Shareholders equity
    
    
    79.1
    
    
    
    131.5
    
    
    
    75.5
    
    
    
    51.3
    
    
    
    121.9Total liabilities and shareholders equity
    
    $
    181.6
    
    
    $
    245.3
    
    
    $
    356.7
    
    
    $
    394.1
    
    
    $
    664.7
 
 (1)
    
    Represents additional charge incurred on Kmart Settlement and the elimination of the
minority interests as part of the cure payment and amount due relating to future store closings.(2)
    
    Represents income and expenses associated with our bankruptcy. See Note 17
Reorganization Items of Notes to Consolidated Financial Statements.(3)
    
    We reviewed the valuation of our deferred tax assets based on objective positive
evidence, such as projections of our future taxable earnings along with negative evidence, such as
operational uncertainties, no taxable income in carryback period, and anticipated liquidation of
our Kmart business in connection with the termination of the Kmart Agreement no later than the end
of 2008. As a result, we could not conclude that it is more likely than not that the deferred tax
assets will be realized and have recorded a (reduction) increase of the valuation allowance of
$(20.3) million in fiscal 2007, $(22.1) million in fiscal 2006, $(6.4) million in fiscal 2005,
$21.4 million in fiscal 2004 and $24.7 million in fiscal 2003.(4)
    
    Loss from discontinued operations includes the losses from the operations of our
discontinued Athletic Segment and the losses from the operations of our discontinued Meldisco
operations including Shoe Zone stores and the footwear departments of Gordmans and Federated
(Meldisco). We discontinued the Athletic Segment in 2003 and Meldisco in 2004. Additionally,
during 2007, the Company increased its liability for an environmental remediation project which
relates to a landfill used by one of the Companys former manufacturing facilities that was closed
over 20 years ago. As such, the accounting for the additional obligation has been recorded in
Discontinued Operations. The (loss) income from discontinued operations includes the following (in
millions): 2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Athletic Segment
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    5.1
    
    
    $
    (38.9
    )
    
    $
    (39.9
    )Meldisco Businesses
    
    
    
    
    
    
    0.1
    
    
    
    (0.4
    )
    
    
    (27.8
    )
    
    
    (10.2
    )Closed Manufacturing Facility
    
    $
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    (0.8
    )
    
    $
    (0.8
    )
    
    $
    4.7
    
    
    $
    (66.7
    )
    
    $
    (50.1
    )
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 FORWARD-LOOKING STATEMENTS
  
    
    the Companys ability to manage the anticipated wind-down of its current businesses in
connection with the termination of our Kmart business by the end of 2008 (subject to any
earlier termination by mutual agreement of Kmart and the Company or, in certain particular
circumstances provided for in the Kmart Agreement, unilaterally by a party pursuant to the
existing early termination or default terms of the Kmart Agreement);
    
    whether the Company continues to operate the footwear departments in Kmart stores
through December 2008;
    
    the impact of the payment of the $5.00 per share special distribution on April 30, 2007
on our future cash requirements and liquidity needs, both for our operating plans and any
contingencies and obligations;
    
    the Companys ability to obtain and maintain adequate terms and service with vendors and
service providers and to ensure timely delivery of goods through December 2008;
    
    the effect of making more current certain vendor payable terms effective February 2008;
    
    the ability to maintain contracts that are critical to the Companys operations;
    
    the Companys ability to successfully implement and maintain internal control and
procedures that ensure timely, effective and accurate financial reporting;
    
    the Companys ability to reduce overhead costs commensurate with any decline in sales
and in connection with the winding down of our business;
    
    any adverse developments in existing commercial disputes or legal proceedings;
    
    the Companys ability to manage and plan for the disposal of, closing or conversion of
Kmart stores;
    
    intense competition in the markets in which the Company competes; and
    
    retention of employees.
  17




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RECENT EVENTS
   OVERVIEW
  
    
    As of December 29, 2007, we operated in 1,388 Kmart stores compared with 1,392 stores on
December 30, 2006 and we operated in 859 Rite Aid stores on December 29, 2007 in the western
region of the United States, compared with 854 stores on December 30, 2006;
 
    
    Operating profit increased by $7.7 million to $52.9 million in fiscal 2007 as compared to
$45.2 million in fiscal 2006, primarily due to an increase in the gross margin rate and a
reduction in selling, general and administrative expenses offset by a decrease in sales.
 
    
    The Company provided $60.4 million in cash (from operating activities of its continuing
operations) during fiscal 2007, as compared to cash provided by operating activities (from
continuing operations) of $5.4 million during fiscal 2006.
 
    
    As of December 29, 2007, the Company had $53.8 million of cash and cash equivalents with no
loans outstanding under the Credit Facility. Outstanding standby letters of credit as of
December 29, 2007 were $8.1 million. The Company had $60.4 million available for additional
borrowings under the Credit Facility as of December 29, 2007.
 
    
    On April 30, 2007, the Company paid a special cash distribution of $5.00 per common share
totaling $104.8 million.
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KMART AGREEMENT
  
      19




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BUSINESS RELATIONSHIP WITH WAL-MART STORES
  PRODUCT SOURCING
  RESULTS OF OPERATIONS
  FISCAL 2007 VERSUS FISCAL 2006
 (in millions)
    
    2007
    
    
    2006
    
    
    % of Sales  2007
    
    
    % of Sales  2006Net Sales
    
    $
    637.0
    
    
    $
    666.7
    
    
    
    100.0
    
    
    
    100.0Gross Profit
    
    
    209.6
    
    
    
    214.6
    
    
    
    32.9
    
    
    
    32.2SG&A Expenses
    
    
    148.6
    
    
    
    160.6
    
    
    
    23.3
    
    
    
    24.0Depreciation/Amortization
    
    
    8.1
    
    
    
    8.8
    
    
    
    1.3
    
    
    
    1.3Operating Profit
    
    $
    52.9
    
    
    $
    45.2
    
    
    
    8.3
    
    
    
    6.8
 20




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NET SALES
  GROSS PROFIT
  SG&A EXPENSES
  DEPRECIATION/AMORTIZATION
  OPERATING PROFIT
  FISCAL 2006 VERSUS FISCAL 2005
 % of Sales 
    
    
    % of Sales (in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net Sales
    
    $
    666.7
    
    
    $
    715.4
    
    
    
    100.0
    
    
    
    100.0Gross Profit
    
    
    214.6
    
    
    
    225.0
    
    
    
    32.2
    
    
    
    31.5SG&A Expenses
    
    
    160.6
    
    
    
    183.1
    
    
    
    24.0
    
    
    
    25.6Depreciation/Amortization
    
    
    8.8
    
    
    
    7.7
    
    
    
    1.3
    
    
    
    1.1Operating Profit
    
    $
    45.2
    
    
    $
    34.2
    
    
    
    6.8
    
    
    
    4.8
 21




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NET SALES
  GROSS PROFIT
  SG&A EXPENSES
  DEPRECIATION/AMORTIZATION
  OPERATING PROFIT
  REORGANIZATION ITEMS
  2006
    
    2005Store and distribution center closing and related asset impairment costs
    
    $
    
    
    
    $
    0.1Professional fees
    
    
    1.5
    
    
    
    18.5Trustee fees
    
    
    0.1
    
    
    
    3.1
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2006
    
    2005Gain on disposition of bankruptcy claims
    
    
    (0.9
    )
    
    
    (1.5
    )Interest income
    
    
    (0.7
    )
    
    
    (5.6
    )Total
    
    $
    
    
    
    $
    14.6
   LIQUIDITY AND CAPITAL RESOURCES
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CREDIT FACILITY
   24




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CONTRACTUAL OBLIGATIONS
  Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 Year
    
    1-3 Years
    
    4-5 Years
    
    5 YearsMortgage payable
    
    $
    3.2
    
    
    $
    1.2
    
    
    $
    2.0
    
    
    $
    
    
    
    $
    Operating leases
    
    
    1.5
    
    
    
    1.2
    
    
    
    0.3
    
    
    
    
    
    
    
    Purchase obligations
    
    
    135.8
    
    
    
    135.8
    
    
    
    
    
    
    
    
    
    
    
    Compensation obligations
    
    
    12.7
    
    
    
    5.7
    
    
    
    7.0
    
    
    
    
    
    
    
    Third party service provider
    
    
    7.4
    
    
    
    7.4
    
    
    
    
    
    
    
    
    
    
    
    Postretirement benefit obligations
    
    
    14.7
    
    
    
    0.9
    
    
    
    2.0
    
    
    
    2.2
    
    
    
    9.6Workers compensation obligations
    
    
    2.4
    
    
    
    0.7
    
    
    
    1.5
    
    
    
    0.2
    
    
    
    Environment remediation
    
    
    1.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.6Total
    
    $
    179.3
    
    
    $
    152.9
    
    
    $
    12.8
    
    
    $
    2.4
    
    
    $
    11.2
 
   CRITICAL ACCOUNTING ESTIMATES
   25




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##### Table of Contents



.
 Valuation and Aging of Inventory and Shrink Reserve
   . . . .
   26




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##### Table of Contents



Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets to be Disposed Of,
    Insurance and Self-Insurance Liabilities
  27




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##### Table of Contents



Deferred Tax Assets
   Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes
 28




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##### Table of Contents



Retiree Medical Benefits
     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 Fair Value Measurements
  29




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FACTORS TO CONSIDER
 Continuing review of strategic course of action
 To date, we have not identified a course of action under which we would continue to operate
following the termination of our Kmart Agreement, which accounts for substantially all of our net
sales and net profits. Absent a strategic course of action under which we would continue to
operate, we are currently planning to wind-down our Kmart business
and all our other businesses by not later than December 31, 2008. This
would likely include a liquidation and wind-up of the Companys
business, including proposing a plan of dissolution to our
shareholders.
    In connection with a plan of liquidation and dissolution, there can be no assurance as to the
amount, if any, of cash or other property that could be distributed to our shareholders or the
timing of any such future distribution.
      30




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##### Table of Contents



Termination of Kmart Agreement
 There can be no assurance that issues will not arise in connection with any of the obligations,
adjustments and payments to occur on the termination of our Kmart Agreement.
  
    
    Final adjustments of all fees and amounts owed by Footstar to Kmart, and all
receipts and amounts owed by Kmart to Footstar, must be computed and finally settled
through the expiration date.
    
    During the term of the agreement, Footstar pays license fees to Kmart equal to
14.625% of gross sales of covered products of all licensed footwear departments. These
license fees are payable through the termination date.
    
    Kmart provides weekly sales amounts to Footstar (called weekly sales remittances)
under the agreement covering licensed footwear sales department receipts, less license
fees, miscellaneous expense deductions, sales and gross receipts taxes, employee
compensation and costs, and other amounts owed by Footstar to Kmart. Kmart has a right
to offset any amounts owed by Footstar from weekly sales remittances.
    
    On and as of the December 31, 2008 termination date, under the agreement Kmart is
required to purchase from Footstar the inventory in all remaining licensed footwear
departments (including inventory that is on order pursuant to Kmarts written request
but excluding inventory that is damaged or unsaleable and excluding seasonal inventory)
for an amount equal to the book value of such inventory plus $1,500,000. Footstar
must deliver the inventory to be purchased by Kmart free and clear of all liens,
security interests and encumbrances. The inventory is currently subject to liens and
security interests under Footstars Credit Facility, and Footstar may need to obtain
the release of such liens and security interests upon purchase of the inventory by
Kmart. Footstar is required to vacate all licensed footwear departments within seven
days after the termination date.
    
    Under the agreement, book value means, with respect to any inventory owned by
Footstar in a licensed footwear department, the book value of such inventory calculated
in accordance with generally accepted accounting principles (GAAP) applied on a
consistent basis, but excluding (i) distribution and delivery costs incurred by
Footstar after receipt of such merchandise from suppliers at a Footstar distribution
center, and (ii) any intercompany royalty or other intercompany charges between and
among Footstar and its affiliates (other than charges that reflect an out-of-pocket
cost incurred by Footstar or an affiliate and that do not result in a book value with
respect to the applicable inventory greater than the book value of such inventory that
would have existed had Footstar and its affiliates been consolidated into a single
entity).
 31




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
    
    Seasonal inventory under the agreement means inventory that is more than four
months post-season. Kmart has no obligation to purchase inventory that was purchased
for a selling season that was completed at least four calendar months prior to the
buy-out date set forth in the agreement. For inventory purchased for a former selling
season, Footstar has four months after the end of such season to sell such inventory.
If the buy-out date occurs during that four month period Kmart has an obligation to
purchase such inventory. If the buy-out date occurs after that four month period such
inventory will be seasonal inventory and Kmart will not have an obligation to
purchase it.
    
    Footstar is required to provide to Kmart all necessary documentation to support the
determination of book value for the six-month period prior to the termination date,
which reflects all permanent markdowns of the inventory. Footstar is not to have (i)
at any time prior to the termination date, purchased or transferred any goods into
inventory outside of the ordinary course in contemplation of the termination date, (ii)
purchased inventory for or otherwise stocked in any licensed footwear department at a
level disproportionately greater than the average level of such licensed footwear
department at the same time of year for the prior three years, unless gross sales at
such licensed footwear department during the prior six months support such increased
stocking, or (iii) prior to the termination date, marked up any inventory. The
inventory mix at each licensed footwear department as of the termination date must be
reasonably comparable to the average mix at such licensed footwear department during
the same time period for the prior three years and shall reflect ordinary course
practice; and all inventory markdowns shall have been taken in the ordinary course and
the documentation provided to Kmart is to reflect all permanent markdowns.
    
    No later than seven days following the termination date, Footstar must remove from
the remaining licensed footwear department all fixtures, furnishings, equipment and
other property belonging to Footstar and surrender possession of all footwear
departments premises in the same condition as received, ordinary wear and tear
excepted.
    
    With respect to any purchase of inventory by Kmart under the agreement, Kmart and
Footstar each have the right to require an actual third party physical count and
determination of the quantity and quality (i.e., damaged, unsaleable or seasonal
inventory) of such inventory for purchase.
    
    Under the agreement, Footstar is required to spend, in the aggregate and on an
annual basis during the term of the agreement, a minimum of 10% of gross sales from the
licensed footwear departments on salaries, payroll taxes, moving and travel expenses,
workers compensation, incentives and other employee costs (staffing costs).
    
    Under the agreement, Footstar is also obligated to pay a claim amount to
Kmart equal to $11,000 per licensed footwear department for the 1,430 licensed footwear
departments existing at the inception of the agreement (totaling $15,730,000). This
claim obligation is waived upon certain conditions provided in the agreement,
including the termination and expiration of the agreement at the scheduled termination
date of December 31, 2008.
    
    Footstar is required to keep accurate books and records necessary for computation of
(i) the book value of any inventory purchased by Footstar for sale in the licensed
footwear
 32




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##### Table of Contents



departments and for any inventory to be purchased by Kmart upon termination of
the agreement, and (ii) the total amount expended by Footstar on staffing costs. These
books and records are to be available for inspection by Kmart or its designated agent
upon reasonable notice during the term of the agreement and for six months following
the termination of the agreement.
 
    
    Pursuant to the terms of the agreement, Footstar is obligated to indemnify Kmart
with respect to, among other things, any failure by Footstar to pay when due taxes owed
to any taxing authority or to file all necessary tax reports and documents. Kmart
withholds from weekly sales remittances certain sales taxes and gross receipts taxes
paid on
Footstars behalf directly to the taxing authorities. Kmart also advances payroll costs
for footwear department employees of Footstar, subject to reimbursement by Footstar,
which may be set off against weekly sales remittances. Footstars and Kmarts
indemnification obligations under the agreement continue and survive following the
termination date.
   Certain issues in winding-down our business
 As our Kmart business winds down during 2008, we may encounter problems and other issues which may
adversely impact our Kmart Agreement and our other business operations and our financial results.
  
    
    We could potentially have issues with our suppliers and other vendors which may be
concerned with the pending termination of our business, and we could potentially
encounter problems with merchandise production, shipments or quality;
    
    We may encounter difficulty retaining or replacing our store personnel or
administrative or management personnel;
 33




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##### Table of Contents




    
    In connection with scaling back and winding down our business in anticipation of the
termination of the Kmart Agreement, we may likely incur cash and non-cash special
charges in connection with exit activities, severance charges, and potential other
charges or matters.
 Our Rite-Aid business is currently expected to end at or about the end of 2008.
  As we scale back our business operations we anticipate reducing our workforce.
  We do not currently expect to generate any material revenues or operating income as an independent
company following the termination of our current business.
  If we
are deemed to be an investment company after we wind-down our current businesses, we could be
required to institute burdensome compliance requirements and our activities could be restricted,
which could make it difficult to implement any future business opportunities.
  34




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##### Table of Contents



We likely will be unable to realize the benefits of our net operating loss carryforwards.
    Our executive officers may have interests that are different from the interests of
other shareholders.
   35




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##### Table of Contents



ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 DERIVATIVES
  INTEREST RATES
  FOREIGN EXCHANGE
   
 ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  36




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##### Table of Contents



INDEX
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the Fiscal Years Ended December 29,
2007, December 30, 2006 and December 31, 2005
    
    
    F-3Consolidated Balance Sheets as of December 29, 2007 and December 30, 2006
    
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for
the Fiscal Years Ended December 29, 2007, December 30, 2006 and December 31,
2005
    
    
    F-5Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29,
2007, December 30, 2006 and December 31, 2005
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Selected
Quarterly Data (See Note 27 to the Consolidated Financial Statements)
    
    
    F-32Schedule II  Valuation and Qualifying Accounts for the Fiscal Years ended
December 29, 2007, December 30, 2006 and December 31, 2005
    
    
    45
 
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures
  37




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##### Table of Contents



(b) Managements Annual Report on Internal Control Over Financial Reporting
  Internal Control  Integrated Framework
  (c) Changes in Internal Control Over Financial Reporting
  (d) Report of Independent Registered Public Accounting Firm
  Internal
Control-Integrated Framework
  38




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##### Table of Contents



Internal
Control-Internal Framework
  
 
 ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  39




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##### Table of Contents



BOARD OF DIRECTORS
  EXECUTIVE OFFICERS OF THE REGISTRANT
  SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
  CODE OF ETHICS
  AUDIT COMMITTEE
  STOCKHOLDER RECOMMENDATIONS FOR DIRECTOR NOMINEES
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION
  40




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##### Table of Contents



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  EQUITY COMPENSATION PLAN INFORMATION
 (a)
    
    (b)
    
    (c)Number of securitiesremaining available forNumber of securities to
    
    Weighted-average exercise
    
    future issuance underbe issued upon exercise
    
    price of outstanding
    
    equity compensation plansof outstanding options,
    
    options,
    
    (excluding securitiesPlan category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by security
holders (1)
    
    
    931,830
    
    
    $
    13
    
    
    
    1,579,413
    (3)Equity compensation
plans not approved
by security holders (2)
    
    
    242,075
    
    
    $
    26
    
    
    
    1,649,169
    (4)Total
    
    
    1,173,905
    
    
    $
    15
    
    
    
    3,228,582
 
 (1)
    
    1996 Non-Employee Director Stock Plan, 1996 Incentive Compensation Plan and 2006
Non-Employee Director Stock Plan(2)
    
    2000 Equity Incentive Plan.(3)
    
    The 1996 Incentive Compensation Plan includes 1,443,157 shares available for
issuance other than upon the exercise of an option or other right. The 2006 Non-Executive
Director Stock Plan includes 136,256 shares available for issuance other than upon the exercise
of an option or other right.(4)
    
    The 2000 Equity Incentive Plan includes 1,649,169 shares available for issuance
other than upon the exercise of an option or other right.  
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  41




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##### Table of Contents



ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
  42




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a)(1) Financial Statements
 The following financial statements are included within this report:
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the Fiscal Years ended December 29,
2007, December 30, 2006 and December 31, 2005
    
    
    F-3Consolidated Balance Sheets as of December 29, 2007 and December 30, 2006
    
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive Income for
the Fiscal Years ended December 29, 2007, December 30, 2006 and December 31,
2005
    
    
    F-5Consolidated Statements of Cash Flows for the Fiscal Years ended December 29,
2007, December 30, 2006 and December 31, 2005
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Selected Quarterly Data (see Note 27 to the Consolidated Financial Statements)
    
    
    F-32
 (a)(2) Schedule
 The following schedule is included in Part IV of this report:
    
    PageSchedule II  Valuation and Qualifying Accounts for the Fiscal Years ended
December 29, 2007, December 30, 2006 and December 31, 2005
    
    
    45
  (a)(3) Exhibits
    FOOTSTAR, INC.By
    /s/ JEFFREY A. SHEPARDJEFFREY A. SHEPARDChief Executive Officer and President 43




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ JONATHAN M. COUCHMAN

Jonathan M. Couchman
    
    Chairman
of the Board
    
    March 12, 2008/s/ JEFFREY A. SHEPARD

Jeffrey A. Shepard
    
    Chief Executive Officer and President
    
    March 12, 2008/s/ MICHAEL J. LYNCH

Michael J. Lynch
    
    Chief Financial Officer- Senior Vice
President
    
    March 12, 2008/s/ CRAIG M. HAINES

Craig M. Haines
    
    Vice President-Controller and Principal
Accounting Officer
    
    March 12, 2008/s/ EUGENE I. DAVIS

Eugene I. Davis
    
    Director
    
    March 12, 2008/s/ ADAM W. FINERMAN

Adam W. Finerman
    
    Director
    
    March 12, 2008/s/ MICHAEL A. OHARA

Michael OHara
    
    Director
    
    March 12, 2008/s/ ALAN I. WEINSTEIN

Alan I. Weinstein
    
    Director
    
    March 12, 2008/s/ ALAN KELLY

Alan Kelly
    
    Director
    
    March 12, 2008/s/ GERALD F. KELLY, JR.

Gerald F. Kelly, Jr.
    
    Director
    
    March 12, 2008/s/ STEVEN D. SCHEIWE

Steven D. Scheiwe
    
    Director
    
    March 12, 2008
 44




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##### Table of Contents



AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    
    
    End ofDescription
    
    of Fiscal Year
    
    Expenses
    
    Deductions(1)(2)
    
    Fiscal YearFiscal Year Ended December 29, 2007Allowance for Doubtful Accounts
    
    $
    0.1
    
    
    $
    
    
    
    $
    (0.1
    )
    
    $
    Aged Inventory Reserve
    
    $
    0.1
    
    
    $
    1.0
    
    
    $
    (0.2
    )
    
    $
    0.9Allowance for Sales Returns
    
    $
    0.9
    
    
    $
    0.3
    
    
    $
    (0.3
    )
    
    $
    0.9Fiscal Year Ended December 30, 2006Allowance for Doubtful Accounts
    
    $
    1.0
    
    
    $
    0.2
    
    
    $
    (1.1
    )
    
    $
    0.1Aged Inventory Reserve
    
    $
    0.1
    
    
    $
    0.5
    
    
    $
    (0.5
    )
    
    $
    0.1Allowance for Sales Returns
    
    $
    0.8
    
    
    $
    0.2
    
    
    $
    (0.1
    )
    
    $
    0.9Fiscal Year Ended December 31, 2005Allowance for Doubtful Accounts
    
    $
    0.4
    
    
    $
    1.0
    
    
    $
    (0.4
    )
    
    $
    1.0Aged Inventory Reserve
    
    $
    0.1
    
    
    $
    0.3
    
    
    $
    (0.3
    )
    
    $
    0.1Allowance for Sales Returns
    
    $
    1.2
    
    
    $
    0.5
    
    
    $
    (0.9
    )
    
    $
    0.8
  (1)
    
    Deductions of allowance for doubtful accounts include write-offs, net of recoveries.(2)
    
    We determine the aged inventory reserve and allowance for sales returns as of the end
of each reporting period. Accordingly, the above schedule reflects net additions
(deductions) for each period, as applicable. 45




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##### Table of Contents



ExhibitNumber
    
    DESCRIPTION2.1
    
    Joint Plan of Reorganization and related Disclosure Statement as filed
with the United States Bankruptcy Court for the Southern District of New
York (Case No. 04-22350(ASH)) on November 12, 2004 (incorporated by
reference to Exhibit 2.1 and Exhibit 2.2 to Footstar, Inc.s Form 8-K
filed on November 15, 2004 and to Exhibit 2.1 to Footstar, Inc.s Form
8-K filed on November 23, 2004).2.2
    
    First Amended Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code as filed with the Bankruptcy Court for the Southern
District of New York (Case No. 04-22350 (ASH)) on November 30, 2005 and
related Disclosure Statement (incorporated by reference to Exhibits 2.1
and 2.2 to Footstar, Inc.s Current Report on Form 8-K filed on December
2, 2005 and to Exhibit 2.1 to Footstar, Inc.s Current Report on Form
8-K filed on February 2, 2006).3.1
    
    Second Amended and Restated Certificate of Incorporation of Footstar,
Inc. and Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation of Footstar, Inc. (incorporated by
reference to Exhibits 3.1 and 3.2 to Footstar, Inc.s Current Report on
Form 8-K filed on February 7, 2006).3.2
    
    Amended and Restated Bylaws of Footstar, Inc. (incorporated by reference
to Exhibit 3.3 to Footstar Inc.s Current Report on Form 8-K filed on
February 7, 2006).4.1
    
    Rights Agreement, dated as of March 8, 1999, between Footstar, Inc. and
Chase Mellon Shareholder Services, L.L.C. (now Mellon Investor Services
LLC), as Rights Agent, which includes, as Exhibit A, the Certificate of
Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock of Footstar, Inc., as Exhibit B, the Form of Right
Certificate, and as Exhibit C, the Summary of Rights to
Purchase Preferred Shares (incorporated by reference to Exhibit 1 to
Footstar, Inc.s Form 8-A filed on March 9, 1999) and Amendment No. 1 to
the Rights Agreement dated as of May 31, 2002, which includes as Exhibit
C, the modified and amended Summary of Rights to Purchase Preferred
Shares (incorporated by reference to Exhibit 2 to Footstar, Inc.s Form
8-A/A filed on June 4, 2002).10.1
    
    Amended and Restated Master Agreement (the Kmart Agreement) dated as
of August 24, 2005 by and between Kmart Corporation, Sears Holding
Corporation as guarantor of payments to be made by Kmart Corporation and
Footstar, Inc. (incorporated by reference to Exhibit 10.1 to Footstar,
Inc.s Current Report on Form 8-K filed on August 26, 2005).10.2
    
    1996 Incentive Compensation Plan of Footstar, Inc. (incorporated by
reference to Exhibit 10.3 to Footstar, Inc.s Form 10/A Information
Statement filed on September 13, 1996).*10.2(a)
    
    Form of Restricted Stock Agreement with Executive Officers (incorporated by
 46




---



##### Table of Contents



ExhibitNumber
    
    DESCRIPTIONreference to Exhibit 10.2(a) to Footstar, Inc.s Form 10-K/A filed on
March 16, 2006).*10.3(a)
    
    Footstar, Inc. 2006 Non-Employee Director Stock Plan (incorporated by
reference to Exhibit 10.1 to Footstar, Inc.s Current Report on Form 8-K
filed on February 7, 2006).*10.3(b)
    
    Form of Restricted Stock Agreement with Non-Employee Directors
(incorporated by reference to Exhibit 10.3(b) to Footstar, Inc.s Form
10-K/A filed on March 16, 2006).*10.3(c)
    
    1996 Non-Employee Director Stock Plan of Footstar, Inc. (incorporated by
reference to Exhibit 10.4 to Footstar, Inc.s Form 10/A Information
Statement filed on September 13, 1996).*10.4(a)
    
    Employment Agreement with Jeffrey Shepard dated as of October 28, 2005
(incorporated by reference to Exhibit 10.1 of Footstar Inc.s Current
Report on Form 8-K filed on November 3, 2005).*10.4(b)
    
    Confidentiality and Non-Competition Agreement with Jeffrey Shepard
(incorporated by reference to Exhibit 10.5(h) of Footstar, Inc.s 2003
Annual Report on Form 10-K filed on April 8, 2005).*10.4(c)
    
    Employment Agreement with William Lenich dated as of December 16, 2005
(incorporated by reference to Exhibit 10.1 of Footstar, Inc.s Current
Report on Form 8-K filed on December 22, 2005).*10.4(d)
    
    Employment Agreement with Dennis M. Lee dated as of December 16, 2005
(incorporated by reference to Exhibit 10.2 of Footstar, Inc.s Current
Report on Form 8-K filed on December 22, 2005).*10.4(e)
    
    Employment Agreement with Michael J. Lynch dated as of December 16, 2005
(incorporated by reference to Exhibit 10.3 of Footstar, Inc.s Current
Report on Form 8-K filed on December 22, 2005).*10.4(f)
    
    Employment Agreement with Randall Proffitt dated as of December 16, 2005
(incorporated by reference to Exhibit 10.4 of Footstar, Inc.s Current
Report on Form 8-K filed on December 22, 2005).*10.4(g)
    
    Employment Agreement with Maureen Richards dated as of December 16, 2005
(incorporated by reference to Exhibit 10.5 of Footstar, Inc.s Current
Report on Form 8-K filed on December 22, 2005).*10.4(h)
    
    Footstar, Inc. Senior Executive Base Salary Review (incorporated by
reference to Item 1.01 of Footstar, Inc.s Current Report on Form 8-K
filed on March 24, 2006).*
 47




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##### Table of Contents



ExhibitNumber
    
    DESCRIPTION10.4(i)
    
    Employment Agreement, by and between Craig Haines and Footstar, Inc.,
dated as of December 30, 2005 (incorporated by reference to Footstar,
Inc.s Current Report on Form 8-K filed on March 24, 2006).*10.4(j)
    
    Compensatory arrangement between Mr. George A. Sywassink and Footstar,
Inc., in connection with Mr. Sywassinks resignation effective March 26,
2007 (incorporated by reference to Item 5.02 of Footstar, Inc.s Current
Report on Form 8-K filed on March 29, 2007).*10.5
    
    Footstar, Inc. Deferred Compensation Plan (incorporated by reference to
Exhibit 10.8 to Footstar, Inc.s 1996 Annual Report on Form 10-K filed
on March 28, 1997, Reg. No. 001-11681).*10.6(a)
    
    Supplemental Retirement Plan for Footstar, Inc., as Amended and Restated
effective on June 19, 2002 (incorporated by reference to Exhibit 10.9(a)
to Footstar, Inc.s Quarterly Report on Form 10-Q filed on August 13,
2002, Reg. No. 001-11681).*10.7(a)
    
    2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.11
to Footstar, Inc.s 1999 Annual Report on Form 10-K filed on March 31,
2000, Reg. No. 001-11681). *10.7(b)
    
    Performance Criteria under the Companys Annual Incentive Plan
(incorporated by reference to Footstar, Inc.s Current Report on From
8-K filed on March 8, 2006).*10.8
    
    Amended and Restated Exit Credit Agreement dated as of February 7, 2006
among Footstar, Inc., as Lead Borrower for Footstar, Inc., and Footstar
Corporation, the Lenders party thereto; Bank of America, N.A., as
Administrative Agent, Swingline Lender and Collateral Agent; and General
Electric Capital Corporation as Syndication Agent (incorporated by
reference to Exhibit 10.1 of Footstar, Inc.s Current Report on Form 8-K
filed on February 13, 2006).10.9
    
    Third Amendment dated as of June 25, 2007 to the Receiving, Warehousing
and Physical Distribution Services Agreement dated as of July 8, 2004,
as amended by First Amendment to Warehousing and Physical Distribution
Services Agreement dated as of July 19, 2004 and a letter agreement
dated January 7, 2005 by and between Footstar Corporation and FMI
International LLC. (incorporated by reference to Exhibit 10.2 to
Footstar, Inc.s Quarterly Report on Form 10-Q filed on August 09,
2007).10.10
    
    Receiving, Warehousing and Physical Distribution Services Agreement
dated as of July 8, 2004 by and between Footstar Corporation and FMI
International LLC, as amended by First Amendment to Warehousing and
Physical Distribution Services Agreement dated as of July 19, 2004
(incorporated by reference to Exhibits 99.2 and 99.3 to Footstar, Inc.s
Current Report on Form 8-K filed on August 5, 2004).21.1
    
    Subsidiaries of Footstar, Inc.
 48




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##### Table of Contents



ExhibitNumber
    
    DESCRIPTION23.1
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer  Senior Vice President
(Principal Financial Officer) pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Management contract or compensatory plan. 49




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 INDEX
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the Fiscal
Years Ended December 29, 2007, December 30, 2006 and
December 31, 2005
    
    
    F-3Consolidated Balance Sheets as of December 29, 2007
and December 30, 2006
    
    
    F-4Consolidated Statements of Shareholders Equity and
Comprehensive Income for the Fiscal Years Ended
December 29, 2007, December 30, 2006 and December 31,
2005
    
    
    F-5Consolidated Statements of Cash Flows for the Fiscal
Years Ended December 29, 2007, December 30, 2006 and
December 31, 2005
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Schedule II  Valuation and Qualifying Accounts for
the Fiscal Years ended December 29, 2007, December 30, 2006 and December 31, 2005
    
    
    45(Part IV, Item 15(a)(2))
 F-1




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Report of Independent Registered Public Accounting Firm
      Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement No. 109
   
 F-2




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Consolidated Statements of Operations
(in millions, except per share amounts)
 For the Fiscal Years EndedDecember 29, 2007
    
    
    December 30, 2006
    
    
    December 31, 2005Net sales
    
    $
    637.0
    
    
    $
    666.7
    
    
    $
    715.4Cost of sales
    
    
    427.4
    
    
    
    452.1
    
    
    
    490.4Gross profit
    
    
    209.6
    
    
    
    214.6
    
    
    
    225.0Store operating, selling, general and administrative expenses
    
    
    148.6
    
    
    
    160.6
    
    
    
    183.1Depreciation and amortization
    
    
    8.1
    
    
    
    8.8
    
    
    
    7.7Other income
    
    
    (0.6
    )
    
    
    
    
    
    
    Interest expense
    
    
    1.2
    
    
    
    1.6
    
    
    
    4.6Interest income
    
    
    (2.6
    )
    
    
    (3.8
    )
    
    
    Income before reorganization items, income taxes and
discontinued operations
    
    
    54.9
    
    
    
    47.4
    
    
    
    29.6Reorganization items
    
    
    
    
    
    
    
    
    
    
    (14.6
    )Income before income taxes and discontinued operations
    
    
    54.9
    
    
    
    47.4
    
    
    
    15.0Provision for income taxes
    
    
    (2.1
    )
    
    
    (1.4
    )
    
    
    (4.2
    )Income before discontinued operations
    
    
    52.8
    
    
    
    46.0
    
    
    
    10.8Income from continuing operations
    
    
    52.8
    
    
    
    46.0
    
    
    
    10.8(Loss) income from discontinued operations, net of tax
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    4.7Gain from disposal of discontinued operations, net of tax
    
    
    
    
    
    
    0.1
    
    
    
    8.9Net income
    
    $
    52.0
    
    
    $
    45.3
    
    
    $
    24.4Average common shares outstandingBasic
    
    
    20.7
    
    
    
    20.6
    
    
    
    20.5Diluted
    
    
    21.0
    
    
    
    20.8
    
    
    
    20.5Income (loss) per share:Basic:Income from continuing operations
    
    $
    2.56
    
    
    $
    2.23
    
    
    $
    0.53(Loss) income from discontinued operations
    
    
    (0.04
    )
    
    
    (0.03
    )
    
    
    0.66Net income
    
    $
    2.52
    
    
    $
    2.20
    
    
    $
    1.19Diluted:Income from continuing operations
    
    $
    2.52
    
    
    $
    2.21
    
    
    $
    0.53(Loss) income from discontinued operations
    
    
    (0.04
    )
    
    
    (0.03
    )
    
    
    0.66Net income
    
    $
    2.48
    
    
    $
    2.18
    
    
    $
    1.19
  F-3




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Consolidated Balance Sheets
(in millions, except share amounts)
 December 29, 2007
    
    
    December 30, 2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    53.8
    
    
    $
    101.3Accounts receivable, net
    
    
    11.4
    
    
    
    10.6Inventories
    
    
    86.7
    
    
    
    92.0Prepaid expenses and other current assets
    
    
    4.4
    
    
    
    7.9Total current assets
    
    
    156.3
    
    
    
    211.8Property and equipment, net
    
    
    20.7
    
    
    
    25.2Intangible assets, net
    
    
    3.3
    
    
    
    6.7Deferred charges and other noncurrent assets
    
    
    1.3
    
    
    
    1.6Total assets
    
    $
    181.6
    
    
    $
    245.3Liabilities and Shareholders EquityCurrent liabilities:Liabilities not subject to compromiseAccounts payable
    
    $
    48.0
    
    
    $
    50.0Accrued expenses
    
    
    20.7
    
    
    
    27.6Amount due under Kmart Settlement
    
    
    5.1
    
    
    
    Income taxes payable
    
    
    1.2
    
    
    
    0.9Liabilities related to discontinued operations
    
    
    0.9
    
    
    
    2.3Liabilities subject to compromise
    
    
    0.5
    
    
    
    1.2Total current liabilities
    
    
    76.4
    
    
    
    82.0Other long-term liabilities
    
    
    26.1
    
    
    
    26.6Amount due under Kmart Settlement
    
    
    
    
    
    
    5.2Total liabilities
    
    
    102.5
    
    
    
    113.8Shareholders equity:Common stock $.01 par value: 100,000,000
shares Authorized 31,836,762 and 31,634,242
shares issued
    
    
    0.3
    
    
    
    0.3Additional paid-in capital
    
    
    328.9
    
    
    
    343.7Treasury stock: 10,711,569 shares, at cost
    
    
    (310.6
    )
    
    
    (310.6
    )Retained earnings
    
    
    51.7
    
    
    
    88.6Accumulated other comprehensive income
    
    
    8.8
    
    
    
    9.5Total shareholders equity
    
    
    79.1
    
    
    
    131.5Total liabilities and shareholders equity
    
    $
    181.6
    
    
    $
    245.3
  F-4




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
(in millions, except share amounts)
 Accum.OtherAddl
    
    
    Unearned
    
    
    
    
    
    
    Compre-Common Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    Compen-
    
    
    Retained
    
    
    hensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    sation
    
    
    Earnings
    
    
    Income(Loss)
    
    
    TotalBalance as of January 1,
2005
    
    
    31,018,065
    
    
    $
    0.3
    
    
    
    10,711,569
    
    
    $
    (310.6
    )
    
    $
    343.1.
    
    
    $
    (0.4
    )
    
    $
    18.9
    
    
    $
    
    
    
    $
    51.3Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24.4
    
    
    
    
    
    
    
    24.4Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24.4Common stock incentive
plans
    
    
    66,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Balance as of December
31, 2005
    
    
    31,084,647
    
    
    $
    0.3
    
    
    
    10,711,569
    
    
    $
    (310.6
    )
    
    $
    342.6
    
    
    $
    (0.1
    )
    
    $
    43.3
    
    
    $
    
    
    
    $
    75.5Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45.3
    
    
    
    
    
    
    
    45.3Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45.3Adjustment to initially
apply FASB Statement No.
158, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9.5
    
    
    
    9.5Common stock incentive
plans
    
    
    549,595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.1
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    1.2Balance as of December
31, 2006
    
    
    31,634,242
    
    
    $
    0.3
    
    
    
    10,711,569
    
    
    $
    (310.6
    )
    
    $
    343.7
    
    
    $
    
    
    
    $
    88.6
    
    
    $
    9.5
    
    
    $
    131.5Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52.0
    
    
    
    
    
    
    
    52.0Defined benefit plans,
net of tax (see notes
20 and 21):Amortization of prior
service credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.4
    )
    
    
    (1.4
    )Net gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7
    
    
    
    0.7Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51.3Effect of changing the
SERP measurement date
pursuant to FASB
Statement No. 158:Service and interest cost
for December 1- December
29, 2007, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.1
    )Special cash distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16.0
    )
    
    
    
    
    
    
    (88.8
    )
    
    
    
    
    
    
    (104.8
    )Common stock incentive
plans
    
    
    202,520
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Balance as of December
29, 2007
    
    
    31,836,762
    
    
    $
    0.3
    
    
    
    10,711,569
    
    
    $
    (310.6
    )
    
    $
    328.9
    
    
    $
    
    
    
    $
    51.7
    
    
    $
    8.8
    
    
    $
    79.1
  F-5




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Consolidated Statements of Cash Flows
 December 29,
    
    December 30,
    
    December 31,2007
    
    2006
    
    2005Cash flows from operating activities:Net income
    
    $
    52.0
    
    
    $
    45.3
    
    
    $
    24.4Adjustments to reconcile net income to net cash provided by
operating activities:Loss (income) from discontinued operations, net of tax
    
    
    0.8
    
    
    
    0.7
    
    
    
    (13.6
    )Depreciation and amortization
    
    
    8.1
    
    
    
    8.8
    
    
    
    7.7Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    2.9Stock incentive plans
    
    
    1.2
    
    
    
    1.3
    
    
    
    (0.2
    )Changes in operating assets and liabilities:(Increase) decrease in accounts receivable, net
    
    
    (0.8
    )
    
    
    (1.8
    )
    
    
    13.3Decrease (increase) in inventories
    
    
    5.4
    
    
    
    (2.9
    )
    
    
    9.8Decrease in prepaid expenses and other assets
    
    
    3.8
    
    
    
    14.0
    
    
    
    9.8Decrease in accounts payable, accrued expenses and amount due
under Kmart Settlement
    
    
    (9.4
    )
    
    
    (56.1
    )
    
    
    (38.4
    )Increase (decrease) in income taxes payable and other long-term
liabilities
    
    
    (0.7
    )
    
    
    (3.9
    )
    
    
    (5.5
    )Net cash provided by operating activities
    
    
    60.4
    
    
    
    5.4
    
    
    
    10.2Cash flows (used in) provided by investing activities:Additions to property and equipment
    
    
    (0.3
    )
    
    
    (1.9
    )
    
    
    (1.4
    )Proceeds from the sale of assets included in reorganization items
    
    
    
    
    
    
    
    
    
    
    0.6Proceeds from sale of the Athletic Segment
    
    
    
    
    
    
    
    
    
    
    6.3Net cash (used in) provided by investing activities
    
    
    (0.3
    )
    
    
    (1.9
    )
    
    
    5.5Cash flows used in financing activities:Special cash distribution paid
    
    
    (104.8
    )
    
    
    
    
    
    
    Payments on mortgage note
    
    
    (1.1
    )
    
    
    (1.0
    )
    
    
    (1.8
    )Net cash used in financing activities
    
    
    (105.9
    )
    
    
    (1.0
    )
    
    
    (1.8
    )Cash flows from discontinued operations:Net cash used in operating activities of discontinued activities
    
    
    (1.7
    )
    
    
    (97.3
    )
    
    
    (7.4
    )Net decrease in cash  discontinued operations
    
    
    (1.7
    )
    
    
    (97.3
    )
    
    
    (7.4
    )Net (decrease) increase in cash and cash equivalents
    
    
    (47.5
    )
    
    
    (94.8
    )
    
    
    6.5Cash and cash equivalents, beginning of year
    
    
    101.3
    
    
    
    196.1
    
    
    
    189.6Cash and cash equivalents, end of year
    
    $
    53.8
    
    
    $
    101.3
    
    
    $
    196.1
  F-6




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 1. Nature of Company
      2. Summary of Significant Accounting Policies
 Principles of Consolidation
   Basis of Presentation
  F-7




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Fiscal Years
  Use of Estimates in Preparation of Financial Statements
  Cash and Cash Equivalents
  Merchandise Inventories and Cost of Sales
  Property and Equipment
  F-8




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   Impairment of Long-Lived Assets
  Other Intangible Assets
 Goodwill and Other Intangible Assets,
 Revenue Recognition
  Advertising Costs
  F-9




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Income Taxes
 Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
Taxes
   Postretirement Benefits
  F-10




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Insurance Liabilities
  Stock-Based Compensation Plans
   2005Net income:Reported
    
    $
    24.4Add: Non-cash employee compensation, as reported
    
    
    (0.1
    )Deduct: Stock-based employee compensation expense determined under
fair value method for all awards, net of tax
    
    
    (1.1
    )Pro forma net income
    
    $
    23.2Earnings per share:Basic and Diluted:Reported
    
    $
    1.19Pro forma
    
    $
    1.13
  2005Expected volatility
    
    
    46.4
    %Expected life in years
    
    
    6.0Risk-free interest rate
    
    
    5.3
    %Assumed forfeiture rate
    
    
    
 F-11




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Earnings Per Share
  2007
    
    2006
    
    2005Average shares outstanding
    
    
    20.6
    
    
    
    20.5
    
    
    
    20.3Average contingently issuable shares (1)
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Average shares outstanding  basic
    
    
    20.7
    
    
    
    20.6
    
    
    
    20.5Average shares outstanding  diluted (2)
    
    
    21.0
    
    
    
    20.8
    
    
    
    20.5
 
 (1)
    
    Represents shares earned under our stock incentive plans.(2)
    
    The computation of diluted EPS does not assume conversion, exercise, or issuance
of shares that would have an anti-dilutive effect on EPS. Shares that could potentially
dilute EPS in the future, but which were not included in the calculation of diluted EPS
because to do so would have been antidilutive, totaled 472,435 at December 29, 2007,
513,275 at December 30, 2006 and 972,065 at January 1, 2005. Fair Value of Financial Instruments
 Disclosures About Fair Value of Financial Instruments
 3. Discontinued Operations
  F-12




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   2007Net sales
    
    $
    Operating loss from
discontinued operations
    
    
    (0.8
    )Interest expense
    
    
    Provision for income taxes
    
    
    Loss from discontinued operations
    
    $
    (0.8
    )
   2007
    
    2006
    
    2005Net sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating (loss) income from discontinued operations
    
    
    
    
    
    
    (0.2
    )
    
    
    10.9Interest expense
    
    
    
    
    
    
    (0.7
    )
    
    
    (5.8
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (Loss) income from discontinued operations
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    5.1
   F-13




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   2007
    
    2006
    
    2005Net sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating income (loss) from discontinued operations
    
    
    
    
    
    
    0.1
    
    
    
    (0.2
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    (0.1
    )Income (loss) from discontinued operations
    
    $
    
    
    
    $
    0.1
    
    
    $
    (0.4
    )
  4. Impact of Recently Issued Accounting Standards
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Liabilities Including an Amendment of FASB Statement No. 115
 5. Relationship with Kmart
    F-14




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
       F-15




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   6.
    
    Accounts Receivable
  2007
    
    
    2006Due from Kmart
    
    $
    9.0
    
    
    $
    7.9Other  primarily trade
    
    
    2.4
    
    
    
    2.811.4
    
    
    
    10.7Less: Allowance for doubtful accounts
    
    
    
    
    
    
    0.1Total
    
    $
    11.4
    
    
    $
    10.6
 7.
    
    Prepaid Expenses and Other Current Assets
  2007
    
    
    2006Income tax refund receivable and
other prepaid taxes
    
    $
    0.5
    
    
    $
    4.7Other
    
    
    3.9
    
    
    
    3.2Total
    
    $
    4.4
    
    
    $
    7.9
 8.
    
    Liabilities Related to Discontinued Operations
  2007
    
    
    2006LiabilitiesAccrued expenses
    
    $
    0.9
    
    
    $
    2.3$
    0.9
    
    
    $
    2.3
 9.
    
    Property and Equipment
  F-16




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Original useful lives (in yrs.)
    
    2007
    
    
    2006Land
    
    
    
    $
    3.2
    
    
    $
    3.2Buildings and improvements
    
    10-40
    
    
    20.3
    
    
    
    20.3Computer hardware and software, equipment and furniture
    
    3-10
    
    
    38.4
    
    
    
    56.3Leasehold improvements
    
    6
    
    
    0.1
    
    
    
    0.1Other
    
    
    
    
    
    
    
    
    0.262.0
    
    
    
    80.1Less: Accumulated depreciation
    
    
    
    
    41.3
    
    
    
    54.9Total
    
    
    
    $
    20.7
    
    
    $
    25.2
   10.
    
    Other Intangible Assets
    11.
    
    Accrued Expenses
  2007
    
    
    2006Taxes other than federal income taxes
    
    $
    0.6
    
    
    $
    3.9Salaries and bonus
    
    
    7.7
    
    
    
    7.7Other  individually not in excess of 5%
    
    
    12.4
    
    
    
    16.0Total
    
    $
    20.7
    
    
    $
    27.6
 F-17




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 12.
    
    Liabilities Subject to Compromise
   2007
    
    
    2006Accrued expenses
    
    $
    0.5
    
    
    $
    1.2Total
    
    $
    0.5
    (a)
    
    $
    1.2
    (a)
 
 (a)
    
    Includes approximately $0 million and $0.3 million of discontinued
operations liabilities subject to compromise at December 29, 2007 and December 30, 2006,
respectively. 13.
    
    Credit Facility
    F-18




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  14.
    
    Other Long-Term Liabilities
  2007
    
    
    2006Employee benefit costs
    
    $
    20.8
    
    
    $
    20.4Other
    
    
    5.3
    
    
    
    6.2Total
    
    $
    26.1
    
    
    $
    26.6
    2008
    
    $
    1.22009
    
    
    1.32010
    
    
    0.7
 15.
    
    Leases
  2007
    
    
    2006
    
    
    2005Minimum rentals
    
    $
    1.2
    
    
    $
    1.6
    
    
    $
    3.2Percentage rentals
    
    
    92.3
    
    
    
    95.8
    
    
    
    100.1Total
    
    $
    93.5
    
    
    $
    97.4
    
    
    $
    103.3
  F-19




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  2008
    
    $
    1.22009
    
    
    0.3
 16.
    
    Income Taxes
  2007
    
    
    2006
    
    
    2005Federal
    
    $
    1.1
    
    
    $
    0.1
    
    
    $
    3.3State
    
    
    1.0
    
    
    
    1.3
    
    
    
    0.9Total
    
    $
    2.1
    
    
    $
    1.4
    
    
    $
    4.2
   2007
    
    
    2006
    
    
    2005Computed expected income tax expense (benefit)
    
    $
    19.3
    
    
    $
    16.6
    
    
    $
    5.3Increases (decreases) in income taxes resulting from:State income taxes, net of
federal tax benefit
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.651% owned subsidiaries
    
    
    
    
    
    
    
    
    
    
    2.6Other
    
    
    2.4
    
    
    
    1.0
    
    
    
    0.3Valuation allowance
    
    
    (20.3
    )
    
    
    (17.0
    )
    
    
    (4.6
    )Net income tax expense
    
    $
    2.1
    
    
    $
    1.4
    
    
    $
    4.2
   2007
    
    2006Deferred tax assets:Kmart Settlement Agreement
    
    $
    1.7
    
    
    $
    3.5Restructuring reserves
    
    
    0.6
    
    
    
    0.3Inventories
    
    
    5.9
    
    
    
    5.9Postretirement benefits
    
    
    6.2
    
    
    
    5.8Employee benefits
    
    
    4.9
    
    
    
    4.3NOL carryforward
    
    
    40.3
    
    
    
    62.6Intangible assets
    
    
    6.0
    
    
    
    5.6Tax credit carryforward
    
    
    1.1
    
    
    
    Other
    
    
    0.7
    
    
    
    0.8Total gross deferred tax assets
    
    
    67.4
    
    
    
    88.8Less valuation allowance
    
    
    (67.4
    )
    
    
    (87.7
    )Total deferred tax assets
    
    
    
    
    
    
    1.1
 F-20




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 2007
    
    2006Deferred tax liabilities:Property and equipment
    
    
    
    
    
    
    (1.1
    )Net deferred tax assets
    
    $
    
    
    
    $
    
     17.
    
    Reorganization Items
  2007
    
    2006
    
    2005Store and distribution center closing and related asset impairment costs
    
    $
    
    
    
    $
    
    
    
    $
    0.1Professional fees
    
    
    
    
    
    
    1.5
    
    
    
    18.5Trustee fees
    
    
    
    
    
    
    0.1
    
    
    
    3.1Gain on disposition of bankruptcy claims
    
    
    
    
    
    
    (0.9
    )
    
    
    (1.5
    )Interest income
    
    
    
    
    
    
    (0.7
    )
    
    
    (5.6
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    14.6
   F-21




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  18.
    
    Share-Based Compensation Plans
        F-22




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   Number of Shares
    
    
    
    
    
    
    
    
    
    Number of Shares
    
    Number of Sharesto be Issued upon
    
    
    
    
    
    Number of Shares
    
    Remaining Available
    
    Remaining AvailableExercise of
    
    Weighted Average
    
    Issued,
    
    for Future
    
    for FutureOutstanding
    
    Exercise Price of
    
    Inception to Date
    
    Issuance, as of
    
    Issuance, as ofPlan Category
    
    Options/Awards
    
    Outstanding Options
    
    as of 12/29/2007
    
    12/29/2007
    
    12/30/20061996 Incentive 
Compensation
Plan
    
    
    725,110
    
    
    $
    15
    
    
    
    931,733
    
    
    
    1,443,157
    
    
    
    1,482,4772000 Equity 
Incentive Plan
    
    
    242,075
    
    
    $
    26
    
    
    
    108,756
    
    
    
    1,649,169
    
    
    
    1,658,7351996 Non-Employee 
Director Stock Plan
    
    
    4,000
    
    
    $
    41
    
    
    
    126,516
    
    
    
    
    
    
    
    2006 Non-Employee 
Director Stock
Plan
    
    
    202,720
    
    
    $
    5
    
    
    
    119,068
    
    
    
    136,256
    
    
    
    336,514Total
    
    
    1,173,905
    
    
    $
    15
    
    
    
    1,286,073
    
    
    
    3,228,582
    
    
    
    3,477,726
  Employee Stock OptionsEmployee
    
    Weighted Average
    
    Aggregate Intrinsic
    
    Weighted AverageStock
    
    Exercise
    
    Value
    
    RemainingOptions
    
    Price
    
    ($000)
    
    Contractual TermOutstanding,
December 30, 2006
    
    
    507,275
    
    
    $
    31Canceled or expired
    
    
    (38,840
    )
    
    $
    29Outstanding,
December 29, 2007
    
    
    468,435
    
    
    $
    31
    
    
    $
    7.2
    
    
    
    2.6Exercisable,
December 29, 2007
    
    
    468,435
    
    
    $
    31
    
    
    $
    7.2
    
    
    
    2.6
  2006Expected volatility
    
    
    47.1
    %Expected life in years
    
    
    6Risk-free interest rate
    
    
    4.6
    %Assumed forfeiture rate
    
    
    
 F-23




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Weighted AverageDeferred Restricted Stock Units and Shares and
    
    Deferred
    
    Grant Date FairPerformance-Based Stock Awards
    
    Shares and Units
    
    ValueNon-vested,
December 30, 2006
    
    
    363,936
    
    
    $
    5Granted
    
    
    37,680
    
    
    $
    4Canceled
    
    
    (778
    )
    
    $
    25Shares vested
    
    
    (1,930
    )
    
    $
    25Non-vested, December 29, 2007
    
    
    398,908
    
    
    $
    5
  1996 Director Stock Plan
    Director Plan Stock OptionsWeighted AverageWeighted Average
    
    Aggregate Intrinsic
    
    RemainingStock Options
    
    Exercise Price
    
    Value ($000)
    
    Contractual TermOutstanding, December 30, 2006
    
    
    6,000
    
    
    $
    35Expired
    
    
    (2,000
    )
    
    $
    22Outstanding, December 29, 2007
    
    
    4,000
    
    
    $
    41
    
    
    $
    0.1
    
    
    
    1.8Options exercisable, December 29, 2007
    
    
    4,000
    
    
    $
    41
    
    
    $
    0.1
    
    
    
    1.8
 F-24




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 2006 Non-Employee Director Stock Plan
       F-25




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   Director Stock Plan UnitsWeighted AverageStock Units
    
    Grant Date Fair ValueNon-vested,
December 30, 2006
    
    
    80,000
    
    
    $
    5Granted
    
    
    200,258
    
    
    $
    5Shares Vested
    
    
    (77,538
    )
    
    $
    6Non-vested,
December 29, 2007
    
    
    202,720
    
    
    $
    5
  Associate Stock Purchase Plan
   19. 401(k) Profit Sharing Plan
   F-26




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   20. Postretirement Benefits
  
    
    have a minimum of 10 years of full time active service as of December 31, 1992, and have
been enrolled in the medical plan on that date,
    
    have continuously participated in the medical plan since that date, and
    
    continue employment with us until at least age 60, or have been terminated by us
involuntarily due to job elimination and had a minimum of 30 years of continuous service
and be at least 50 years of age on the actual termination date.
   2007
    
    
    2006Change in benefit obligationBenefit obligation at beginning of year
    
    $
    15.0
    
    
    $
    14.2Service cost
    
    
    0.2
    
    
    
    0.2Interest cost
    
    
    0.9
    
    
    
    0.8Actuarial (gain) loss
    
    
    (0.5
    )
    
    
    0.4Benefits paid
    
    
    (1.3
    )
    
    
    (1.1
    )Participant contributions
    
    
    0.3
    
    
    
    0.3Retiree drug subsidy receipt
    
    
    0.1
    
    
    
    0.2Benefit obligation at end of year
    
    
    14.7
    
    
    
    15.0Reconciliation of funded statusFunded status
    
    
    14.7
    
    
    
    15.0Accrued benefit cost (unfunded)
    
    $
    14.7
    
    
    $
    15.0
  2007
    
    2006Net gain
    
    $
    4.3
    
    
    $
    4.1Prior service credit
    
    
    4.1
    
    
    
    5.5Total amount included in AOCI
    
    $
    8.4
    
    
    $
    9.6
  F-27




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   2007Amortization of net gain included in net income
    
    $
    (0.3
    )Net gain arising during period
    
    
    0.5Amortization of prior service credit included in net income
    
    
    (1.4
    )Total other comprehensive loss during period attributable to
postretirement benefits
    
    $
    (1.2
    )
 2007
    
    
    2006Weighted-average assumptions as of December 31Discount rate
    
    
    6.3
    %
    
    
    5.8
    %
  2007
    
    
    2006
    
    
    2005Service cost
    
    $
    0.2
    
    
    $
    0.1
    
    
    $
    0.1Interest cost
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.8Amortization of prior service cost
    
    
    (1.5
    )
    
    
    (1.4
    )
    
    
    (1.3
    )Amortization of net actuarial gain
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.4
    )Net periodic benefit gain
    
    $
    (0.7
    )
    
    $
    (0.7
    )
    
    $
    (0.8
    )
  1-Percentage
    
    
    1- Percentagepoint increase
    
    
    point decreaseEffect on total of service and interest
cost components
    
    $
    0.1
    
    
    $
    (0.1
    )Effect on postretirement benefit obligation
    
    $
    1.7
    
    
    $
    (1.5
    )
  2008
    
    $
    0.92009
    
    
    1.02010
    
    
    1.12011
    
    
    1.12012
    
    
    1.12013-2017
    
    
    5.9$
    11.1
 F-28




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 21. Supplemental Executive Retirement Plan
   
    
    The normal retirement benefit commencing at age 60 is equal to 2% of the average of the
three highest salary amounts received by the executive in the preceding ten years, plus
the target annual incentive, as defined, for each full year of service with the Company.
In the case of retirement before age 60, a reduced benefit is provided.
    
    All participants will be terminated on December 31, 2008 and a lump sum benefit will be
paid as if a change in control had occurred the day prior to the date of termination.
Such amount is estimated to be $8.1 million.
    
    The maximum annual benefit available under the plan is 50% of compensation, as defined
in the plan.
    
    The benefits will be paid based on the actuarial equivalent lump sum of annual
installments for the life of the executive.
    
    The assumed discount rate was 4.8% and 5.0% in fiscal 2007 and 2006, respectively.
    
    The assumed salary rate of increase was 0% and 3.0% in fiscal 2007 and 2006,
respectively.
    
    For purposes of determining eligible compensation, bonus targets will be frozen at the
2004 level.
   2007
    
    
    2006Net gain (loss)
    
    $
    0.4
    
    
    $
    (0.1
    )Total amount included in AOCI (loss)
    
    $
    0.4
    
    
    $
    (0.1
    )
  22. Commitments and Contingencies
 Kmart Relationship
  F-29




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Litigation Matters
 Adidas America, Inc. and Adidas Salomon AG v. Kmart
Corporation and Footstar, Inc.
  FMI Agreement
  23. Shareholder Rights Plan
  F-30




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
    24. Supplemental Cash Flow Information
  2007
    
    
    2006
    
    
    2005Income taxes (received) paid
    
    $
    (1.2
    )
    
    $
    (11.1
    )
    
    $
    0.4Interest received
    
    $
    2.9
    
    
    $
    4.6
    
    
    $
    5.3Interest paid
    
    $
    1.1
    
    
    $
    1.8
    
    
    $
    3.3
 25. Vendor Concentration
  26. Special Cash Distribution
  F-31




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 27. Summary of Quarterly Results  Unaudited
 (in millions, except per share data)
    
    1st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th QtrNet sales2007
    
    $
    134.1
    
    
    $
    173.4
    
    
    $
    147.8
    
    
    $
    181.72006
    
    $
    133.9
    
    
    $
    190.6
    
    
    $
    153.6
    
    
    $
    188.6Gross profit2007
    
    $
    40.9
    
    
    $
    60.7
    
    
    $
    44.2
    
    
    $
    63.82006
    
    $
    39.1
    
    
    $
    65.2
    
    
    $
    45.8
    
    
    $
    64.5Income (loss) from continuing operations2007
    
    $
    0.8
    
    
    $
    21.5
    
    
    $
    4.9
    
    
    $
    25.62006
    
    $
    (2.6
    )
    
    $
    21.4
    
    
    $
    6.1
    
    
    $
    21.1(Loss) income from discontinued
operations(1)(2)2007
    
    $
    
    
    
    $
    
    
    
    $
    (0.8
    )
    
    $
    2006
    
    $
    (0.8
    )
    
    $
    (0.1
    )
    
    $
    0.2
    
    
    $
    Net income (loss)2007
    
    $
    0.8
    
    
    $
    21.5
    
    
    $
    4.1
    
    
    $
    25.62006
    
    $
    (3.4
    )
    
    $
    21.4
    
    
    $
    6.3
    
    
    $
    21.0Earnings (loss) per share(3)2007 BasicContinuing operations
    
    $
    0.04
    
    
    $
    1.04
    
    
    $
    0.24
    
    
    $
    1.24Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net income
    
    $
    0.04
    
    
    $
    1.04
    
    
    $
    0.20
    
    
    $
    1.242007 DilutedContinuing Operations
    
    $
    0.04
    
    
    $
    1.02
    
    
    $
    0.24
    
    
    $
    1.22Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Net income
    
    $
    0.04
    
    
    $
    1.02
    
    
    $
    0.20
    
    
    $
    1.222006 BasicContinuing operations
    
    $
    (0.12
    )
    
    $
    1.04
    
    
    $
    0.30
    
    
    $
    1.02Discontinued operations
    
    
    (0.04
    )
    
    
    
    
    
    
    0.01
    
    
    
    Net (loss) income
    
    $
    (0.16
    )
    
    $
    1.04
    
    
    $
    0.31
    
    
    $
    1.022006 DilutedContinuing Operations
    
    $
    (0.12
    )
    
    $
    1.03
    
    
    $
    0.29
    
    
    $
    1.01Discontinued Operations
    
    
    (0.04
    )
    
    
    
    
    
    
    0.01
    
    
    
    Net (loss) income
    
    $
    (0.16
    )
    
    $
    1.03
    
    
    $
    0.30
    
    
    $
    1.01
 
 (1)
    
    The Athletic Segment, which consisted of certain
Footaction stores sold to Foot Locker together with the closure
of the underperforming Just For Feet and Footaction stores, and
the exited Meldisco businesses have been accounted for as
discontinued operations.(2)
    
    During the third quarter of 2007, the Company increased its
liability for an environmental remediation project which relates to a landfill
used by one of the Companys former manufacturing facilities that was closed
over 20 years ago.(3)
    
    Computations for each quarter are independent. EPS data would
neither be restated retroactively nor adjusted currently to obtain quarterly
(or other period) amounts to equal the amount computed for the year to date due
to fluctuations in stock price. F-32