##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended January 3, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 1-11681
 FOOTSTAR, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    22-3439443(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)933 MacArthur Blvd., Mahwah, New Jersey
    
    07430(Address of principal executive offices)
    
    (Zip Code)
 (201) 934-2000
 Securities registered pursuant to Section 12(b) of the Act:
  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




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##### 



FOOTSTAR, INC  ANNUAL REPORT ON FORM 10-K
  
 TABLE OF CONTENTS
 PART I
    
    
    3Introductory Note
    
    
    3Item 1. Business
    
    
    4General
    
    
    4Employees
    
    
    5Executive Officers of the Registrant
    
    
    5Available Information
    
    
    6Item 1A. Risk Factors
    
    
    7Item 1B. Unresolved Staff Comments
    
    
    10Item 2. Properties
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART II
    
    
    11Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    11Item 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
    
    
    32Item 8. Financial Statements and Supplementary Data
    
    
    32Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    33Item 9A. Controls and Procedures
    
    
    33Item 9B. Other Information
    
    
    34PART III
    
    
    34Item 10. Directors, Executive Officers and Corporate Governance
    
    
    34Item 11. Executive Compensation
    
    
    34Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    35Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    35Item 14. Principal Accountant Fees and Services
    
    
    36PART IV
    
    
    36Item 15. Exhibits and Financial Statement Schedules
    
    
    36EX-10.12: RESTRICTED STOCK AGREEMENTEX-10.14: SUPPLEMENTAL RETIREMENT PLANEX-21.1: SUBSIDIARIESEX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATIONS
  2




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PART I
 
 INTRODUCTORY NOTE
         3




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ITEM 1. BUSINESS
 
 GENERAL
    4




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ContractBeginning of Year
    
    Opened
    
    Closed
    
    Expiration
    
    End of YearFiscal 2008Kmart
    
    
    1,388
    
    
    
    
    
    
    
    (11
    )
    
    
    (1,377
    )
    
    
    Rite Aid
    
    
    859
    
    
    
    14
    
    
    
    (43
    )
    
    
    (830
    )
    
    
    Fiscal 2007Kmart
    
    
    1,392
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    1,388Rite Aid
    
    
    854
    
    
    
    16
    
    
    
    (11
    )
    
    
    
    
    
    
    859Fiscal 2006Kmart
    
    
    1,421
    
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    1,392Rite Aid
    
    
    859
    
    
    
    9
    
    
    
    (14
    )
    
    
    
    
    
    
    854
  
 EMPLOYEES
  
 EXECUTIVE OFFICERS OF THE REGISTRANT
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AVAILABLE INFORMATION
 www.footstar.com
 www.sec.gov
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ITEM 1A. RISK FACTORS
  We may not meet the anticipated timing for the Dissolution and liquidation.
  
    
    delays in the disposition of our remaining assets;
    
    unanticipated lawsuits or other claims asserted against us;
    
    unanticipated legal, regulatory, governmental, tax or administrative requirements; and
    
    delays in settling our remaining obligations.
 We cannot determine with certainty the amount of distributions that will be made to our
shareholders.
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Adverse U.S. economic conditions and the current turmoil in the U.S. capital and credit markets
could limit demand for our property in Mahwah, New Jersey, which
contains our corporate headquarters and 21 acres of land, and, thus, we may not be able to timely
sell our property in Mahwah or on acceptable terms.
  We may not be able to settle all of our obligations to creditors.
  We will continue to incur claims, liabilities and expenses, which will reduce the amount available
for distribution to shareholders.
  We will continue to incur the expenses of complying with public company reporting requirements.
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Each shareholder may be liable to our creditors for an amount up to the amount distributed to such
shareholder by us if our reserves for payments to creditors are inadequate.
  Recordation of transfers of our common stock on our stock transfer books will be restricted as of
the Final Record Date, and thereafter it generally will not be possible for shareholders to change
record ownership of our stock.
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Shareholders may not be able to recognize a loss for federal income tax purposes until they receive
a final distribution from us, which may be three years or more after our Dissolution.
  Our Board of Directors may amend, modify, abandon or delay implementation of the Plan and our
Dissolution, even if approved by our shareholders
  We
have a dispute with Kmart under the Kmart Agreement related to the
sale of all our remaining inventory to Kmart and additional disputes
with Kmart may arise in the future.
  See Forward-Looking Statements in Item 7 for additional risk factors to consider.
 
 ITEM 1 B. UNRESOLVED STAFF COMMENTS
  10




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ITEM 2. PROPERTIES
     
 ITEM 3. LEGAL PROCEEDINGS
  
 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
  11




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HIGH
    
    
    LOW2007First Quarter
    
    $
    8.50
    
    
    $
    6.10Second Quarter
    
    $
    9.12
    
    
    $
    4.10Third Quarter
    
    $
    4.72
    
    
    $
    4.00Fourth Quarter
    
    $
    4.92
    
    
    $
    4.202008First Quarter
    
    $
    4.70
    
    
    $
    4.25Second Quarter
    
    $
    5.35
    
    
    $
    4.10Third Quarter
    
    $
    4.09
    
    
    $
    3.40Fourth Quarter
    
    $
    3.64
    
    
    $
    2.80
       12




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Stock Performance Graph
  13




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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 
 
  Recent Sales of Unregistered Securities
  Issuer Purchases of Equity Securities
  14




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ITEM 6. SELECTED FINANCIAL DATA  FIVE-YEAR HISTORICAL FINANCIAL SUMMARY
 Managements Discussion and Analysis of Financial Condition and Results of Operations.
 (dollars in millions except per share data)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Revenue:Net sales
    
    $
    580.0
    
    
    $
    637.0
    
    
    $
    666.7
    
    
    $
    715.4
    
    
    $
    800.2Liquidation of inventory
    
    
    54.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total revenue
    
    
    634.2
    
    
    
    637.0
    
    
    
    666.7
    
    
    
    715.4
    
    
    
    800.2Cost:Cost of sales
    
    
    396.7
    
    
    
    427.4
    
    
    
    452.1
    
    
    
    490.4
    
    
    
    535.8Cost of liquidation of inventory
    
    
    59.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total cost
    
    
    455.8
    
    
    
    427.4
    
    
    
    452.1
    
    
    
    490.4
    
    
    
    535.8Total gross profit
    
    
    178.4
    
    
    
    209.6
    
    
    
    214.6
    
    
    
    225.0
    
    
    
    264.4Store operating, selling, general and administrative expenses
    
    
    146.8
    
    
    
    148.6
    
    
    
    160.6
    
    
    
    183.1
    
    
    
    236.1Depreciation and amortization
    
    
    4.5
    
    
    
    8.1
    
    
    
    8.8
    
    
    
    7.7
    
    
    
    21.7Loss on impairment of long-lived assets
    
    
    10.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on cancellation of retiree benefit plan
    
    
    (22.3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of intangible assets
    
    
    (10.5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Gain) loss on Kmart Agreement (1)
    
    
    (5.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.3Other income
    
    
    
    
    
    
    (0.6
    )
    
    
    
    
    
    
    
    
    
    
    (9.2
    )Interest expense
    
    
    1.1
    
    
    
    1.2
    
    
    
    1.6
    
    
    
    4.6
    
    
    
    11.0Interest income
    
    
    (0.7
    )
    
    
    (2.6
    )
    
    
    (3.8
    )
    
    
    
    
    
    
    Income (loss) before reorganization items,
income taxes, minority interests and
discontinued operations
    
    
    53.7
    
    
    
    54.9
    
    
    
    47.4
    
    
    
    29.6
    
    
    
    (1.5
    )Reorganization items (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14.6
    )
    
    
    (37.1
    )Income (loss) before income taxes, minority interests and
discontinued operations
    
    
    53.7
    
    
    
    54.9
    
    
    
    47.4
    
    
    
    15.0
    
    
    
    (38.6
    )(Provision) benefit for income taxes (3)
    
    
    (1.3
    )
    
    
    (2.1
    )
    
    
    (1.4
    )
    
    
    (4.2
    )
    
    
    2.9Income (loss) before minority interests and discontinued
operations
    
    
    52.4
    
    
    
    52.8
    
    
    
    46.0
    
    
    
    10.8
    
    
    
    (35.7
    )Minority interests in loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11.0Income (loss) from continuing operations
    
    
    52.4
    
    
    
    52.8
    
    
    
    46.0
    
    
    
    10.8
    
    
    
    (24.7
    )Income (loss) from discontinued operations,
net of tax (4)
    
    
    1.3
    
    
    
    (0.8
    )
    
    
    (0.8
    )
    
    
    4.7
    
    
    
    (66.7
    )Gain from disposal of discontinued operations, net of tax
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    8.9
    
    
    
    21.4Net income (loss)
    
    $
    53.7
    
    
    $
    52.0
    
    
    $
    45.3
    
    
    $
    24.4
    
    
    $
    (70.0
    )Basic income (loss) per share from continuing operations
    
    $
    2.51
    
    
    $
    2.56
    
    
    $
    2.23
    
    
    $
    0.53
    
    
    $
    (1.20
    )Diluted income (loss) per share from continuing operations
    
    $
    2.48
    
    
    $
    2.52
    
    
    $
    2.21
    
    
    $
    0.53
    
    
    $
    (1.20
    )Special distribution declared per common share
    
    $
    1.00
    
    
    $
    5.00
    
    
    
    
    
    
    
    
    
    
    
    
 15




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ITEM 6. SELECTED FINANCIAL DATA, cont.  FIVE-YEAR HISTORICAL FINANCIAL SUMMARY
 (dollars in millions)
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Balance Sheet DataCurrent assets:Cash and cash equivalents
    
    $
    56.6
    
    
    $
    53.8
    
    
    $
    101.3
    
    
    $
    196.1
    
    
    $
    189.6Inventories
    
    
    
    
    
    
    86.7
    
    
    
    92.0
    
    
    
    89.2
    
    
    
    98.9Receivables and other
    
    
    65.1
    
    
    
    15.8
    
    
    
    18.5
    
    
    
    30.3
    
    
    
    50.5Assets held for sale
    
    
    6.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Assets related to discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    6.2Total current assets
    
    
    127.9
    
    
    
    156.3
    
    
    
    211.8
    
    
    
    315.7
    
    
    
    345.2Property and equipment, net
    
    
    
    
    
    
    20.7
    
    
    
    25.2
    
    
    
    28.9
    
    
    
    35.4Other assets
    
    
    1.0
    
    
    
    4.6
    
    
    
    8.3
    
    
    
    12.1
    
    
    
    13.5Total assets
    
    $
    128.9
    
    
    $
    181.6
    
    
    $
    245.3
    
    
    $
    356.7
    
    
    $
    394.1Current liabilities:Amount due under Kmart Settlement (1)
    
    $
    
    
    
    $
    5.1
    
    
    $
    
    
    
    $
    
    
    
    $
    45.0Other current liabilities
    
    
    20.7
    
    
    
    69.9
    
    
    
    78.5
    
    
    
    107.8
    
    
    
    98.0Liability held for sale
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Liabilities related to discontinued operations
    
    
    0.5
    
    
    
    0.9
    
    
    
    2.3
    
    
    
    7.4
    
    
    
    3.5Liabilities subject to compromise
    
    
    
    
    
    
    0.5
    
    
    
    1.2
    
    
    
    125.5
    
    
    
    152.3Total current liabilities
    
    
    23.2
    
    
    
    76.4
    
    
    
    82.0
    
    
    
    240.7
    
    
    
    298.8Other long term liabilities
    
    
    1.2
    
    
    
    26.1
    
    
    
    26.6
    
    
    
    35.0
    
    
    
    38.5Amount due under Kmart Settlement (1)
    
    
    
    
    
    
    
    
    
    
    5.2
    
    
    
    5.5
    
    
    
    5.5Total liabilities
    
    
    24.4
    
    
    
    102.5
    
    
    
    113.8
    
    
    
    281.2
    
    
    
    342.8Shareholders equity
    
    
    104.5
    
    
    
    79.1
    
    
    
    131.5
    
    
    
    75.5
    
    
    
    51.3Total liabilities and shareholders equity
    
    $
    128.9
    
    
    $
    181.6
    
    
    $
    245.3
    
    
    $
    356.7
    
    
    $
    394.1
 
 (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 for
fiscal 2004 and 2007. Upon the expiration of the Kmart Agreement all claims not yet due or
payable relating to future store closings were waived for any remaining stores. As such the Company
recorded a gain on the elimination of the amount due under Kmart Settlement of $5.0 million during
fiscal 2008.(2)
    
    Represents income and expenses associated with our bankruptcy. See Note 18
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 the liquidation of our
business. 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
$17.3 million in 2008, $(20.3) million in fiscal 2007, $(22.1) million in fiscal 2006, $(6.4)
million in fiscal 2005 and $21.4 million in fiscal 2004.(4)
    
    Income (loss) from discontinued operations includes the gains and losses from the
operations of our discontinued Athletic Segment and the gains and 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. In April 2008, the Company entered into an agreement
with CVS Pharmacy, Inc. (CVS), its former parent entity, pursuant to which CVS agreed to assume
any and all of Footstars obligations with respect to the environmental remediation. The
assumption by CVS eliminated the previously recorded obligation of $1.6 million for cash
consideration of $0.9 million, resulting in a gain of $0.7 million, net of tax, included in income
from discontinued operations. As such, the accounting for the additional obligation has been
recorded in Discontinued Operations. The income (loss) from discontinued operations includes the
following (in millions): 2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Athletic Segment
    
    $
    0.6
    
    
    $
    
    
    
    $
    (0.9
    )
    
    $
    5.1
    
    
    $
    (38.9
    )Meldisco Businesses
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    (0.4
    )
    
    
    (27.8
    )Closed Manufacturing Facility
    
    $
    0.7
    
    
    $
    (0.8
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1.3
    
    
    $
    (0.8
    )
    
    $
    (0.8
    )
    
    $
    4.7
    
    
    $
    (66.7
    )
  16




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 FORWARD-LOOKING STATEMENTS
  
    
    the impact of any dividends or any other special distributions to stockholders on the
Companys future cash requirements and liquidity needs, both in connection with the wind-down
of the Companys operations and all contingencies;
    
    the Plan and our Dissolution are subject to approval and adoption by the Companys
stockholders;
    
    under the Plan, the Companys remaining assets would be disposed of, known liabilities
would be paid or provided for and reserves would be established for contingent liabilities,
with only any remaining assets available for ultimate distribution;
    
    uncertainties exist as to the disposition value of our remaining assets as well as the
amount of our liabilities and obligations, and, in connection with the Plan and our
Dissolution, there can be no assurance as to the amount of any cash or other property that
may potentially be distributed to stockholders or the timing of any distributions;
    
    there can be no assurance that additional issues will not arise in connection with the obligations,
adjustments and payments as a result of the expiration of the Kmart Agreement;
    
    we do not expect to be able to fully realize the benefits of
our net operating loss carry forwards; and
    
    the difficulty of selling the Companys property in
Mahwah, New Jersey on satisfactory terms, taking into
account the current decline in the economic conditions and the current disruption in the
capital and credit markets.
  17




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RECENT EVENTS
    inter alia
 
    
    filing a certificate of dissolution with the Secretary of State of Delaware and,
thereafter, remaining in existence as a non-operating entity for at least three years as
required under Delaware law;
    
    complete the sale or liquidation of the Companys remaining assets including its
property in Mahwah, New Jersey, which may include, without limitation, entering into
commercial leases to enhance or facilitate the disposition of real estate if advisable;
    
    collecting, or providing for the collection of, accounts receivable, debts and other
claims owing to the Company;
    
    paying, or providing for the payment of, our debts and liabilities, including both
known liabilities and those that are contingent, conditional, unmatured or unknown, in
accordance with Delaware law;
    
    winding up our remaining business activities and withdrawing from any jurisdiction in
which we remain qualified to do business;
    
    complying with the SECs filing requirements for so long as we are required to do so;
    
    making ongoing tax and other regulatory filings; and
 18




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##### Table of Contents




    
    preparing to make, and making, distributions to our shareholders of any liquidation
proceeds that may be available for such distributions.
  OVERVIEW
  
    
    On December 31, 2008, we concluded our operations in the Kmart and Rite Aid stores;
    
    Operating profit increased by $1.2 million to $54.1 million in fiscal 2008 as compared to
$52.9 million in fiscal 2007. The $37.8 million of gains recorded on the cancellation of the
retiree benefit plan, sale of intangible assets and expiration of the Kmart Agreement along
with the decrease of depreciation and amortization expense of $3.6 million were offset by the
$31.2 million decrease in gross profit from net sales and an impairment loss on the corporate
headquarters building of $10.8 million;
    
    The Companys operating activities provided $11.4 million in cash during fiscal 2008, as
compared to cash provided by operating activities of $60.4 million during fiscal 2007;
    
    As of January 3, 2009, the Company had $56.6 million of cash and cash equivalents;
    
    On May 9, 2008, the Company paid a special cash distribution of $1.00 per common share
totaling $21.3 million; and
 Kmart Agreement
    19




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RESULTS OF OPERATIONS
  FISCAL 2008 VERSUS FISCAL 2007
 % ofTotal
    
    
    % of TotalSales 
    
    
    Sales -(in millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net Sales
    
    $
    580.0
    
    
    $
    637.0Liquidation of Inventory
    
    
    54.2
    
    
    
    Total Revenues
    
    
    634.2
    
    
    
    637.0
    
    
    
    100
    %
    
    
    100
    %Gross Profit on Net Sales
    
    
    183.3
    
    
    
    209.6
    
    
    
    28.9
    
    
    
    32.9Loss on Liquidation of Inventory
    
    
    (4.9
    )
    
    
    
    
    
    
    (0.8
    )
    
    
    Total Gross Profit
    
    
    178.4
    
    
    
    209.6
    
    
    
    28.1
    
    
    
    32.9SG&A Expenses
    
    
    146.8
    
    
    
    148.6
    
    
    
    23.1
    
    
    
    23.3Depreciation/Amortization
    
    
    4.5
    
    
    
    8.1
    
    
    
    0.7
    
    
    
    1.3Loss on Impairment of Long-Lived Asset
    
    
    10.8
    
    
    
    
    
    
    
    1.7
    
    
    
    Gain on Cancellation of Retiree
Benefit Plan
    
    
    (22.3
    )
    
    
    
    
    
    
    3.5
    
    
    
    Gain on Sale of Intangible Assets
    
    
    (10.5
    )
    
    
    
    
    
    
    1.7
    
    
    
    Gain on Expiration of Kmart Agreement
    
    
    (5.0
    )
    
    
    
    
    
    
    0.8
    
    
    
    Operating Profit
    
    $
    54.1
    
    
    $
    52.9
    
    
    
    8.5
    
    
    
    8.3
 NET SALES
 rd
 20




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##### Table of Contents



GROSS PROFIT ON NET SALES
  LIQUIDATION OF INVENTORY
  LOSS ON LIQUIDATION OF INVENTORY
  SG&A EXPENSES
  DEPRECIATION/AMORTIZATION
  LOSS ON IMPAIRMENT OF LONG-LIVED ASSET
  21




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##### Table of Contents



GAIN ON CANCELLATION OF RETIREE BENEFIT PLAN
  GAIN ON SALE OF INTANGIBLE ASSETS
  GAIN ON EXPIRATION OF KMART AGREEMENT
  OPERATING PROFIT
  FISCAL 2007 VERSUS FISCAL 2006
 % of Sales -
    
    
    % of Sales (in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    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
 22




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##### Table of Contents



NET SALES
  GROSS PROFIT
  SG&A EXPENSES
  DEPRECIATION/AMORTIZATION
  OPERATING PROFIT
  LIQUIDITY AND CAPITAL RESOURCES
  23




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##### Table of Contents



24




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##### Table of Contents



Amended Credit Facility
  25




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##### Table of Contents



CONTRACTUAL OBLIGATIONS
  Payments Due By PeriodAfter 5Total
    
    
    Less than 1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    YearsMortgage payable
    
    $
    2.0
    
    
    $
    2.0
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    Compensation obligations
    
    
    13.7
    
    
    
    13.7
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation obligations
    
    
    1.8
    
    
    
    0.5
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    Total
    
    $
    17.6
    
    
    $
    16.3
    
    
    $
    1.1
    
    
    $
    0.2
    
    
    $
    
  CRITICAL ACCOUNTING ESTIMATES
   26




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##### Table of Contents



.
 Valuation and Aging of Inventory and Shrink Reserve
   . . .
   27




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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
   28




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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
 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 Fair Value Measurements
 29




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##### Table of Contents



Determining Fair Value of a Financial Asset in a Market
That Is Not Active
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles Public Company Accounting Oversight Board Auditing The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.
 FACTORS TO CONSIDER
 In connection with the Plan and our 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



We do not currently expect to generate any material revenues or operating income as an independent
company.
  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.
   We likely will be unable to realize the benefits of our net operating loss carryforwards.
  31




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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
  32




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 (a) Disclosure Controls and Procedures
  (b) Managements Annual Report on Internal Control Over Financial Reporting
   33




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##### Table of Contents



Internal Control  Integrated Framework
  (c) Changes in Internal Control Over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   
 ITEM 11. EXECUTIVE COMPENSATION
  34




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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)
    
    
    725,358
    
    
    $
    12
    
    
    
    1,628,495
    (3)Equity compensation
plans not approved
by security holders (2)
    
    
    101,215
    
    
    $
    32
    
    
    
    1,752,442
    (4)Total
    
    
    826,573
    
    
    $
    15
    
    
    
    3,380,937
 
 (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 1,621,873 shares available for
issuance other than upon the exercise of an option or other right. The 2006 Non-Executive
Director Stock Plan includes 6,622 shares available for issuance other than upon the exercise of
an option or other right.(4)
    
    The 2000 Equity Incentive Plan includes 1,752,442 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
  35




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##### Table of Contents



ITEM 14 . PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 (a)(1) Financial Statements
  PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Statements of Operations for the Fiscal Years ended January 3, 2009,
December 29, 2007 and December 30, 2006
    
    
    F-4Consolidated Balance Sheets as of January 3, 2009 and December 29, 2007
    
    
    F-5Consolidated Statements of Shareholders Equity and Comprehensive Income for the
Fiscal Years ended January 3, 2009, December 29, 2007 and December 30, 2006
    
    
    F-6Consolidated Statements of Cash Flows for the Fiscal Years ended January 3, 2009,
December 29, 2007 and December 30, 2006
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8Selected Quarterly Data (see Note 28 to the Consolidated Financial Statements)
    
    
    F-33
 (a)(2) Schedule
  PageSchedule II  Valuation and Qualifying Accounts for the Fiscal Years ended January
3, 2009, December 29, 2007 and December 30, 2006
    
    
    38
  (a)(3) Exhibits
  36




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##### Table of Contents



FOOTSTAR, INC.By       /s/ JONATHAN M. COUCHMANJonathan M. CouchmanChairman of the Board, Chief Executive

    Officer and PresidentMarch 9, 2009  Signature
    
    Title
    
    Date/s/ JONATHAN M. COUCHMAN

Jonathan M. Couchman
    
    Chairman of the Board, 
Chief
Executive Officer & President
    
    March 9, 2009/s/ MICHAEL J. LYNCH

Michael J. Lynch
    
    Chief Financial
Officer-
Senior Vice President
    
    March 9, 2009/s/ CRAIG M. HAINES

Craig M. Haines
    
    Vice President-Controller 
and Principal Accounting Officer
    
    March 9, 2009/s/ EUGENE I. DAVIS

Eugene I. Davis
    
    Director
    
    March 4, 2009/s/ADAM W. FINERMAN

Adam W. Finerman
    
    Director
    
    March 3, 2009/s/ MICHAEL A. OHARA

Michael OHara
    
    Director
    
    March 5, 2009/s/ ALAN I. WEINSTEIN

Alan I. Weinstein
    
    Director
    
    March 1, 2009/s/ GERALD F. KELLY, JR.

Gerald F. Kelly, Jr.
    
    Director
    
    March 2, 2009/s/ STEVEN D. SCHEIWE

Steven D. Scheiwe
    
    Director
    
    March 2, 2009
 37




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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 January 3, 2009Allowance for Doubtful Accounts
    
    $
    
    
    
    $
    0.4
    
    
    $
    (0.3
    )
    
    $
    0.1Aged Inventory Reserve
    
    $
    0.9
    
    
    $
    3.0
    
    
    $
    (3.9
    )
    
    $
    Allowance for Sales Returns
    
    $
    0.9
    
    
    $
    0.1
    
    
    $
    (1.0
    )
    
    $
    Fiscal 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
    )
    
    $
    0.9
  
 (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. 38




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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 Current
Report on Form 8-K filed on November 15, 2004 and to Exhibit 2.1 to
Footstar, Inc.s Current Report on 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).2.3
    
    Plan of Complete Liquidation of Footstar, Inc. (incorporated by
reference to Exhibit 2.1 of Footstar, Inc.s Form 8-K filed on May 09,
2008).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), 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) and Amendment No. 2 to the Rights
Agreement, dated as of February 4, 2009 (incorporated by reference to
Exhibit 4.1 to Footstars Current Report on Form 8-K
filed on February 4,
2009).10.1
    
    Amended and Restated Master Agreement dated as of August 24, 2005 by and
 39




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##### Table of Contents



ExhibitNumber
    
    DESCRIPTIONbetween 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 Amendment No. 5 to Form
10/A filed on September 13, 1996).*10.3
    
    Form of Restricted Stock Agreement with Executive Officers (incorporated
by reference to Exhibit 10.2(a) to Footstar, Inc.s Amendment No. 1
to Annual Report on Form 10-K/A filed on March 16, 2006).*10.4
    
    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).*10.5
    
    First Amendment, dated June 17, 2008, to Footstar, Inc. 2006
Non-Employee Director Stock Plan (incorporated by reference to Exhibit
10.4 to Footstars Quarterly Report on Form 10-Q filed on August 6,
2008).*10.6
    
    Form of Restricted Stock Agreement with Non-Employee Directors
(incorporated by reference to Exhibit 10.3(b) to Footstar, Inc.s
Amendment No.1 to Annual Report on Form 10-K/A filed on March 16,
2006).*10.7
    
    1996 Non-Employee Director Stock Plan of Footstar, Inc. (incorporated by
reference to Exhibit 10.4 to Footstar, Inc.s Amendment No. 5 to Form
10/A filed on September 13, 1996).*10.8
    
    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).*10.9
    
    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).*10.10
    
    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).*10.11
    
    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).*10.12
    
    Employment Agreement, by and between Jonathan M. Couchman and Footstar,
Inc., dated as of December 9, 2008 (incorporated by reference to
Footstar Inc.s Current
 40




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##### Table of Contents



ExhibitNumber
    
    DESCRIPTIONReport on Form 8-K filed on
December 9, 2008). Form of Restricted Stock Agreement with Jon
Couchman effective December 9, 2008*10.13
    
    Footstar, Inc. Deferred Compensation Plan (incorporated by reference to
Exhibit 10.8 to Footstar, Inc.s Annual Report on Form 10-K filed on
March 28, 1997, Reg. No. 001-11681).*10.14
    
    Supplemental Retirement Plan for Footstar, Inc., as Amended and Restated
effective October 14, 1996, Amended and Restated effective as of
January 1, 2005.10.15
    
    2000 Equity Incentive Plan (incorporated by reference to Exhibit 10.11
to Footstar, Inc.s Annual Report on Form 10-K filed on March 31, 2000,
Reg. No. 001-11681).*10.16
    
    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).*10.17
    
    Intellectual Property Purchase Agreement, dated as of April 3, 2008, by
and among Footstar Corporation, Sears Brands LLC and Sears Holdings
Corporation (incorporated by reference to Exhibit 10.1 of Footstar,
Inc.s Current Report on Form 8-K filed on April 04, 2008).10.18
    
    Master Agreement Amendment, dated as of April 3, 2008, by and among
Footstar, Inc., Kmart Corporation, certain affiliates of Kmart
Corporation and Sears Holdings Corporation (incorporated by reference to
Exhibit 10.2 of Footstar, Inc.s Current Report on Form 8-K filed on
April 04, 2008).10.19
    
    Amended and Restated Exit Credit
Agreement dated as of February 7, 2006 among Footstar, Inc. and
Footstar Corporation, certain parties as lenders, 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).10.20
    
    First Amendment to an Amended and
Restated Exit Credit Agreement, dated as of May 9, 2008, by and
among Footstar, Inc. and Footstar Corporation, certain parties as
lenders, and Bank of America, N.A., as administrative agent,
swingline lender, issuing bank and collateral agent (incorporated by
reference to Exhibit 10.1 of Footstar, Inc.s Current
Report on Form 8-K filed on May 9, 2008).21.1
    
    Subsidiaries of Footstar, Inc.23.1
    
    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. 41




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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 January 3, 2009, December 29, 2007 and
December 30, 2006
    
    F-4Consolidated Balance Sheets as of January 3, 2009 and
December 29, 2007
    
    F-5Consolidated Statements of Shareholders Equity and
Comprehensive Income for the Fiscal Years Ended
January 3, 2009, December 29, 2007 and December 30,
2006
    
    F-6Consolidated Statements of Cash Flows for the Fiscal
Years Ended January 3, 2009, December 29, 2007 and
December 30, 2006
    
    F-7Notes to Consolidated Financial Statements
    
    F-8Schedule II  Valuation and Qualifying Accounts for
the Fiscal Years ended January 3, 2009, December 29,
2007 and December 30, 2006
    
    38
(Part IV, Item 15(a)(2))
 F-1




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
  
      F-2




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Internal Control-Internal Framework
   
 F-3




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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 EndedJanuary 3, 2009
    
    December 29, 2007
    
    December 30, 2006Revenue:Net sales
    
    $
    580.0
    
    
    $
    637.0
    
    
    $
    666.7Liquidation of inventory
    
    
    54.2
    
    
    
    
    
    
    
    Total revenue
    
    
    634.2
    
    
    
    637.0
    
    
    
    666.7Cost:Cost of sales
    
    
    396.7
    
    
    
    427.4
    
    
    
    452.1Cost of liquidation of inventory
    
    
    59.1
    
    
    
    
    
    
    
    Total cost
    
    
    455.8
    
    
    
    427.4
    
    
    
    452.1Total gross profit
    
    
    178.4
    
    
    
    209.6
    
    
    
    214.6Store operating, selling, general and
administrative expenses
    
    
    146.8
    
    
    
    148.6
    
    
    
    160.6Depreciation and amortization
    
    
    4.5
    
    
    
    8.1
    
    
    
    8.8Loss on impairment of long-lived assets
    
    
    10.8
    
    
    
    
    
    
    
    Gain on cancellation of retiree benefit plan
    
    
    (22.3
    )
    
    
    
    
    
    
    Gain on sale of intangible assets
    
    
    (10.5
    )
    
    
    
    
    
    
    Gain on expiration of Kmart Agreement
    
    
    (5.0
    )
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    (0.6
    )
    
    
    Interest expense
    
    
    1.1
    
    
    
    1.2
    
    
    
    1.6Interest income
    
    
    (0.7
    )
    
    
    (2.6
    )
    
    
    (3.8
    )Income before income taxes and discontinued
operations
    
    
    53.7
    
    
    
    54.9
    
    
    
    47.4Provision for income taxes
    
    
    (1.3
    )
    
    
    (2.1
    )
    
    
    (1.4
    )Income from continuing operations
    
    
    52.4
    
    
    
    52.8
    
    
    
    46.0Income (loss) discontinued operations, net of tax
    
    
    1.3
    
    
    
    (0.8
    )
    
    
    (0.8
    )Gain from disposal of discontinued operations,
net of tax
    
    
    
    
    
    
    
    
    
    
    0.1Net income
    
    $
    53.7
    
    
    $
    52.0
    
    
    $
    45.3Weighted Average common shares outstandingBasic
    
    
    20.9
    
    
    
    20.7
    
    
    
    20.6Diluted
    
    
    21.1
    
    
    
    21.0
    
    
    
    20.8Income (loss) per share:Basic:Income from continuing operations
    
    $
    2.51
    
    
    $
    2.56
    
    
    $
    2.23Income (loss) from discontinued operations
    
    
    0.06
    
    
    
    (0.04
    )
    
    
    (0.03
    )Net income
    
    $
    2.57
    
    
    $
    2.52
    
    
    $
    2.20Diluted:Income from continuing operations
    
    $
    2.48
    
    
    $
    2.52
    
    
    $
    2.21(Loss) income from discontinued operations
    
    
    0.06
    
    
    
    (0.04
    )
    
    
    (0.03
    )Net income
    
    $
    2.54
    
    
    $
    2.48
    
    
    $
    2.18
  F-4




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Consolidated Balance Sheets
(in millions, except per share and share amounts)
 January 3, 2009
    
    December 29, 2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    56.6
    
    
    $
    53.8Accounts receivable, net
    
    
    56.8
    
    
    
    11.4Inventories
    
    
    
    
    
    
    86.7Assets held for sale
    
    
    6.2
    
    
    
    Prepaid expenses and other current assets
    
    
    8.3
    
    
    
    4.4Total current assets
    
    
    127.9
    
    
    
    156.3Property and equipment, net
    
    
    
    
    
    
    20.7Intangible assets, net
    
    
    
    
    
    
    3.3Deferred charges and other noncurrent assets
    
    
    1.0
    
    
    
    1.3Total assets
    
    $
    128.9
    
    
    $
    181.6Liabilities and Shareholders EquityCurrent liabilities:Liabilities not subject to compromiseAccounts payable
    
    $
    0.2
    
    
    $
    48.0Accrued expenses
    
    
    19.2
    
    
    
    20.7Amount due under Kmart Settlement
    
    
    
    
    
    
    5.1Income taxes payable
    
    
    1.3
    
    
    
    1.2Liability held for sale
    
    
    2.0
    
    
    
    Liabilities related to discontinued operations
    
    
    0.5
    
    
    
    0.9Liabilities subject to compromise
    
    
    
    
    
    
    0.5Total current liabilities
    
    
    23.2
    
    
    
    76.4Other long-term liabilities
    
    
    1.2
    
    
    
    26.1Total liabilities
    
    
    24.4
    
    
    
    102.5Shareholders equity:Common stock $.01 par value: 100,000,000
shares 
Authorized 32,236,400 and 31,836,762
shares issued
    
    
    0.3
    
    
    
    0.3Additional paid-in capital
    
    
    330.1
    
    
    
    328.9Treasury stock: 10,711,569 shares, at cost
    
    
    (310.6
    )
    
    
    (310.6
    )Retained earnings
    
    
    84.1
    
    
    
    51.7Accumulated other comprehensive income
    
    
    0.6
    
    
    
    8.8Total shareholders equity
    
    
    104.5
    
    
    
    79.1Total liabilities and shareholders equity
    
    $
    128.9
    
    
    $
    181.6
  F-5




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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
    
    
    TotalBalance 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
    
    
    $
    79.1Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53.7
    
    
    
    
    
    
    
    53.7Defined benefit plans, net
of tax (see notes 21 and
22):Amortization of prior
service credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    (0.6
    )Cancellation of post
retirement benefit plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.7
    )
    
    
    (7.7
    )Amortization of gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )
    
    
    (0.4
    )Net gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    0.5Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45.5Special cash distribution
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21.3
    )
    
    
    
    
    
    
    (21.3
    )Common stock incentive plans
    
    
    399,638
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Balance as of January 3, 2009
    
    
    32,236,400
    
    
    $
    0.3
    
    
    
    10,711,569
    
    
    $
    (310.6
    )
    
    $
    330.1
    
    
    $
    
    
    
    $
    84.1
    
    
    $
    0.6
    
    
    $
    104.5
  F-6




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
 Consolidated Statements of Cash Flows
 January 3,
    
    December 29,
    
    December 30,2009
    
    2007
    
    2006Cash flows from operating activities:Net income
    
    $
    53.7
    
    
    $
    52.0
    
    
    $
    45.3Adjustments to reconcile net income to net cash provided by
operating activities:(Income) loss from discontinued operations, net of tax
    
    
    (1.3
    )
    
    
    0.8
    
    
    
    0.7Depreciation and amortization
    
    
    4.5
    
    
    
    8.1
    
    
    
    8.8Gain on retiree medical plan cancellation
    
    
    (22.3
    )
    
    
    
    
    
    
    Gain on sale of intellectual property
    
    
    (10.5
    )
    
    
    
    
    
    
    Loss on impairment of long-lived assets
    
    
    10.8
    
    
    
    
    
    
    
    Stock incentive plans
    
    
    1.2
    
    
    
    1.2
    
    
    
    1.3Changes in operating assets and liabilities:Increase in accounts receivable, net
    
    
    (45.5
    )
    
    
    (0.8
    )
    
    
    (1.8
    )Decrease (increase) in inventories
    
    
    86.7
    
    
    
    5.4
    
    
    
    (2.9
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (3.5
    )
    
    
    3.8
    
    
    
    14.0Decrease in accounts payable, accrued expenses and amount due
under Kmart Settlement
    
    
    (54.1
    )
    
    
    (9.4
    )
    
    
    (56.1
    )Decrease in income taxes payable and other long-term liabilities
    
    
    (8.3
    )
    
    
    (0.7
    )
    
    
    (3.9
    )Net cash provided by operating activities
    
    
    11.4
    
    
    
    60.4
    
    
    
    5.4Cash flows provided by (used in) investing activities:Proceeds from sale of intellectual property
    
    
    13.0
    
    
    
    
    
    
    
    Additions to property and equipment
    
    
    
    
    
    
    (0.3
    )
    
    
    (1.9
    )Net cash provided by (used) in investing activities
    
    
    13.0
    
    
    
    (0.3
    )
    
    
    (1.9
    )Cash flows used in financing activities:Special cash distribution paid
    
    
    (21.3
    )
    
    
    (104.8
    )
    
    
    Payments on mortgage note
    
    
    (1.2
    )
    
    
    (1.1
    )
    
    
    (1.0
    )Net cash used in financing activities
    
    
    (22.5
    )
    
    
    (105.9
    )
    
    
    (1.0
    )Cash flows from discontinued operations:Net cash provided by (used in) operating activities of
discontinued activities
    
    
    0.9
    
    
    
    (1.7
    )
    
    
    (97.3
    )Net increase (decrease) in cash  discontinued operations
    
    
    0.9
    
    
    
    (1.7
    )
    
    
    (97.3
    )Net increase (decrease) in cash and cash equivalents
    
    
    2.8
    
    
    
    (47.5
    )
    
    
    (94.8
    )Cash and cash equivalents, beginning of year
    
    
    53.8
    
    
    
    101.3
    
    
    
    196.1Cash and cash equivalents, end of year
    
    $
    56.6
    
    
    $
    53.8
    
    
    $
    101.3
  F-7




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 
  1.
    
    Nature of Company
 Background
    Expected Liquidation of the Companys Business.
  see
  F-8




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
         F-9




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Master Agreement Amendment; Intellectual Property Purchase Agreement
       F-10




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
    2.
    
    Summary of Significant Accounting Policies
 Principles of Consolidation
   Basis of Presentation
  Fiscal Years
  Use of Estimates in Preparation of Financial Statements
  F-11




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Cash and Cash Equivalents
  Merchandise Inventories and Cost of Sales
  Property and Equipment
   Impairment of Long-Lived Assets
  F-12




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Revenue Recognition
  Advertising Costs
  Income Taxes
 Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
Taxes
   F-13




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Insurance Liabilities
  Earnings Per Share
  2008
    
    2007
    
    2006Average shares outstanding
    
    20.9
    
    20.6
    
    20.5Average contingently issuable shares (1)
    
    
    
    0.1
    
    0.1Average shares outstanding  basic
    
    20.9
    
    20.7
    
    20.6Average shares outstanding  diluted (2)
    
    21.1
    
    21.0
    
    20.8
 
 (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 327,725 at January 3, 2009, 472,435
at December 29, 2007 and 513,275 at December 30, 2006. Fair Value of Financial Instruments
  F-14




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  3. Reduction in Workforce
   Year-to-date periodJanuary 3, 2009Beginning balance of termination benefits accrual
    
    $
    Costs charged to expense
    
    
    9.9Cash payments
    
    
    (3.1
    )Ending balance of termination benefits accrual
    
    $
    6.8
 4. Discontinued Operations
    F-15




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  2008
    
    2007Net sales
    
    $
    
    
    
    $
    Operating income (loss) from
discontinued operations
    
    
    0.7
    
    
    
    (0.8
    )Interest expense
    
    
    
    
    
    
    Provision for income taxes
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    $
    0.7
    
    
    $
    (0.8
    )
    2008
    
    2007
    
    2006Net sales
    
    $
    
    
    
    $
    
    
    
    $
    Operating income (loss) from discontinued operations
    
    
    0.6
    
    
    
    
    
    
    
    (0.2
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    $
    0.6
    
    
    $
    
    
    
    $
    (0.9
    )
 5. Impact of Recently Issued Accounting Standards
 Fair Value Measurements
 F-16




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Determining Fair Value of a Financial Asset in a Market
That Is Not Active
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles Public Company Accounting Oversight Board Auditing The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles
 Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities.
 6. Accounts Receivable
  2008
    
    
    2007Due from Kmart
    
    $
    54.3
    
    
    $
    9.0Other  primarily trade
    
    
    2.6
    
    
    
    2.456.9
    
    
    
    11.4Less: Allowance for doubtful accounts
    
    
    (0.1
    )
    
    
    Total
    
    $
    56.8
    
    
    $
    11.4
 7. Assets and Liability Held For Sale
  F-17




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 Building and improvements
    
    $
    20.3Less accumulated depreciation
    
    
    (17.3
    )3.0Land
    
    
    3.2Assets held for sale
    
    $
    6.2
  Accrued expenses
    
    $
    2.0Liabilities held for sale
    
    $
    2.0
 8. Prepaid Expenses and Other Current Assets
  2008
    
    
    2007Income tax refund receivable and
other prepaid taxes
    
    $
    0.6
    
    
    $
    0.5Cash collaterized letters of credit
    
    
    7.1
    
    
    
    Other prepaids
    
    
    0.6
    
    
    
    3.9Total
    
    $
    8.3
    
    
    $
    4.4
 9. Liabilities Related to Discontinued Operations
  2008
    
    
    2007LiabilitiesAccrued expenses
    
    $
    0.5
    
    
    $
    0.9$
    0.5
    
    
    $
    0.9
 10. Property and Equipment
  Original useful lives (in yrs.)
    
    
    2008
    
    
    2007Land
    
    
    
    
    
    $
    
    
    
    $
    3.2Buildings and improvements
    
    
    10-40
    
    
    
    
    
    
    
    20.3Computer hardware and software, equipment and furniture
    
    
    3-10
    
    
    
    17.9
    
    
    
    38.4Leasehold improvements
    
    
    6
    
    
    
    
    
    
    
    0.117.9
    
    
    
    62.0Less: Accumulated depreciation
    
    
    
    
    
    
    17.9
    
    
    
    41.3Total
    
    
    
    
    
    $
    
    
    
    $
    20.7
  F-18




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  11. Other Intangible Assets
  12. Accrued Expenses
  2008
    
    
    2007Taxes other than federal income taxes
    
    $
    0.3
    
    
    $
    0.6Salaries, bonus and severance
    
    
    8.8
    
    
    
    7.7Employee benefit costs
    
    
    6.9
    
    
    
    3.8Other  individually not in excess of 5%
    
    
    3.2
    
    
    
    8.6Total
    
    $
    19.2
    
    
    $
    20.7
 13. Liabilities Subject to Compromise
   2008
    
    
    2007Accrued expenses
    
    $
    
    
    
    $
    0.5Total
    
    $
    
    
    
    $
    0.5
 F-19




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 14. Credit Facility
     15. Other Long-Term Liabilities
  F-20




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 2008
    
    
    2007Employee benefit costs
    
    $
    
    
    
    $
    20.8Workers compensation
    
    
    1.2
    
    
    
    1.8Other
    
    
    
    
    
    
    3.5Total
    
    $
    1.2
    
    
    $
    26.1
    2009
    
    $
    1.32010
    
    
    0.7
 16. Leases
  2008
    
    
    2007
    
    
    2006Minimum rentals
    
    $
    1.1
    
    
    $
    1.2
    
    
    $
    1.6Percentage rentals
    
    
    84.7
    
    
    
    92.3
    
    
    
    95.8Total
    
    $
    85.8
    
    
    $
    93.5
    
    
    $
    97.4
   17. Income Taxes
  2008
    
    
    2007
    
    
    2006Federal
    
    $
    
    
    
    $
    1.1
    
    
    $
    0.1State
    
    
    1.3
    
    
    
    1.0
    
    
    
    1.3Total
    
    $
    1.3
    
    
    $
    2.1
    
    
    $
    1.4
 F- 21




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   2008
    
    
    2007
    
    
    2006Computed expected income tax expense (benefit)
    
    $
    18.8
    
    
    $
    19.3
    
    
    $
    16.6Increases (decreases) in income taxes resulting from:State income taxes, net of federal tax benefit
    
    
    1.1
    
    
    
    0.7
    
    
    
    0.8Other
    
    
    (1.3
    )
    
    
    2.4
    
    
    
    1.0Valuation allowance
    
    
    (17.3
    )
    
    
    (20.3
    )
    
    
    (17.0
    )Net income tax expense
    
    $
    1.3
    
    
    $
    2.1
    
    
    $
    1.4
   2008
    
    2007Deferred tax assets:Kmart Settlement Agreement
    
    $
    
    
    
    $
    1.7Restructuring reserves
    
    
    
    
    
    
    0.6Inventories
    
    
    
    
    
    
    5.9Postretirement benefits
    
    
    
    
    
    
    6.2Employee benefits
    
    
    2.5
    
    
    
    4.9NOL carryforward
    
    
    41.3
    
    
    
    40.3Intangible assets
    
    
    
    
    
    
    6.0Tax credit carryforward
    
    
    1.1
    
    
    
    1.1Property and equipment
    
    
    5.1
    
    
    
    Other
    
    
    0.1
    
    
    
    0.7Total gross deferred tax assets
    
    
    50.1
    
    
    
    67.4Less valuation allowance
    
    
    (50.1
    )
    
    
    (67.4
    )Total deferred tax assets
    
    $
    
    
    
    
    
   F-22




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
   18. Reorganization Items
  2008
    
    2007
    
    2006Professional fees
    
    $
    
    
    
    $
    
    
    
    $
    1.5Trustee fees
    
    
    
    
    
    
    
    
    
    
    0.1Gain on disposition of bankruptcy claims
    
    
    
    
    
    
    
    
    
    
    (0.9
    )Interest income
    
    
    
    
    
    
    
    
    
    
    (0.7
    )Total
    
    $
    
    
    
    $
    
    
    
    $
    
  19. Share-Based Compensation Plans
   F-23




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
     Number ofShares to be
    
    Weighted
    
    Number of
    
    
    
    
    
    Number of SharesIssued upon
    
    Average
    
    Shares
    
    Number of Shares
    
    RemainingExercise of
    
    Exercise Price
    
    Issued,
    
    Remaining Available
    
    Available for FutureOutstanding
    
    of Outstanding
    
    Inception to Date
    
    for Future Issuance,
    
    Issuance, as ofPlan Category
    
    Options/Awards
    
    Options
    
    as of 1/3/2009
    
    as of 1/3/2009
    
    12/29/20071996 Incentive
Compensation
Plan
    
    
    546,394
    
    
    $
    15
    
    
    
    931,733
    
    
    
    1,621,873
    
    
    
    1,443,1572000 Equity
Incentive Plan
    
    
    101,215
    
    
    $
    32
    
    
    
    146,343
    
    
    
    1,752,442
    
    
    
    1,649,1691996 Non-Employee
Director Stock Plan
    
    
    4,000
    
    
    $
    41
    
    
    
    189,441
    
    
    
    
    
    
    
    2006 Non-Employee
Director Stock
Plan
    
    
    174,964
    
    
    $
    4
    
    
    
    276,458
    
    
    
    6,622
    
    
    
    136,256Total
    
    
    826,573
    
    
    $
    15
    
    
    
    1,543,975
    
    
    
    3,380,937
    
    
    
    3,228,582
  F-24




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  WeightedWeighted
    
    Aggregate
    
    AverageEmployee
    
    Average
    
    Intrinsic
    
    RemainingStock
    
    Exercise
    
    Value
    
    ContractualOptions
    
    Price
    
    ($000)
    
    TermOutstanding December 30, 2006
    
    
    507,275
    
    
    $
    31Canceled or expired
    
    
    (38,840
    )
    
    $
    29Outstanding, December 29, 2007
    
    
    468,435
    
    
    $
    31Canceled or expired
    
    
    (144,710
    )
    
    $
    31Outstanding, January 3, 2009
    
    
    323,725
    
    
    $
    31
    
    
    $
    5.1
    
    
    1.9 yearsExercisable, January 3, 2009
    
    
    323,725
    
    
    $
    31
    
    
    $
    5.1
    
    
    1.9 years
  2006Expected volatility
    
    
    47.1
    %Expected life in years
    
    
    6Risk-free interest rate
    
    
    4.6
    %Assumed forfeiture rate
    
    
    
  
 Deferred
    
    WeightedShares and
    
    Average GrantUnits
    
    Date Fair ValueNon-vested
December 30, 2006
    
    
    363,936
    
    
    $
    5Granted
    
    
    37,680
    
    
    $
    4Canceled
    
    
    (778
    )
    
    $
    25Shares vested
    
    
    (1,930
    )
    
    $
    25Non-vested,
December 29, 2007
    
    
    398,908
    
    
    $
    5Granted
    
    
    174,352
    
    
    $
    3Canceled
    
    
    (1,069
    )
    
    $
    6Shares vested
    
    
    (382,808
    )
    
    $
    5Non-vested, January 3, 2009
    
    
    189,383
    
    
    $
    4
  F-25




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 1996 Director Stock Plan
    Director Plan Stock OptionsAggregateWeighted
    
    Intrinsic
    
    Weighted AverageStock
    
    Average
    
    Value
    
    RemainingOptions
    
    Exercise Price
    
    ($000)
    
    Contractual TermOutstanding, December 30, 2006
    
    
    6,000
    
    
    $
    35Expired
    
    
    (2,000
    )
    
    $
    22Outstanding, December 29, 2007
    
    
    4,000
    
    
    $
    41Expired
    
    
    
    
    
    $
    Outstanding, January 3, 2009
    
    
    4,000
    
    
    $
    41
    
    
    $
    0.1
    
    
    10 monthsOptions exercisable, January 3, 2009
    
    
    4,000
    
    
    $
    41
    
    
    $
    0.1
    
    
    10 months
 2006 Non-Employee Director Stock Plan
   F-26




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
      F-27




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Weighted Average Grant DateStock Units
    
    Fair ValueNon-vested, December 30, 2006
    
    
    80,000
    
    
    $
    5Granted
    
    
    200,258
    
    
    $
    5Shares Vested
    
    
    (77,538
    )
    
    $
    6Non-vested, December 29, 2007
    
    
    202,720
    
    
    $
    5Granted
    
    
    129,634
    
    
    $
    4Shares Vested
    
    
    (157,390
    )
    
    $
    4Non-vested, January 3, 2009
    
    
    174,964
    
    
    $
    4
  Associate Stock Purchase Plan
   20. 401(k) Profit Sharing Plan
    F-28




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##### Table of Contents



FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 21. Postretirement Benefits
   2008
    
    2007Change in benefit obligationBenefit obligation at beginning of year
    
    $
    14.7
    
    
    $
    15.0Service cost
    
    
    0.1
    
    
    
    0.2Interest cost
    
    
    0.4
    
    
    
    0.9Actuarial (gain) loss
    
    
    
    
    
    
    (0.5
    )Benefits paid
    
    
    (0.8
    )
    
    
    (1.3
    )Participant contributions
    
    
    
    
    
    
    0.3Retiree drug subsidy receipt
    
    
    0.2
    
    
    
    0.1Cancellation of benefit obligation
    
    
    (14.6
    )
    
    
    Benefit obligation at end of year
    
    
    
    
    
    
    14.7Reconciliation of funded statusFunded status
    
    
    
    
    
    
    14.7Accrued benefit cost (unfunded)
    
    $
    
    
    
    $
    14.7
  2008
    
    2007Net gain
    
    $
    
    
    
    $
    4.3Prior service credit
    
    
    
    
    
    
    4.1Total amount included in AOCI
    
    $
    
    
    
    $
    8.4
  2008
    
    2007Amortization of net gain included in net income
    
    $
    (0.2
    )
    
    $
    (0.3
    )Net gain arising during period
    
    
    
    
    
    
    0.5Gain on cancellation of postretirement medical plan
    
    
    (7.7
    )
    
    
    Amortization of prior service credit included in net income
    
    
    (0.5
    )
    
    
    (1.4
    )Total other comprehensive loss during period attributable to
postretirement benefits
    
    $
    (8.4
    )
    
    $
    (1.2
    )
 2007Weighted-average assumptions as of December 31Discount rate
    
    
    6.3
    %
  2008
    
    
    2007
    
    
    2006Service cost
    
    $
    0.1
    
    
    $
    0.2
    
    
    $
    0.1Interest cost
    
    
    0.4
    
    
    
    0.9
    
    
    
    0.8Amortization of prior service cost
    
    
    (0.5
    )
    
    
    (1.5
    )
    
    
    (1.4
    )Amortization of net actuarial gain
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Net periodic benefit gain
    
    $
    (0.2
    )
    
    $
    (0.7
    )
    
    $
    (0.7
    )
 F-29




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 22. 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.
    
    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 0% and 4.8% in fiscal 2008 and 2007, respectively.
    
    The assumed salary rate of increase was 0% in fiscal 2008 and 2007.
    
    For purposes of determining eligible compensation, bonus targets will be frozen at the
2004 level.
   2008
    
    
    2007Net gain
    
    $
    0.6
    
    
    $
    0.4Total amount included in AOCI
    
    $
    0.6
    
    
    $
    0.4
  23. Commitments and Contingencies
 Kmart Relationship
 F-30




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
  Litigation Matters
 Adidas America, Inc. and Adidas Salomon AG v. Kmart Corporation and
Footstar, Inc.
  24. Shareholder Rights Plan
      F-31




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 25. Supplemental Cash Flow Information
  2008
    
    
    2007
    
    
    2006Income taxes received
    
    $
    (1.2
    )
    
    $
    (1.2
    )
    
    $
    (11.1
    )Interest received
    
    $
    0.8
    
    
    $
    2.9
    
    
    $
    4.6Interest paid
    
    $
    1.2
    
    
    $
    1.1
    
    
    $
    1.8
 26. Vendor Concentration
  27. Special Cash Distribution
    F-32




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FOOTSTAR, INC. and SUBSIDIARY COMPANIES
 28. Summary of Quarterly Results  Unaudited
 (in millions, except per share data)
    
    1st Qtr
    
    2nd Qtr
    
    3rd Qtr
    
    4th QtrTotal revenue(3)2008
    
    $
    117.9
    
    
    $
    153.2
    
    
    $
    133.1
    
    
    $
    230.02007
    
    $
    134.1
    
    
    $
    173.4
    
    
    $
    147.8
    
    
    $
    181.7Total gross profit(3)2008
    
    $
    34.3
    
    
    $
    48.3
    
    
    $
    36.8
    
    
    $
    59.02007
    
    $
    40.9
    
    
    $
    60.7
    
    
    $
    44.2
    
    
    $
    63.8(Loss) income from continuing operations(4)2008
    
    $
    (2.8
    )
    
    $
    30.4
    
    
    $
    0.1
    
    
    $
    24.72007
    
    $
    0.8
    
    
    $
    21.5
    
    
    $
    4.9
    
    
    $
    25.6Income (loss) from discontinued operations(1)(2)2008
    
    $
    1.3
    
    
    $
    
    
    
    $
    
    
    
    $
    2007
    
    $
    
    
    
    $
    
    
    
    $
    (0.8
    )
    
    $
    Net (loss) income2008
    
    $
    (1.5
    )
    
    $
    30.4
    
    
    $
    0.1
    
    
    $
    24.72007
    
    $
    0.8
    
    
    $
    21.5
    
    
    $
    4.1
    
    
    $
    25.6
 Earnings (loss) per share(4)
 2008 BasicContinuing operations
    
    $
    (0.13
    )
    
    $
    1.46
    
    
    $
    
    
    
    $
    1.17Discontinued operations
    
    
    0.06
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    (0.07
    )
    
    $
    1.46
    
    
    $
    
    
    
    $
    1.172008 DilutedContinuing Operations
    
    $
    (0.13
    )
    
    $
    1.44
    
    
    $
    
    
    
    $
    1.16Discontinued Operations
    
    
    0.06
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    $
    (0.07
    )
    
    $
    1.44
    
    
    $
    
    
    
    $
    1.162007 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
    
    
    $
    1.22
 
 (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 fiscal 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. In April 2008, the company entered into an agreement
with
CVS Pharmacy, Inc. (CVS), its former parent entity, pursuant to which
CVS agreed to assume any and all of Footstars obligations with respect
to the environmental remediation. The assumption by CVS eliminated the
previously recorded obligation of $1.6 million for cash consideration of
$0.9 million, resulting in a gain of $0.7 million, net of tax, included
in income from discontinued operations.(3)
    
    During the fourth quarter of fiscal 2008, the Company sold its
remaining inventory on hand for $54.2 million. Loss on liquidation of
inventory totaled $4.9 million and is included in Total Gross Profit.(4)
    
    During the fourth quarter of fiscal 2008, the Company recorded
an impairment charge $10.8 million to reduce the carrying amount of its
corporate headquarters building to its fair value of $6.2 million.(5)
    
    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-33