Footstar entered into a settlement agreement with Kmart Corporation to resolve ongoing litigation regarding the Master Agreement under which Footstar's Shoemart division operates the footwear departments in Kmart stores. The agreement was recently approved by the Bankruptcy Court. The settlement will enable Footstar to move forward in preparing for emergence from the Chapter 11 process.
Under the terms of the agreement, Footstar will pay Kmart a “cure” amount of $45 million to resolve existing claims and will restructure the terms under which Kmart is compensated for sales in the Shoemart departments, which will be based on a percentage of sales rather than a percentage of sales and profits. Footstar will retain the right to operate in Kmart stores through December 31, 2008, at which time Kmart will purchase substantially all of the remaining store inventory from Footstar at an amount equal to the book value of the inventory. Footstar's proprietary brand names will remain the property of Footstar. In addition, Kmart has agreed not to dispose of (by way of conversion, closure or otherwise) in excess of an agreed upon number of existing Kmart stores, unless Footstar is provided with compensation as provided in the settlement. Prior to the settlement, the term of the Master Agreement was due to expire in 2012.
Footstar anticipates filing a revised Plan of Reorganization in its Chapter 11 case once the settlement has been approved by the Bankruptcy Court. Absent any unanticipated additional claims, Footstar expects that the revised Plan of Reorganization will continue to provide creditors with payment in full on their claims and equity holders will retain their interests in the reorganized company.
