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TROY MI- Bankrupt footwear company Footstar Inc. will pay $45 million to Kmart to settle an ongoing dispute over whether the discount retailer could end a contract that allowed the shoe vendor to sell footwear in Kmart stores. The settlement allows Footstar to continue its plan to emerge from bankruptcy.

Under the settlement, Footstar will resolve existing claims for unpaid dividends and other damages by Kmart and restructure the way it compensates the retailer for sales by basing that compensation on 14.6% of gross shoe sales rather than a percentage of sales and profits. The agreement also shortens the footwear company’s contract term by four years to Dec. 31, 2008, after which Kmart will purchase Footstar’s remaining store inventory.

In exchange Kmart agreed to compensate Footstar if the discounter closes more than 85 existing stores in 2005, 150 in 2006 and 160 stores per calendar year in 2007 and 2008. Footstar also won the right to terminate its contract with Kmart if either the number of Kmart stores falls below 900 or gross sales fall below $450 million.

“The settlement preserves our business base for the next 3 ½ years,” Dale W. Hilpert, Footstar chairman and CEO said in a statement. “With this settlement, we are unable to put the uncertainty of the litigation behind us as we focus our full attention on concluding the Chapter 11 process.”

Mahweh, NJ-based Footstar, which also operates the footwear section of Rite Aid Corp. drug stores and distributes national brands such as Thom McCann, said it anticipates filing a revised Plan of Reorganization in its Chapter 11 case once the federal Bankruptcy Court approves the settlement. The footwear company said provided there are no new claims, it expects that the reorganization plan will provide creditors payment in full on their claims and allow equity holders to retain their interests in the reorganized company.

Last year Footstar closed 77 of its mostly mall-based Footaction stores, as well as all of its 88 Just For Feet units. Later in the year, the company sold its remaining 350 to Foot Locker as part of its reorganization.

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