<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1994
REGISTRATION NO. 33-50297
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
KMART CORPORATION
(Exact Name of Registrant as Specified in its Charter)
-------------------------
<TABLE>
<S> <C>
MICHIGAN 38-0729500
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
3100 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
(810) 643-1000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
A. N. Palizzi
Executive Vice President and
General Counsel
Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
(810) 643-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Verne C. Hampton, II Richard D. Rudder
Dickinson, Wright, Moon, Brown & Wood
Van Dusen & Freeman One World Trade Center
500 Woodward Avenue, Suite 4000 New York, New York 10048
Detroit, Michigan 48226
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH SERIES OF AMOUNT BEING OFFERING PRICE OFFERING AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
% Secured Lease Bonds Series A................ $ 42,000,000 100% $ 42,000,000 --
----------------------------------------------------------------------------------------------------------------------
% Secured Lease Bonds Series B................ $117,923,000 100% $117,923,000 --
----------------------------------------------------------------------------------------------------------------------
% Secured Lease Bonds Series C................ $ 15,577,000 100% $ 15,577,000 --
----------------------------------------------------------------------------------------------------------------------
Total........................................... $175,500,000 100% $175,500,000 $56,227.37*
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Of which $55,123.92 has been paid previously.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 1, 1994
PROSPECTUS
$175,500,000
SECURED LEASE BONDS, SERIES A, B AND C
DUE, RESPECTIVELY, JANUARY 1, 2002, JANUARY 1, 2017 AND JULY 1, 2018.
Each of the Bonds offered hereby will be secured primarily by (i) a pledge
by FGHK, Inc., a New York corporation (the "Issuer"), to The Bank of New York
(in such capacity, the "Bond Trustee") of certain notes issued as non-recourse
obligations of 24 separate Owner Trusts (as defined herein) to refinance a
portion of the purchase price of each Owner Trust's interest in one of 24
commercial properties (the "Properties") operated by Kmart Corporation ("Kmart")
or one of its subsidiaries, (ii) a present assignment by the Issuer of its
rights under the Note Indentures (as defined herein) and (iii) a present
assignment of all of the Note Trustee's (as defined below) rights and interests
in and to (a) the Leases (as defined below), (b) the Mortgages (as defined
herein) and (c) the Options to Lease (as defined herein). Three series of notes
(the "Series A Notes," the "Series B Notes" and the "Series C Notes";
collectively, the "Notes"), issued in respect of each Property, each have an
interest rate and a maturity date corresponding to a series of Bonds. The Notes
issued in respect of a Property are secured primarily by (i) a first-mortgage
lien on the appropriate Owner Trust's interest in such Property and (ii) a
present assignment of certain of the rights of the Owner Trust, as lessor under
the lease (the "Lease" and collectively for all of the Properties, the "Leases")
relating to such Property. Principal, interest and any Make-Whole Premium (as
described herein) due on the Bonds will be payable from rental payments due
under the Leases to be paid by
KMART CORPORATION
The rent payable by Kmart under the Leases will be in amounts that will be
at least sufficient to pay in full, when due, all payments of principal,
interest and any Make-Whole Premium due on the Notes, which amounts will be paid
directly to the Bond Trustee for distribution on the Bonds. The Series A Bonds,
Series B Bonds and Series C Bonds will mature, respectively, on January 1, 2002,
January 1, 2017, and July 1, 2018, and will be in the aggregate principal
amounts shown in the table below. Interest on each series of Bonds will be
payable to holders of the Bonds on January 1 and July 1 of each year, commencing
January 1, 1995, at the applicable interest rates set forth below, until the
principal amount of such series of Bonds has been repaid. The Bonds are subject
to scheduled payments of principal through the operation of a sinking fund.
Principal on the Bonds may be prepaid under certain circumstances, in whole or
in part, at a price equal to the unpaid principal amount thereof or the portion
thereof to be prepaid, plus accrued interest thereon and, in certain
circumstances, a Make-Whole Premium. For sinking fund and other prepayment
provisions, see "DESCRIPTION OF THE BONDS -- Distributions on the Bonds" herein.
ALTHOUGH PAYMENTS UNDER THE LEASES IN AMOUNTS NECESSARY TO PERMIT TIMELY
PAYMENTS OF PRINCIPAL, INTEREST AND ANY MAKE-WHOLE PREMIUM DUE ON THE NOTES ARE
DIRECT OBLIGATIONS OF KMART, NEITHER THE BONDS NOR THE NOTES REPRESENT AN
INTEREST IN OR DIRECT OBLIGATION OF, AND ARE NOT GUARANTEED BY, KMART OR ANY OF
ITS AFFILIATES. NONE OF THE BONDS, THE NOTES, THE MORTGAGES OR THE LEASES ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
Elections will be made to treat the three separate pools of assets,
consisting principally of the Series A Notes, Series B Notes and Series C Notes,
respectively, as three separate real estate mortgage investment conduits (the
"Pool A REMIC", the "Pool B REMIC" and the "Pool C REMIC", respectively; and
collectively, the "REMICs") for federal income tax purposes. As described more
fully herein, the Series A Bonds, Series B Bonds and Series C Bonds will
constitute the "regular interests" in the Pool A REMIC, Pool B REMIC and Pool C
REMIC, respectively. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
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<CAPTION>
UNDERWRITING
PRINCIPAL PRICE TO DISCOUNT AND
AMOUNT PUBLIC COMMISSIONS(1) PROCEEDS
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
% Secured Lease Bonds, Series A.................. $ 42,000,000 100% $ $
------------------------------------------------------------------------------------------------------------------
% Secured Lease Bonds, Series B.................. $117,923,000 100% $ $
------------------------------------------------------------------------------------------------------------------
% Secured Lease Bonds, Series C.................. $ 15,577,000 100% $ $
------------------------------------------------------------------------------------------------------------------
Total............................................... $175,500,000 $
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The underwriting discounts and commissions and certain expenses related to
the offering, estimated to be $ , will be paid as described herein. See
"UNDERWRITING" herein.
------------------------
The Bonds are offered by Bear, Stearns & Co. Inc. (the "Underwriter")
subject to prior sale when, as and if delivered to and accepted by the
Underwriter and subject to certain other conditions. The Underwriter reserves
the right to withdraw, cancel or modify such offer without notice and to reject
any order in whole or in part. It is expected that delivery of the Bonds will be
made in book-entry form only through the Same Day Funds Settlement System of The
Depository Trust Company ("DTC"), on or about June , 1994.
------------------------
BEAR, STEARNS & CO. INC.
June , 1994
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT LEVELS
ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Kmart is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Proxy statements, reports and other information
can be inspected and copied at the public reference facilities at the
Commission's office at 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's regional offices in Chicago (500 West Madison Avenue, Chicago, IL
60661) and New York (7 World Trade Center, 13th Floor, New York, NY 10048).
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates.
Kmart's common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Stock Exchange. Reports, proxy statements and other
information concerning Kmart can be inspected and copied at the New York Stock
Exchange, 20 Broad Street, New York, NY 10005 and at the Pacific Stock Exchange,
301 Pine Street, San Francisco, CA 94104.
Kmart has filed with the Commission a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Bonds. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. The Registration Statement may be inspected without
charge at the public-reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549, and copies thereof may be
obtained from the Commission upon payment of prescribed rates.
REPORTS TO BONDHOLDERS BY THE BOND TRUSTEE
Unless and until Definitive Bonds (as defined herein) are issued (which
will occur only under the limited circumstances described herein), certain
periodic statements concerning payments on the Bonds will be sent by The Bank of
New York, as Bond Trustee under the Bond Indenture pursuant to which the Bonds
are to be issued (as more fully described herein), to Cede & Co. ("Cede"), as
nominee of DTC, the registered holder of the Bonds. See "DESCRIPTION OF THE
BONDS -- Registration of the Bonds" and "-- Definitive Bonds" herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Kmart's Annual Report on Form 10-K for the fiscal year ended January 26,
1994 and all documents filed by Kmart pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, after the date of this Prospectus and prior to the
termination of the offering of the Bonds described herein, shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
dates of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this Prospectus modifies
or supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
KMART WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS
DELIVERED, UPON SUCH PERSON'S WRITTEN OR ORAL REQUEST, A COPY OF ANY OR ALL OF
THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS (NOT
INCLUDING EXHIBITS TO SUCH INFORMATION UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH INFORMATION). ANY SUCH REQUEST SHOULD BE
DIRECTED TO THE CORPORATE REPORTING DEPARTMENT, KMART CORPORATION, 3100 WEST BIG
BEAVER ROAD, TROY, MI 48084 (TELEPHONE NO. (810) 643-1093).
2
<PAGE> 4
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information appearing elsewhere or incorporated by reference in this Prospectus.
Certain capitalized terms used in this summary are defined elsewhere in the
Prospectus on the pages indicated in "INDEX OF PRINCIPAL TERMS" herein.
<TABLE>
<S> <C>
ISSUER............................... FGHK, Inc., a New York corporation (the "Issuer").
SECURITIES OFFERED................... $42,000,000 principal amount of % Secured Lease
Bonds, Series A, due January 1, 2002 (the "Series A
Bonds").
$117,923,000 principal amount of % Secured Lease
Bonds, Series B, due January 1, 2017 (the "Series B
Bonds").
$15,577,000 principal amount of % Secured Lease
Bonds, Series C, due July 1, 2018 (the "Series C
Bonds"; and together with the Series A Bonds and
Series B Bonds, the "Bonds").
The Bonds, together with the Series AR, Series BR and
Series CR Bonds not offered hereby, will be issued
pursuant to a Collateral Trust Indenture (the "Bond
Indenture"), to be dated as of June , 1994 (the
"Closing Date"), between the Issuer and the Bond
Trustee.
BOND TRUSTEE......................... The Bank of New York, a New York banking corporation,
will act as Bond Trustee (in such capacity, the "Bond
Trustee") under the Bond Indenture.
INTEREST PAYMENTS.................... Interest will be payable in immediately available
funds on the unpaid principal amount of each
outstanding series of Bonds at the applicable
interest rate on each January 1 and July 1 (each, a
"Payment Date"), commencing on January 1, 1995, to
holders of record ("Bondholders") as of the 15th day
of the calendar month prior to the month in which a
Payment Date occurs (each, a "Record Date"). If any
Payment Date is not a business day, any payment due
thereon shall be made on the next succeeding business
day, without any accrued interest from such Payment
Date. Interest payable on any Payment Date shall
accrue on each Bond from and including the previous
Payment Date (or from and including the Closing Date
with respect to the first Payment Date) to, but
excluding, the Payment Date. Interest shall be
calculated on the basis of a 360-day year consisting
of 12 months of 30 days each.
PRINCIPAL PAYMENTS................... Scheduled Payments of Principal. Principal on the
Bonds will be paid on scheduled Payment Dates
pursuant to a sinking fund (the "Sinking Fund") in
amounts set forth herein, commencing on January 1,
1995, with respect to the Series A Bonds, on July 1,
2002, with respect to the Series B Bonds and on July
1, 2017, with respect to the Series C Bonds. Payments
of Principal of any series pursuant to the Sinking
Fund will be made pro rata in accordance with the
denominations thereof. See "DESCRIPTION OF THE BONDS
-- Distributions on the Bonds -- Scheduled Payments
of Principal" herein.
Prepayments of Principal with a Make-Whole
Premium. The Bonds may be prepaid on any Payment
Date, at par, plus a Make-Whole Premium (as described
herein), together with interest accrued to the date
of such prepayment, in part, (a) following any
economic abandonment of a Property by
</TABLE>
3
<PAGE> 5
<TABLE>
<S> <C>
Kmart during the base term of the related Lease, but
not earlier than January 1, 2004, or (b) if a Lease
is terminated due to an unpermitted use of the
related Property involving the mining or removal of
oil, gas or minerals by an unrelated third party. See
"DESCRIPTION OF THE LEASES -- Early Termination" and
"DESCRIPTION OF THE BONDS -- Distributions on the
Bonds -- Prepayments of Principal with a Make-Whole
Premium" herein.
Prepayments of Principal at Par. The Bonds may be
prepaid in part on any Payment Date, at par, together
with interest accrued to the date of such prepayment,
in the event that (a) a Lease is terminated following
a casualty to or condemnation of the related Property
or (b) a portion of condemnation proceeds is paid to
the Note Trustee pursuant to such Lease, but such
Lease is not terminated. See "DESCRIPTION OF THE
LEASES -- Condemnation and Casualty" and "DESCRIPTION
OF THE BONDS -- Distributions on the Bonds --
Prepayments of Principal at Par" herein.
If less than all the principal amount of the Bonds
are to be prepaid, payments will be made pro rata in
the proportion that the aggregate principal amount of
each Bond bears to the aggregate amount of all Bonds
outstanding.
Optional Prepayment. Neither the Notes nor the Bonds
are subject to prepayment at the option of the Owner
Trustee or the Issuer.
SOURCE OF PAYMENT OF THE BONDS....... Payments of rent to be made by Kmart pursuant to the
Leases on each Payment Date ("Rental Payments") will
be in amounts that will be at least sufficient to pay
in full, when due, all payments of principal,
interest and any Make-Whole Premium due on the Notes,
and are to be paid pursuant to the Collateral
Assignment (as defined herein) in immediately
available funds directly to the Bond Trustee for
distribution to the Bondholders pursuant to the Bond
Indenture. The remaining amount of each Rental
Payment shall be distributed to the Note Trustee for
distribution pursuant to the Note Indentures. In the
event that on any Payment Date, the amount actually
received by the Bond Trustee is less than the amount
necessary to provide for such payments on the Bonds,
the Bond Trustee shall only be obligated to
distribute to the Bondholders such amounts received
on such Payment Date, which shall be applied pro rata
based on the amount of interest, principal and any
Make-Whole Premium currently payable on the Bonds.
Any overdue payments, plus accrued interest at a rate
with respect to each series of Bonds equal to 1%
above the applicable rate shown on the cover hereof,
shall be distributed to Bondholders on the day such
overdue amounts are received by the Bond Trustee. See
"DESCRIPTION OF THE BONDS -- Distributions on the
Bonds" herein. Although Rental Payments are direct
obligations of Kmart, the Bonds are not direct
obligations of and are not guaranteed by Kmart.
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
SECURITY............................. Security for the Bonds. The Bonds will be equally and
ratably secured by (i) a pledge (the "Pledge") by the
Issuer to the Bond Trustee of the three series of
notes (the "Series A Notes", "Series B Notes" and
"Series C Notes", and collectively, the "Notes")
relating to each Property issued on a non-recourse
basis by one of 24 trusts (the "Owner Trusts") that
were established pursuant to 24 separate but
substantially similar trust agreements (each, a
"Trust Agreement"), between the owner trustee named
therein, acting thereunder not in its individual
capacity but solely as trustee of the related Owner
Trust (in such capacity, the "Owner Trustee") and the
holder or holders of the beneficial interest in each
Owner Trust (the "Owner Participant") to finance the
sale-leaseback transactions described herein (the
"Sale-Leaseback Transactions"), (ii) a present
assignment (the "Note Assignment") by the Issuer to
the Bond Trustee of its rights under each Note
Indenture (as defined below) and (iii) a present
assignment with respect to each Property (each, a
"Collateral Assignment") to the Bond Trustee of all
of the Note Trustee's rights and interests in and to
(a) the Leases, (b) the Mortgages (as defined below)
and (c) the Options to Lease (as defined herein). The
Series A Note, Series B Note and Series C Note issued
in respect of each Property will have a maturity date
and an interest rate corresponding to those on the
Series A Bonds, Series B Bonds and Series C Bonds,
respectively. The aggregate principal amount of each
series of Notes with respect to all of the Properties
will be the same as the aggregate principal amount of
the corresponding series of Bonds. See "STRUCTURE OF
THE TRANSACTION", "DESCRIPTION OF THE BONDS" and
"DESCRIPTION OF THE NOTES" herein.
Security for the Notes. The Notes with respect to
each Property have been issued by the respective
Owner Trustee under 24 separate "Trust Indenture,
Assignment of Lease and Rents and Security
Agreements" (each, a "Note Indenture"), each of which
relates to an individual Property. Each Note and Note
Indenture will be amended and restated concurrently
with the issuance of the Bonds. The Bank of New York
is acting as Note Trustee under each of the Note
Indentures (in such capacity, the "Note Trustee").
The trust estate created by each Note Indenture (each
a "Note Trust Estate") consists primarily of (i) a
present assignment to the Note Trustee of the Owner
Trustee's rights and interests in and to (subject to
Excepted Rights and Excepted Payments, each as
defined herein) the Lease relating to such Property,
including the right to receive payments of rent under
such Lease that will be, as of the Closing Date, in
amounts at least sufficient to pay in full, when due,
all payments of principal, interest and any
Make-Whole Premium due on the Notes and of the rights
of the Owner Trustee pursuant to the related Option
to Lease (each, a "Lease Assignment") and (ii) a
first-mortgage lien on the Owner Trust's interest in
the related Property (the "Mortgage"), subject to the
rights of Kmart under the Lease of
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
such Property. See "DESCRIPTION OF THE NOTES --
Security" herein. Upon the occurrence of a Note
Indenture Event of Default (as defined herein), the
Note Trustee may, pursuant to the terms of the Note
Indenture, exercise its rights with respect to the
related Note Trust Estate for the equal and ratable
benefit of all of the holders of the Notes issued
under or secured by the related Note Indenture. So
long as the Notes are subject to the lien of the Bond
Indenture, the Bond Trustee shall be entitled to
exercise all the rights, privileges and entitlements
of the Noteholders under each Note Indenture and the
Bond Trustee shall be entitled to exercise all the
rights of the Note Trustee under the Leases,
Mortgages and Options to Lease. None of the Leases,
the Notes or the Mortgages are cross-defaulted or
cross-collateralized. See "STRUCTURE OF THE
TRANSACTION" and "DESCRIPTION OF THE PROPERTIES"
herein.
The Bondholders will have no recourse against Kmart
(except pursuant to any remedies available to the
Bond Trustee and the Bondholders upon the occurrence
and continuation of a Lease Event of Default (as
herein defined)), and will have no personal recourse
against the Owner Trustees, the Owner Participant,
the Remainder Purchaser, the Note Trustee, the Bond
Trustee, the Issuer or their respective affiliates.
SALE-LEASEBACK TRANSACTION........... Each of the Owner Trusts has acquired from Kmart a
separate interest in one of 24 commercial properties
(the "Properties") consisting of either (i) a 30-year
estate-for-years interest in the land comprising one
of 22 of the Properties (collectively, the "Estate
for Years Interests") or (ii) a leasehold estate in
excess of 25 years in the land comprising one of the
remaining two Properties (collectively, the
"Leasehold Estates") and, with respect to each of the
Properties, the improvements thereon. Each Owner
Trust has leased its respective Estate for Years
Interest or sublet its respective Leasehold Estate
(and, in each case, the improvements thereon) to
Kmart pursuant to a net lease (each, a "Lease")
having an interim term from December 27, 1993 to
December 31, 1993, a base term of 25 years, which
commenced on January 1, 1994, and options to renew.
Concurrently with the sale of the Estate for Years
Interests to the appropriate Owner Trusts, Kmart sold
a remainder interest in such Properties, which
commences upon the expiration of the related Estate
for Years Interest, to FGHK, Ltd., A Wyoming Limited
Liability Company (the "Remainder Purchaser").
Approximately 90% of the aggregate purchase price of
$190,923,922 paid by the Owner Trusts for their
interests in the Properties was financed by the
issuance to a single noteholder (the "Initial
Noteholder") of certain notes (the "Interim Notes")
secured by the Properties pursuant to an interim
financing arrangement (the "Interim Financing") and
the balance was obtained from equity investments in
the Owner Trusts by the Owner Participant. The
Initial Noteholder will assign the Interim Notes to
the Issuer in exchange for a portion of the proceeds
from the offering of the Bonds. The remainder of the
proceeds from the offering of the Bonds will be used
to
</TABLE>
6
<PAGE> 8
<TABLE>
<S> <C>
finance an additional amount of the aggregate
purchase price paid by the Owner Trusts for the
Properties and such amount will be subsequently
distributed to the Owner Participant.
BOOK-ENTRY REGISTRATION.............. The Bonds initially will be issued in fully
registered form only, in the name of Cede & Co.,
("Cede") as the nominee of The Depository Trust
Company ("DTC"). No person acquiring a beneficial
interest in the Bonds (a "Bond Owner") will be
entitled to receive a bond representing such Bond
Owner's interest in the Bonds, except in the event
that Definitive Bonds are issued in the limited
circumstances described herein. See "DESCRIPTION OF
THE BONDS -- Definitive Bonds" herein.
DENOMINATIONS........................ The Bonds will be issued in minimum denominations of
$1,000 and integral multiples thereof. The
denomination of each Bond signifies a Bondholder's
pro rata share of the aggregate principal amount of
such series of Bonds. See "DESCRIPTION OF THE BONDS
-- General" herein.
USE OF PROCEEDS...................... The offering of the Bonds is intended to enable the
Owner Trusts to refinance their purchase of their
respective interests in the Properties from Kmart,
including certain costs and expenses associated
therewith. A portion of the proceeds of the sale of
the Bonds (the "Proceeds") will be used by the Issuer
to purchase the Interim Notes and the remainder will
be distributed to the Owner Participant. The proceeds
from the sale of the Properties, including the sale
of the residual interests, have been used by Kmart
for general corporate purposes. See "STRUCTURE OF THE
TRANSACTION" and "USE OF PROCEEDS" herein.
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS..................... Elections will be made to treat three separate pools
of the assets held subject to the Bond Indenture (the
"Asset Pools"), consisting principally of the Series
A Notes, Series B Notes, Series C Notes and, as they
apply to the related Series of Notes, the Pledge, the
Note Assignment and the Collateral Assignments as
three separate real estate mortgage investment
conduits (the "Pool A REMIC", the "Pool B REMIC" and
the "Pool C REMIC", respectively, and collectively,
the "REMICs") for federal income tax purposes. As
described more fully herein, the Series A Bonds,
Series B Bonds and Series C Bonds will constitute the
"regular interests" in the Pool A REMIC, Pool B REMIC
and Pool C REMIC, respectively, and the Secured Lease
Bonds, Series AR, Series BR and Series CR
(collectively, the "Residual Bonds"), which are not
offered hereby, will constitute the "residual
interests" in the respective REMICs. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" herein.
The Bonds will be taxable obligations under the
Internal Revenue Code of 1986, as amended (the
"Code"). The amount of income recognized in any
period by the original purchaser of a Bond will equal
the amount of interest accrued on such Bond in
accordance with its terms. Bond Owners must use the
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C>
accrual method of accounting with respect to their
income on the Bonds, even if they otherwise use the
cash method.
The Bond Trustee initially will act as the tax
administrator for the Bonds (the "Tax
Administrator"), as described in "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein, although the Bond
Trustee may appoint an agent to act as Tax
Administrator at a future date.
In general, as a result of the qualification of each
Asset Pool as a REMIC, Bonds held by a mutual savings
bank or a domestic building and loan association
(each, a "Thrift Institution") will constitute
"qualifying real property loans" within the meaning
of Code Section 593(d)(1). In addition, Bonds held by
a real estate investment trust (a "REIT") generally
will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and interest on
the Bonds generally will be considered "interest on
obligations secured by mortgages on real property or
on interests in real property" within the meaning of
Code Section 856(c)(3)(B). However, Bonds held by a
regulated investment company (a "RIC") will not
constitute "Government securities" within the meaning
of Code Section 851(b)(4)(A)(i), and Bonds will not
constitute assets set forth in Code Section
7701(a)(19)(C) for domestic building and loan
associations.
For further information regarding the federal income
tax consequences of investing in each series of
Bonds, see "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" herein.
ERISA CONSIDERATIONS................. Subject to certain conditions specified herein, the
Bonds may be purchased by employee benefit plans that
are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
Fiduciaries of employee benefit plans subject to
ERISA or Code Section 4975 should carefully review
with their legal advisors whether the purchase or
holding of the Bonds could give rise to a transaction
prohibited or otherwise not permissible under ERISA
or the Code. See "ERISA CONSIDERATIONS" herein.
RATINGS.............................. It is a condition to the issuance of the Bonds
offered hereby that they be rated at least "A3" by
Moody's Investors Services, Inc. ("Moody's"), "BBB+"
by Standard and Poor's Ratings Group ("S&P") and "A-"
by Duff and Phelps Credit Rating Co. ("D&P"). A
security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization. Each security rating should be
evaluated independently of similar ratings on
different types of securities. The ratings take into
account the structural and legal aspects associated
with the Bonds, the characteristics of the Leases,
and the credit quality of Kmart. The ratings on the
Bonds do not address the payment to the Bondholders
of any Make-Whole Premium or any payment to the
Bondholders of interest at the Default Rate.
</TABLE>
8
<PAGE> 10
KMART
BACKGROUND
Kmart Corporation ("Kmart" or "Company") is one of the world's largest mass
merchandise retailers. The dominant portion of Kmart's business consists of the
Kmart Group which as of January 26, 1994 operated a chain of 2,323 Kmart
discount stores with locations in each of the 50 United States and Puerto Rico.
The Kmart Group's international operations consisted primarily of 127 Kmart
stores in Canada and 13 department stores located in the Czech Republic and
Slovakia as of January 26, 1994. The Central European stores were acquired in
mid-1992 and represent Kmart's entry into that market. Kmart is developing
advanced distribution methods and merchandising skills to modernize, refurbish
and streamline operations in the two Central European countries. As part of its
international expansion strategy, the Kmart Group has formed joint ventures in
Mexico and Singapore and expects to open stores in those countries in 1994.
Kmart also holds significant equity interests in Coles Myer Ltd., Australia's
largest retailer, and substantially all of the Meldisco subsidiaries of Melville
Corporation, which operate the footwear departments in domestic Kmart stores.
The Kmart Group also includes the operations of PayLess Drug Stores Northwest,
Inc., which was sold in the first quarter of 1994, and PACE Membership
Warehouse, Inc., substantially all of the assets of which were sold in January
1994, each of which have been presented as discontinued operations in the
Company's consolidated financial statements.
Kmart's Specialty Retail Groups consist of the Borders-Walden Group, the
Builders Square Group, the OfficeMax Group and The Sports Authority Group. The
Borders-Walden Group is a leading book retailer in the United States, and is
comprised of the Company's Borders, Inc. ("Borders") and Walden Book Company,
Inc. ("Walden") subsidiaries. As of January 23, 1994, Borders operated 44 large
format superstores in 22 states and the District of Columbia, each of which is
designed to be the premier book retailer in its market, and Walden, which is the
largest operator of mall-based bookstores in the United States, operated 1,159
book stores in 50 states and the District of Columbia. Although Borders and
Walden will continue to operate independently, Borders and Walden recently have
been combined under common executive leadership in order to realize synergies in
certain areas, including in the development of inventory control systems and in
merchandise distribution. The Builders Square Group, comprised of the Company's
Builders Square, Inc. subsidiary operated 177 home improvement stores in 26
states and Puerto Rico at January 23, 1994, of which 130 were Builders Square I
Stores and 47 were Builders Square II Stores. The business strategy of Builders
Square is to phase out its self-service warehouse-style home improvement stores
and operate large format superstores that emphasize customer service and provide
an extensive selection of quality products and services to repair, remodel,
redecorate and maintain both home and garden. The OfficeMax Group is one of the
largest operators of high-volume, deep discount office products superstores in
the United States, and is comprised of the Company's OfficeMax, Inc. subsidiary.
It operated 328 superstores in 38 states as of January 22, 1994. The Sports
Authority Group is the largest operator of large format sporting goods stores in
the United States in terms of both sales and number of stores and is also the
largest full-line sporting goods retailer in the United States in terms of
sales. It is comprised of the Company's The Sports Authority, Inc. subsidiary
which operated 80 sporting goods megastores at January 23, 1994.
Kmart was incorporated under the laws of the State of Michigan on March 9,
1916. The principal executive offices of Kmart are located at 3100 West Big
Beaver Road, Troy, Michigan 48084, and its telephone number is (810) 643-1000.
SPECIALTY RETAIL STOCK PROPOSAL
Kmart intends to submit for approval to its stockholders at the Annual
Meeting of Stockholders to be held on June 3, 1994, a proposal to amend its
Restated Articles of Incorporation to authorize its Board of Directors to issue
any of four new series of common stock that are intended to reflect the
performance of each of the specialty retail businesses (collectively, the
"Specialty Retail Stock"). The amendment would, among other things, increase the
number of authorized shares of common stock from 1.5 billion to 3.0 billion;
redesignate 1.5 billion shares of existing common stock as Kmart Group Common
Stock ("Kmart Stock"); and authorize 1.5 billion shares of common stock to be
available for designation in series by resolution of the
9
<PAGE> 11
Board of Directors as additional shares of Kmart Stock and/or any of the four
new series of Specialty Retail Stock. While each series of Specialty Retail
Stock would constitute common stock of the Company and would continue to be
subject to risks associated with an investment in the Company, each is intended
to reflect the separate performance of the business of the Borders-Walden Group,
the Builders Square Group, the OfficeMax Group and The Sports Authority Group.
If the stockholders approve the Specialty Retail Stock proposal, the
Company currently intends, subject to prevailing market and other conditions, to
offer shares of each series of Specialty Retail Stock for cash in separate
initial public offerings and to allocate the net proceeds of the offerings to
the Kmart Group to repay outstanding indebtedness of the Company and for general
corporate purposes. The timing, sequence and size of such offerings and the
price at which such shares would be sold would be determined by the Board,
without further approval of stockholders prior to each offering based upon then
prevailing market and other conditions; however, it is currently contemplated
that the first offering of shares of a series of Specialty Retail Stock would be
commenced shortly after the Annual Meeting and that offerings for shares of the
other series of Specialty Retail Stock would be made sequentially thereafter. In
each such offering, the Company would initially offer to the public shares of
each series of Specialty Retail Stock that would be intended to represent
approximately 20% to 30% of the equity value of the Company attributed to the
relevant Specialty Retail Group as determined by the Board at the time of such
offering. Therefore, it is expected that the Company would retain and attribute
to the Kmart Group a 70% to 80% retained interest in each Specialty Retail
Group. The terms of each offering would be determined by the Board and the
underwriters of such offering based upon prevailing market and other conditions;
the financial condition and results of operations of the relevant Specialty
Retail Group; the history of and prospects for the relevant Specialty Retail
Group; the specialty retail industry and the segment of that industry in which
the relevant Specialty Retail Group competes; the management and operations of
the relevant Specialty Retail Group; the progress of the relevant Specialty
Retail Group in implementing its business strategy; the foregoing factors in
relation to market values of other companies engaged in similar businesses; and
the financial condition of the Company as a whole. In addition to or in lieu of
any offering, the Board reserves the right to issue shares of any series of
Specialty Retail Stock as a distribution on the Kmart Stock, although the Board
has no current intention to do so. The determination of whether to proceed with
an offering of any series of Specialty Retail Stock would be made by the Board
based on, among other things, the proposed terms of such offering and then
prevailing market and other conditions. The Board reserves the right not to
proceed with any or all of the offerings, without further approval of
stockholders, if it determines that the consummation of any such offering or
offerings is not in the best interest of the Company.
FINANCIAL INFORMATION
On January 5, 1994, the Board of Directors approved a restructuring plan
involving the Kmart Group (including Kmart Canada), the Builders Square Group
and the Borders-Walden Group. As a result, in the fourth quarter of 1993, Kmart
recorded a charge (Store Restructuring and Other Charges) to earnings of $1,348
million before taxes. Net of taxes, the charge was $862 million. The provision
included anticipated costs associated with Kmart stores which will be closed and
relocated, enlarged or refurbished in the United States and Canada, the closing
and relocation of certain Builders Square stores and the closing of
underperforming Walden stores. These costs, which represent approximately 85% of
the total, include lease obligations for store closings as well as fixed asset
writedowns, primarily furniture and fixtures, and inventory dispositions for all
affected stores. The remainder of the charge is for costs related to certain
changes to Walden's accounting policies in connection with its combination with
Borders, re-engineering programs (principally severance) and non-routine legal
contingency accrual.
In January 1994, PACE Membership Warehouse, Inc. ("PACE") sold the assets
and lease obligations of 93 of its warehouses and virtually all of the inventory
and membership files in the 34 warehouses not included in the transaction to
Sam's Club, a division of Wal-Mart, Stores, Inc. for $774 million. The book
value of the assets sold to Wal-Mart was $624 million. Operations of the 34
remaining PACE sites not included in the transaction were discontinued and PACE
is in the process of evaluating and marketing these leased sites as well as
leased premises for unopened warehouses and corporate facilities. Included in
the loss on the
10
<PAGE> 12
disposition of PACE was unamortized goodwill of $395 million, expected remaining
lease obligations in the warehouses not sold, other PACE liabilities and a
provision for additional costs anticipated during the wind-down of PACE
operations. The Company has accounted for PACE as a discontinued operation in
its financial statements.
In addition, Kmart sold its PayLess Drug Stores Northwest, Inc. ("PayLess")
subsidiary to Thrifty PayLess Holdings, Inc. ("TPH") and its subsidiary Thrifty
PayLess, Inc. for approximately $595 million in cash, $100 million in senior
notes of TPH and approximately 46% of the common equity of TPH. The book value
of PayLess' net assets sold was $1,186 million at January 26, 1994. The
structure of the sale was designed to maximize value received for PayLess. It is
Kmart's intention to divest substantially all of its interest in TPH within one
year. Management expects the disposition to be achieved either through a private
offering or other alternative means. Accordingly, Kmart has reported PayLess as
a discontinued operation in its financial statements and has recorded its
investment in TPH at anticipated net realizable value.
Kmart has called for early redemption $300 million of its 8 3/8% debentures
due January 15, 2017, using the proceeds of the sale of PayLess to redeem the
issue. The resulting redemption premium and associated cost of $18 million, net
of applicable income taxes, was recorded in 1993 as part of the loss on disposal
of the discontinued operations. The $300 million principal amount has been
included in the current portion of long-term debt. Kmart believes the effect of
recognizing the charge in 1993 rather than in the first quarter of 1994 would
not have a material effect on the results of operations for its 1993 or 1994
fiscal years.
Net income (loss) from continuing retail operations in 1993 was $(328)
million, as compared to $882 million and $789 million in 1992 and 1991,
respectively. Excluding the net of tax $862 million store restructuring and
other charges, 1993 net income from continuing retail operations was $534
million. The decrease in net income from continuing retail operations in 1993,
exclusive of the store restructuring and other charges, resulted primarily from
the inventory reduction program and gross margin pressure in U.S. Kmart stores.
Net income (loss) from discontinued operations in 1993 was $(81) million,
as compared to $59 million and $70 million in 1992 and 1991, respectively.
Discontinued operations include the results of PayLess and PACE, which have been
reclassified to reflect their respective dispositions announced in the fourth
quarter of 1993. The $81 million after-tax loss from the operation of
discontinued businesses in 1993 was the result of a significant net operating
loss at PACE which more than offset net income from PayLess. Additionally, in
1993, an after-tax loss of $521 million was realized from the disposal of
discontinued businesses.
Sales in 1993 were $34.16 billion, an increase of 10.1% from the $31.03
billion in the preceding year, as restated to exclude the PACE and PayLess
businesses.
As of May 31, 1994, Moody's, S&P and D&P assigned the ratings of "A3,"
"BBB+" and "A-", respectively, to the senior unsecured debt of Kmart. There can
be no assurance that the ratings set forth above may not be changed by the
respective rating agency at any time.
11
<PAGE> 13
KMART CORPORATION
SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1989(1) 1990 1991 1992 1993(2)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Sales........................................ $27,670 $28,133 $29,042 $31,031 $34,156
Cost of merchandise sold..................... 20,310 20,614 21,243 22,800 25,646
Selling, general and administrative
expenses.................................. 6,277 6,435 6,603 6,875 7,636
Interest expense -- net...................... 353 384 384 414 477
Income (loss) from continuing retail
operations before income taxes............ 444 1,070 1,189 1,327 (550)
Net income (loss) from continuing retail
operations................................ 282 712 789 882 (328)
Ratio of earnings from continuing retail
operations to fixed charges (3)........... 1.8 2.9 3.0 3.0 N/A
Balance Sheet (at end of period):
Working capital.............................. $ 3,685 $ 3,519 $ 4,682 $ 5,014 $ 4,123
Merchandise inventories...................... 6,933 6,891 7,546 8,752 7,252
Total assets................................. 13,145 13,899 15,999 18,931 17,504
Long-term debt............................... 1,480 1,701 2,287 3,237 2,227
Capital leases............................... 1,549 1,598 1,638 1,698 1,720
Shareholders' equity......................... 4,972 5,384 6,891 7,536 6,093
</TABLE>
-------------------------
(1) Results of operations for 1989 include a pre-tax provision of $640 million
($422 million net of tax) for store restructuring and other charges.
(2) Results of operations for 1993 include a pre-tax provision of $1,348 million
($862 million net of tax) for store restructuring and other charges.
(3) Fixed charges represent total interest charges, a portion of operating
rentals representative of the interest factor and amortization of debt
discount and expense. The deficiency of income from continuing retail
operations versus fixed charges was $581 million for the fiscal year ended
January 26, 1994.
FIRST QUARTER 1994 FINANCIAL RESULTS
Net income from continuing retail operations for the 13 weeks ended April
27, 1994 declined to $18 million from $58 million for the 13 weeks ended April
28, 1993 as restated to exclude the discontinued PACE and PayLess businesses and
before an extraordinary item and accounting changes. First-quarter sales reached
$7.81 billion, an increase of 6.2% from $7.35 billion for the same period in
1993.
KMART CORPORATION
SALES AND OPERATING INCOME
13 WEEKS ENDED APRIL 27, 1994 AND APRIL 28, 1993
(MILLIONS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
APRIL 27, APRIL 28,
1994 1993
--------- ---------
<S> <C> <C>
Sales...................................................................... $ 7,810 $ 7,352
Cost of merchandise sold................................................... 5,840 5,466
Selling, general and administrative expenses............................... 1,886 1,744
Interest expense -- net.................................................... 124 122
Income from continuing retail operations before income taxes............... 28 83
Net income from continuing retail operations............................... 18 58
</TABLE>
12
<PAGE> 14
DIAGRAM OF TRANSACTION STRUCTURE
Footnotes to Diagram:
(A) On December 27, 1993, each of the Owner Trusts acquired an interest in one
of the Properties from Kmart and leased such Property back to Kmart. Kmart
received the entire purchase price for such interest in each Property from
the appropriate Owner Trustee.
(B) On December 27, 1993, Kmart sold a remainder interest in each of the
Properties which are subject to an Estate for Years Interest, commencing
upon the expiration of the related Estate for Years Interest, to the
Remainder Purchaser in exchange for a cash payment.
(C) On December 27, 1993, the Remainder Purchaser granted each appropriate Owner
Trustee an option to lease the land underlying the related Property
commencing on the expiration of the related Estate for Years Interest in
exchange for a cash payment.
(D) On December 27, 1993, each Owner Trustee issued three Interim Notes to the
Initial Noteholder pursuant to a Note Indenture, evidencing the interim
financing of a portion of the purchase price for the related Property.
(E) As security for the three Interim Notes relating to a particular Property,
on December 27, 1993, the appropriate Owner Trustee, among other things,
executed and delivered a Mortgage on such Property to the Note Trustee and
assigned certain of its rights under the related Lease on such Property,
including its rights to receive Rental Payments, and the Option to Lease to
the Note Trustee.
(F) On the Closing Date, the Initial Noteholder will assign the Interim Notes
to the Issuer, each of the Notes and Note Indentures will be amended and
restated.
(G) On the Closing Date, the Issuer will issue the Bonds to the Bondholders
pursuant to the Bond Indenture, in exchange for the proceeds therefrom,
which will be paid to the Initial Noteholder for the Interim Notes.
(H) As security for the Bonds, the Bond Trustee, on the Closing Date, will
receive from the Issuer a pledge of the Notes and a present assignment of
its interest in, to and under the Note Indentures.
(I) As security for the Bonds, on the Closing Date, the Bond Trustee will
receive from the Note Trustee assignments of its rights and interests in,
to and under (i) the Leases, as amended on the Closing Date, (ii) the
Mortgages, as amended on the Closing Date, and (iii) the Options to Lease.
(J) On each Payment Date, Kmart will make Rental Payments directly to the Bond
Trustee.
(K) On each Payment Date, payments of principal, interest and any Make-Whole
Premium due on the Notes derived from the rental payments received from
Kmart shall be distributed by the Bond Trustee to the Bondholders as
payments of principal, interest and any Make-Whole Premium due on the
Bonds.
(L) On each Payment Date, the Bond Trustee shall transfer to the Note Trustee
and the Note Trustee shall distribute to the Owner Trustees amounts
constituting any remaining amount of Rental Payments not otherwise
distributed to the Bondholders as set forth in the immediately preceding
footnote.
See "STRUCTURE OF THE TRANSACTION" herein for a more detailed description of
the transaction set forth in the foregoing diagram.
13
<PAGE> 15
STRUCTURE OF THE TRANSACTION
On December 27, 1993, each of the 24 Owner Trusts, the beneficiary of each
of which is the Owner Participant, acquired from Kmart an interest in one of the
Properties, consisting of either (i) a Leasehold Estate or (ii) an Estate for
Years Interest, in each case including the improvements on such Property, for an
aggregate purchase price of $190,923,922. Each Owner Trust immediately leased
its Property to Kmart, pursuant to a Lease which had an interim term from
December 27, 1993 until December 31, 1993, a base term of 25 years which
commenced on January 1, 1994, and options to renew. The Leases are not
cross-defaulted. At the same time as the sale of the Estate for Years Interests,
Kmart sold a remainder interest in the land underlying the Estate for Years
Interests, commencing on the expiration of the Estates for Years Interests, to
the Remainder Purchaser. In consideration of a cash payment, the Remainder
Purchaser granted the respective Owner Trusts options (the "Options to Lease")
to lease the land underlying its Property from the Remainder Purchaser for
additional terms commencing on the expiration of the Estate for Years Interests.
The transactions set forth in this paragraph are collectively referred to herein
as the Sale-Leaseback Transaction.
Each Owner Trust obtained approximately 10% of the purchase price for its
interest in the related Property from an equity investment by the Owner
Participant, and the remaining amount was financed by the Initial Noteholder
pursuant to the Interim Financing. As security for the Interim Financing, each
Owner Trust issued three Interim Notes with respect to each Property in favor of
the Initial Noteholder. The Interim Notes with respect to each Property were
issued pursuant to, and secured by, a Note Indenture. Each Owner Trustee also
granted a Mortgage on each Property to the Note Trustee for the benefit of the
Noteholders. The Note Trust Estate of each Note Indenture consists primarily of
(i) the Mortgage with respect to the related Property and (ii) the Lease
Assignment including the right to receive rents on the related Lease.
On the Closing Date, the Issuer will acquire the Interim Notes from the
Initial Noteholder in exchange for a portion of the proceeds from the offering
of the Bonds. The remainder of such proceeds will be used to finance an
additional amount of the aggregate purchase price paid by the Owner Trusts for
the Properties and will be subsequently distributed to the Owner Participant.
Concurrently with the Issuer's acquisition of the Interim Notes, each Lease will
be amended and each Note Indenture will be amended and restated in order to
remove terms specific to the Interim Financing, to increase the aggregate
principal amount of the Notes, to provide for the issuance of the Notes and
Bonds and to ensure that Rental Payments will be at least sufficient to pay in
full, when due, all payments of principal, interest and any Make-Whole Premium
due on the Bonds. See "DESCRIPTION OF THE LEASES" and "DESCRIPTION OF THE NOTES"
herein.
Each Note Indenture and Mortgage provides for recourse only with respect to
the related Note Trust Estate. None of the Notes, the Note Indentures or the
Mortgages are cross-defaulted or cross-collateralized.
The Issuer will issue the Bonds on a non-recourse basis pursuant to, and
secured by, the Bond Indenture. The trust estate of the Bond Indenture will
consist primarily of (i) the Pledge, (ii) the Note Assignment and (iii) the
Collateral Assignments. The Series A Note, Series B Note and Series C Note
issued in respect of each Property will have a maturity date and an interest
rate corresponding to those on the Series A Bonds, Series B Bonds and Series C
Bonds, respectively. The aggregate principal amount of each series of Notes with
respect to all of the Properties will be the same as the aggregate principal
amount of the corresponding series of Bonds.
The Owner Trusts have agreed not to create liens with respect to their
respective interests in the Properties, except for liens expressly permitted by
the Note Indentures, the Mortgages or the Leases (including certain easements
which do not materially reduce the value of the Properties). The interests of
the Remainder Purchaser in the Properties are not subject to the liens of the
Note Indentures and the Mortgages. For information regarding the Properties, see
"DESCRIPTION OF THE PROPERTIES" herein.
The Rental Payments payable by Kmart under the Leases, as amended as of the
Closing Date, will be in amounts that will be at least sufficient to pay in
full, when due, all required payments of principal, interest and any Make-Whole
Premium due on the Notes, and shall be paid to the Bond Trustee in immediately
available funds on each Payment Date. On each such date, upon receipt by the
Bond Trustee of the Rental Payments
14
<PAGE> 16
from Kmart, the Bond Trustee shall (i) distribute funds equal to the amount of
all payments of principal, interest and any Make-Whole Premium due on the Notes
to the Bondholders, and (ii) transfer any amounts in excess of amounts
distributed to the Bondholders pursuant to clause (i) to the Note Trustee for
distribution to the appropriate Owner Trustee as set forth in the Note
Indentures. See "DESCRIPTION OF THE NOTES -- Security" herein. The Bonds will be
payable solely from amounts paid under the Leases and from amounts realized from
the exercise of remedies under the Note Indentures, the Mortgages or the Leases,
and will be without recourse to the general credit of Kmart, the Issuer, the
Owner Trustees or the Owner Participant.
A more detailed description of the financing arrangements and the
Properties is set forth below under the headings "DESCRIPTION OF THE
PROPERTIES", "DESCRIPTION OF THE LEASES", "DESCRIPTION OF THE BONDS" and
"DESCRIPTION OF THE NOTES" herein. The statements appearing in this section and
under those headings are subject to the detailed provisions of the documents
being described, the respective copies or forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. Such
documents are incorporated by reference herein and references to such documents
are qualified in their entirety by the provisions of such documents.
USE OF PROCEEDS
The offering of the Bonds is intended to enable the Owner Trusts to
refinance their purchase of their respective interests in each of the Properties
from Kmart, including certain costs and expenses associated therewith. A portion
of the Proceeds will be used by the Issuer to purchase the Interim Notes and the
remainder will be distributed to the Owner Participant. The proceeds from the
sale of the Properties, including the sale of the remainder interests, have been
used by Kmart for general corporate purposes. See "STRUCTURE OF THE TRANSACTION"
herein.
DESCRIPTION OF THE PROPERTIES
The Properties consist of 19 Kmart store locations (including two
combination general-merchandise and grocery Super Kmart Centers), one apparel
warehouse and four Builders Square store locations. On December 27, 1993, Kmart
assigned its rights as lessee under the four leases relating to the Builders
Square
15
<PAGE> 17
locations to its Builders Square, Inc. subsidiary. Certain information regarding
each of the Properties is set forth in the following table:
<TABLE>
<CAPTION>
FACILITY SIZE LOT SIZE
KMART STORE LOCATIONS (SQ. FT.) (ACRES) OPENING DATE
---------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
Crescent City, CA........... 91,305 6.82 April 1993
Folsom, CA.................. 108,255 9.47 April 1993
Watertown, NY............... 120,727 3.57 April 1993
Galesburg, IL............... 94,970 2.43 November 1992
Kenai, AK................... 146,759 10.70 July 1993
Fairbanks, AK............... 146,300 11.80 October 1993
Marina, CA.................. 90,854 7.77 October 1993
Santee, CA.................. 104,551 8.73 November 1993
San Diego, CA............... 107,210 Ground Lease August 1993
Moorpark, CA................ 108,830 Ground Lease November 1993
Manteca, CA................. 107,489 7.95 May 1993
Fairlea, WV................. 90,933 9.28 May 1993
Sunrise, FL................. 108,408 11.53 November 1993
Perris, CA.................. 116,955 9.95 November 1993
Exmore, VA.................. 94,900 13.64 November 1993
Tustin, CA.................. 108,413 9.10 November 1993
Warwick, RI................. 113,113 13.79 November 1993
SUPER KMART CENTER LOCATIONS
----------------------------
Lorain, OH.................. 193,193 28.32 October 1993
Yuma, AZ.................... 191,271 21.58 November 1993
BUILDERS SQUARE LOCATIONS
----------------------------
Fort Myers, FL.............. 107,400 12.29 July 1993
San Antonio, TX............. 106,881 10.47 May 1993
Tulsa, OK................... 80,229 8.62 October 1986
Austin, TX.................. 108,028 10.08 February 1993
APPAREL WAREHOUSE LOCATION
----------------------------
Forest Park, GA............. 227,401 19.57 October 1992
</TABLE>
APPRAISALS
All of the Properties were inspected between June 2, 1993 and November 1,
1993 and were valued on December 27, 1993 at the request of the Owner
Participant by Marshall and Stevens Incorporated, an independent appraiser, in
accordance with the requirements of the Code of Professional Ethics and
Standards of Professional Conduct of the Appraisal Institute and the Appraisal
Foundation's Uniform Standards of Professional Appraisal Practice. As a result
of its appraisals, Marshall and Stevens Incorporated has determined that, as of
the date of the appraisal thereof, assuming that those Properties which were not
completed at that time were completed substantially in accordance with the plans
and specifications therefor, the fair market value of each Property on the open
market and as unencumbered by the related Lease is not less than the amount of
the purchase price financed by the proceeds of the Interim Notes, except with
respect to the Properties located in Tustin, California, Crescent City,
California and Forest Park, Georgia. With respect to those three Properties,
Marshall and Stevens Incorporated has also determined that, as of the appraisal
date thereof, the fair market value of each such Property as encumbered by the
related Lease is not less than the amount of the purchase price financed by the
proceeds of the Interim Notes of each such Property. The fair market values of
the Tustin, Crescent City and Forest Park Properties as encumbered by the
related Leases reflect an additional premium value attributable to the rents
payable by Kmart.
None of Kmart, the Issuer, the Underwriter, the Note Trustee or the Bond
Trustee or any other entity has prepared or obtained separate independent
appraisals or reappraisals. None of Kmart, the Issuer, the Underwriter, the Note
Trustee or the Bond Trustee makes any representation as to the fair market value
of any of the Properties. Moreover, there can be no assurance that other
appraisers would not arrive at materially different conclusions as to the fair
market value of the Properties.
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LEASEHOLD ESTATES
The Properties in Moorpark and San Diego, California are subject to
unsubordinated ground leases. Under the related Leases, Kmart has agreed during
the term of the Lease to pay the rent due under the applicable ground leases and
to comply with all obligations of the ground lessee thereunder.
ENVIRONMENTAL MATTERS
Phase I or other environmental assessment reports were prepared during 1993
for each Property. The reports disclosed no material environmental conditions
which would materially interfere with the intended uses of the Properties. With
respect to the Properties located in Crescent City, California and Fort Myers,
Florida, state regulatory authorities have required certain remediation actions
and continued monitoring, which activities are being undertaken by the
appropriate party. It is not expected that the environmental matters referred to
in the previous sentence will have a material adverse effect on Kmart's ability
to make Rental Payments. Kmart will indemnify, among other parties, the Owner
Trusts, the Note Trustee and the Bond Trustee for the benefit of the Bondholders
for any past or present environmental liability or any environmental liability
arising during the term of the Leases with respect to the Properties.
Kmart agreed in the Leases that, except for those items such as batteries
and oil typically and customarily sold in Kmart stores or its subsidiaries'
stores, as the case may be, in the ordinary course of business and in compliance
with applicable environmental laws, it would not cause or permit any hazardous
materials to exist on or to be used on the Properties during the term of the
Leases. Kmart will indemnify the Owner Trusts, the Note Trustee and the Bond
Trustee, among other parties, from any liability arising from the presence of
hazardous materials that pre-existed the Lease or from any use of the Properties
arising during the term of the Lease unless caused by the gross negligence or
willful misconduct of the indemnified parties. Kmart made covenants in the
Leases that it shall comply in all material respects with applicable
environmental laws affecting each Property or the use, modification, maintenance
or operation thereof, and shall have sole responsibility for all expenses
(whether legal, professional or arising from investigation) associated with such
compliance, and shall further comply in all respects with environmental laws
where non-compliance could involve an environmental claim in excess of $100,000
or where such non-compliance would materially interfere with the use or
operation of the Property.
DESCRIPTION OF THE LEASES
The statements under this caption are summaries of the terms of the Leases
and do not purport to be complete. The summaries make use of terms defined in
and are qualified in their entirety by reference to all of the provisions of
each Lease, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
TERMS AND RENTALS
Each Owner Trust has leased its respective Property to Kmart pursuant to a
Lease for an initial term from December 27, 1993 until December 31, 1993, and a
base term of 25 years which commenced on January 1, 1994. Kmart will have the
option to extend a Lease relating to any Estate for Years Interest for at least
six consecutive terms of five years each and the option to extend a Lease
relating to any Leasehold Estate for a term of at least 10 years beyond the
maturity date of the Notes and Bonds. Because the Bonds are scheduled to be
retired during the base term of the Lease, any such extensions should not affect
the interests of the Bondholders. So long as no Lease Event of Default (as
defined herein) exists with respect to an individual Lease, Kmart, as lessee
thereunder, will be entitled to undisturbed possession of the related Property,
even if there exists a default under the related Mortgage or Note Indenture or
under the Bond Indenture. Rental Payments are required to be paid by Kmart under
the Leases in immediately available funds on each January 1 and July 1,
commencing on January 1, 1994. On each Payment Date, commencing on July 1, 1994,
the aggregate amount of Rental Payments payable under the Leases, as amended as
of the Closing Date, will be at least equal to the aggregate scheduled amount of
principal, interest and any Make-Whole Premium due on the outstanding Notes on
such date. See "STRUCTURE OF THE
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TRANSACTION" herein. Kmart is obligated under each Lease to pay interest on any
late payments of rent which shall accrue at a rate equal to the sum of 1% plus
the weighted average of the interest rates of the Notes from the relevant
Payment Date to the date such payments are actually received by the Bond Trustee
(the "Default Rate").
NET LEASES; NO SET-OFF
Each Lease is a net Lease and Kmart is obligated to pay thereunder, on an
absolutely net basis, all Rental Payments without diminution for any reason,
except to the extent a Lease is terminated, as described below. Additionally,
Kmart will pay all taxes (including ad valorem real estate taxes) and
assessments, regardless of how named or denominated, relating to the Properties
together with every fine, penalty, interest or cost which may be added for
non-payment or late payment thereof, and all utility and other charges incurred
in the operation of the Properties, and Kmart shall obtain, and use its
reasonable efforts to maintain, utilities services therefor.
Each Lease also provides that it shall not be terminable by Kmart
thereunder, except under limited circumstances as described herein, nor shall
Kmart be entitled to any abatement, reduction, set-off, counterclaim, defense or
deduction with respect to any payment of rent or other obligation under any
Lease, by reason of: (i) any damage to or destruction of a leased Property; (ii)
any taking of a Property or any part thereof by eminent domain or otherwise;
(iii) any prohibition, limitation, restriction, interference with or prevention
of Kmart's use, occupancy or enjoyment of all or any part of a Property; (iv)
any default by an Owner Trust under a Lease; (v) any eviction by a holder of
paramount title or otherwise; (vi) any purported merger of estates resulting
from Kmart's acquisition of all or any part of a Property; or (vii) any other
cause whether similar or dissimilar to the foregoing, any present or future law
to the contrary notwithstanding.
REPAIRS AND MAINTENANCE
Kmart shall, at its expense and on a timely basis, maintain each Property
in good repair and condition, ordinary wear and tear excepted, and will make
structural and non-structural, foreseen and unforeseen changes, replacements and
repairs which may be required to keep the Property in good repair and condition
and at a standard applicable to similar properties in the marketplace and those
owned or leased by Kmart. In no event are the Owner Trusts required to repair,
rebuild or maintain any of the Properties. An Owner Trust may grant easements,
release existing easements, make dedications, execute annexation petitions and
amend covenants and restrictions affecting a Property that are requested by
Kmart in respect of any Property that do not materially impair such Property's
useful life or materially reduce its fair market value.
ALTERATIONS AND IMPROVEMENTS
Kmart, at its expense, may add to, or alter, existing improvements on any
Property, which improvements shall be subject to the lien of the related
Mortgage and Note Indenture, provided that the fair market value or useful life
of such Property shall not be adversely affected thereby and that the work shall
be done in a first-class, workmanlike manner in compliance with applicable laws.
All such additional improvements shall be and remain the property of the
respective Owner Trust and shall be subject to all of the terms and provisions
of the applicable Lease. All inventory, trade fixtures, machinery, equipment and
other personal property installed at the expense of Kmart shall remain the
property of Kmart, not subject to the lien of the related Mortgage or Note
Indenture, and shall be removed from the premises by Kmart, at its expense, at
the expiration of the term of the Lease.
LIENS
Kmart, as lessee, covenants that it shall not, during the term of any
Lease, directly or indirectly create, incur, assume, suffer or permit any lien
on or with respect to the related Property or any part thereof, any rent, title
thereto or interest therein, up to and including the date of the end of such
Lease term, other than Permitted Liens. "Permitted Liens" are: (i) liens
representing the respective rights and interests of Kmart, the Owner Trusts, the
Owner Participant, the Remainder Purchaser, the Bond Trustee, the Note Trustee,
the
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Issuer, each REMIC and any holder of a lien for the benefit of the Bondholders;
(ii) certain liens caused or permitted to be incurred by the Owner Trusts or the
Remainder Purchaser; (iii) liens for taxes and assessments that either are not
yet due and payable or are being contested in good faith and by appropriate
proceedings diligently conducted, so long as such proceedings do not (a) subject
the Property to foreclosure, forfeiture or loss or result in the sale of the
Property, (b) materially interfere with the use, possession or disposition of
the Property, (c) interfere with the payment of Rental Payments or (d) involve
any risk of loss of the priority of the lien of the Note Indenture relating
thereto; (iv) materialmen's, mechanics', workers', repairmen's, employees' or
other like liens arising after the date of the Lease in the ordinary course of
business for amounts either not yet due or being contested in good faith and by
appropriate proceedings so long as such proceedings shall not involve any risk
of the sale, forfeiture or loss of any part of the Property and shall not
materially interfere with the use, occupancy or disposition of the Property or
interfere with the payment of Rental Payments; (v) liens arising after the date
of the Lease out of judgments or awards with respect to which at the time an
appeal or proceeding for review is being prosecuted diligently and in good faith
and that either have been bonded to the satisfaction of the Owner Trusts and the
Note Trustee or the enforcement of which has been continuously stayed pending
such appeal or review; (vi) easements, rights-of-way, reservations, servitudes
and rights of others against the Property which (a) are listed as Permitted
Exceptions in the Agreement for Sale of Real Estate (the "Sale Agreement") dated
as of the date of the Leases or (b) are granted pursuant to the specific
provisions of such Lease; and (vii) assignments, leases and subleases expressly
permitted by the Operative Documents (as defined in the Note Indentures).
Kmart shall promptly, but no later than 30 days after the attachment
thereof, at its own expense, discharge, eliminate or bond any lien that is not a
Permitted Lien in a manner satisfactory to the Owner Trusts. In the event such
lien is not so discharged, eliminated or bonded, the Owner Trusts may pay and
discharge any such lien, and Kmart shall reimburse the Owner Trusts upon demand
for the amount so paid together with interest thereon at the Default Rate.
ASSIGNMENT OR SUBLEASE; USE; NO CONTINUOUS OPERATION
Kmart may assign all or sublease all or any part of its leasehold interest
in the Properties without the prior written consent of the respective Owner
Trust. Kmart shall provide notice to the respective Owner Trust of such
assignment or sublease within 15 days prior to the effective date thereof. No
such assignment or sublease shall release Kmart from its obligations and
liabilities under the Lease. Kmart's liability under any Lease shall continue
notwithstanding the rejection of such Lease as to the assignee or sublease as to
the sublessee pursuant to Title 11 of the United States Code (the "Bankruptcy
Code"). In the event Kmart assigns the Lease and it is thereafter rejected in a
bankruptcy or similar proceeding, a new lease identical to the rejected Lease
shall be reinstituted as between the appropriate Owner Trustee and Kmart without
further act by either party. Kmart is prohibited from mortgaging or otherwise
encumbering its interest under the Leases.
Each Property may be used for any lawful purpose; provided that no use of
any Property may be made by Kmart or an assignee or sublessee of Kmart that
would: (i) be a public nuisance; (ii) cause a Property to become a "tax-exempt
use property" within the meaning of Section 168(h) of the Code, or any successor
statute thereto, or to become a "tax-exempt bond financed property" within the
meaning of Section 168(g)(5) of the Code; (iii) void any certificate of
occupancy required for such Property; (iv) cancel or make it impossible to
obtain the issuance of any insurance policy required for such Property by the
related Lease; (v) involve the mining or removal of any oil, gas or minerals
from or through the surface of the Property; or (vi) increase the Owner Trust's
risk of environmental liability through any use other than for retail or office
use. Any use of the Property in violation of clause (v) above by an unrelated
third party shall not give rise to a Lease Event of Default, but shall give rise
to an obligation on the part of Kmart to make a purchase offer as described in
"-- Condemnation and Casualty" below.
While the Leases are net Leases requiring Kmart to pay taxes, maintenance
and operating expenses during the period in which Kmart leases a Property, Kmart
has not, under any of the Leases, covenanted to operate a business at the
Properties for the term of the Leases and Kmart may, unless otherwise prohibited
by law or by other agreement binding on the Property, cease actual operations at
any Property.
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INSURANCE
Under each Lease, Kmart is required, at its own cost and expense, to carry
workers' compensation insurance, insurance against loss by fire and other
casualties included under extended-coverage, all-risk endorsements in an amount
not less than 100% of the full insurable replacement value of the improvements
constituting part of the Property, comprehensive general public-liability
insurance with minimum coverage of $5,000,000 with respect to injury of any one
person, $5,000,000 with respect to any one accident or disaster and $5,000,000
with respect to damage to property. In no event shall the deductible amount
under any of such casualty insurance policies exceed $100,000. In the event that
Kmart fails to obtain or maintain such insurance, the respective Owner Trust may
obtain such coverage and will be reimbursed by Kmart for the cost thereof, plus
interest at the Default Rate from the date incurred by such Owner Trust. The
Owner Trusts shall have no obligation to maintain insurance of any type on the
Properties and Kmart shall not have any rights to direct actions or subrogation
against any insurance policy obtained by the Owner Trusts. Kmart may elect to
self-insure any leased Property against casualty, workers' compensation and
liability risks; provided that Kmart meets the financial requirements set forth
in the Leases.
CONDEMNATION AND CASUALTY
In the event of a condemnation or casualty affecting any Property, Kmart
will be obligated to continue paying rent and to restore such Property at its
own expense as nearly as practicable to the condition as existed immediately
before the condemnation or casualty occurred. If Kmart maintains a consolidated
tangible net worth of at least $750,000,000 calculated in accordance with
generally accepted accounting principles (the "Net Worth Standard") at the time
of the condemnation or casualty, or if insurance proceeds or a condemnation
award due to such occurrence are less than $250,000, any such insurance proceeds
or condemnation awards shall be released to Kmart for the restoration of the
Property. If Kmart does not maintain the Net Worth Standard at the time of such
loss, and if such condemnation award or casualty proceeds are in excess of
$250,000, however, the net proceeds of such insurance claim or condemnation
award shall be deposited with the Note Trustee for as long as the related Note
Indenture is outstanding and shall be disbursed to Kmart from time to time upon
its application for funds to meet the costs of rebuilding and repairs as they
become due, subject to certain provisions set forth in the related Lease. In the
event that condemnation proceeds exceed the actual cost of restoration, such
excess proceeds shall be distributed pursuant to the related Note Indenture, as
described in "DESCRIPTION OF THE NOTES" herein.
Notwithstanding the foregoing, in the event of a casualty affecting a
substantial portion or the entirety of a Property, Kmart may either (i) restore
the Property as set forth above or (ii) make a rejectable purchase offer to the
respective Owner Trustee within 30 days of such damage or destruction. In the
event of a permanent or temporary condemnation of the Property or any
substantial portion thereof that in Kmart's judgment renders the Property
unsuitable for its occupancy and use, or in the event of a condemnation of the
points of ingress and egress of the Property such that the property is rendered
unsuitable for its intended use, Kmart shall be obligated to make such a
rejectable offer to purchase the Property within 30 days of such condemnation
(or, with respect to a partial condemnation, within 90 days after the entry of a
final order of taking). If accepted, such purchase shall be effected on the next
scheduled Payment Date occurring not less than 100 days after the Owner Trust's
receipt of such offer, for a price at least equal to the principal of and
interest due on the related Notes. See "DESCRIPTION OF THE NOTES --
Distributions on the Notes -- Prepayments of Principal at Par" herein.
If Kmart makes such a rejectable offer to purchase such Property, the
corresponding Owner Trust will have 70 days to decide whether to accept such
offer. Such Owner Trust may not reject Kmart's purchase offer unless the Owner
Trust makes satisfactory provisions with the Note Trustee for the redemption of
the related Notes, which provisions shall include the escrowing of cash or cash
equivalents in amounts sufficient to redeem the Notes. If Kmart's offer is
rejected and the Owner Trust makes satisfactory arrangements with the Note
Trustee, Kmart shall, on the Payment Date on which Kmart's purchase would
otherwise have occurred, pay to such Owner Trust all payments accrued and owing
under the Lease as of such Payment Date, at which time the Lease shall terminate
and the Owner Trust shall receive all attendant insurance or condemnation
proceeds. If, on the other hand, Kmart's offer is accepted and the Owner Trust
makes satisfactory
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arrangements with the Note Trustee, the sale of the affected Property shall be
closed on the next scheduled Payment Date, with the purchase price (which shall
be at least sufficient to redeem the Notes, including any premium owing thereon)
and all Lease payments accrued and owing on that date paid in cash to the Bond
Trustee on behalf of the applicable Owner Trust. In the event of such sale,
title to the affected Property shall be conveyed to Kmart. All costs and
expenses in connection with such sale shall be paid by Kmart. See "DESCRIPTION
OF THE NOTES -- Distributions on the Notes -- Prepayments of Principal at Par"
herein.
EARLY TERMINATION
Kmart may terminate any Lease on any Payment Date on or after the tenth
year of the base term of the Lease (provided that no Lease Event of Default has
occurred and is continuing) if it determines that the Property has become
obsolete or that continued use thereof is no longer economic by providing at
least 12 months' and not more than 18 months' notice to the respective Owner
Trust. In such event, the Property may be (i) transferred to Kmart for an amount
sufficient to retire the related Notes (including the Make-Whole Premium
thereon) (the "Retirement Price"), (ii) sold to a third party, with the excess
of the Retirement Price over the sale price being contributed by Kmart or (iii)
retained by the respective Owner Trust, provided that such Owner Trust makes
satisfactory provisions with the Note Trustee for the redemption of the related
Notes, which provisions shall include the escrowing of cash or cash equivalents
in amounts sufficient to redeem the corresponding Notes at their respective
Retirement Prices, and the Property shall thereupon be released from the liens
of the respective Note Indenture and Mortgage.
An Owner Trust may accept Kmart's purchase offer with respect to the mining
or removal of oil, gas or minerals on a Property as described under "--
Assignment or Sublease; Use" above, if such offer is for an amount sufficient to
redeem the related Notes (including any premium thereon) and the Note Trustee
shall redeem the related Notes at par with a Make-Whole Premium.
EVENTS OF DEFAULT
The following are events of default under each Lease ("Lease Events of
Default"):
(i) the failure by Kmart to make Rental Payments when due continuing
for a period of five days after notice thereof to Kmart;
(ii) the failure by Kmart to make any other payment under the Lease
when due continuing for a period of 15 days after notice thereof to Kmart;
(iii) the failure by Kmart to maintain insurance as required by the
Lease;
(iv) the failure by Kmart to perform any of its other covenants or
obligations under the Lease or the Master Indemnification Agreement (as
defined in the related Note Indenture) or certain of its covenants or
obligations under the Sale Agreement within 30 days after notice thereof in
each case only to the extent such covenants and obligations relate to the
Property; provided that any non-monetary default that is curable but is not
susceptible to a cure within 30 days shall not be deemed a default if a
cure is commenced within 30 days after such notice and is diligently
pursued thereafter; and provided further that in no event shall such cure
period for a non-monetary default exceed 180 days;
(v) certain events of bankruptcy, insolvency, reorganization pursuant
to bankruptcy or similar laws, receivership, dissolution or liquidation of
Kmart; provided that such events shall not constitute a Lease Event of
Default under a Lease so long as they do not affect the performance of
Lease covenants by Kmart thereunder or another party claiming under Kmart;
and
(vi) any breach of a representation by Kmart in the Lease or the Sale
Agreement relating to the Property or in any certificate expressly required
to be delivered pursuant thereto which (a) shall be incorrect when
discovered and shall have a material adverse effect on the Owner Trust, the
Owner Participant or the Owner Trust's interest in the Property or (b) is a
material breach of a representation in the Sale Agreement relating to
Kmart's financial condition, and that in either case shall not have been
cured within 30 days after receipt of written notice by Kmart from the
Owner Trust, unless the default is
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curable and Kmart shall be diligently proceeding to correct such failure;
provided that in no event shall such cure period exceed 180 days.
The occurrence of a Lease Event of Default under any one Lease shall not
affect the obligations of Kmart and the Owner Trusts under any of the other
Leases, it being expressly provided that such Lease obligations are in no way
cross-defaulted.
If a Lease Event of Default has occurred with respect to any Lease and is
continuing beyond any applicable cure periods, the corresponding Owner Trust
(subject to the assignment of its rights under the Lease) may (i) terminate such
Lease and recover damages from Kmart as described below or (ii) re-enter the
Property without terminating such Lease to remove Kmart and its property, all at
Kmart's expense, with Kmart remaining liable for the balance of Rental Payments
accruing to the end of the base term of such Lease (less the amount received by
the appropriate Owner Trustee with respect to reletting the Property net of such
Owner Trustee's expenses in connection therewith). Kmart shall also pay the
Make-Whole Premium, if any, required to be paid by the related Owner Trust under
the related Note Indenture in the event such Owner Trust shall elect to re-enter
the Property without terminating the Lease. If a Lease is terminated upon the
occurrence of a Lease Event of Default thereunder, damages permitted to be
recovered by the related Owner Trust from Kmart include: (i) all Rental Payments
and other payments due under such Lease as of the date on which the Lease shall
be terminated (including any Make-Whole Premium), plus (ii) at the option of the
Owner Trust, any of: (a) the difference between the amount required to redeem
the related Notes and the fair market value of the Property; (b) the difference
between the amount required to redeem the related Notes and the present value of
the fair market rental value of the Property, discounted semiannually at a 6%
annual percentage rate for the remainder of the term of the Lease; (c) the
difference between the present value of all Rental Payments, discounted
semiannually at a 6% annual percentage rate, for the remainder of the base or
applicable renewal term of the Lease (the "Discounted Basic Rents") and the
present value of the fair market rental value of the Property for the remainder
of such term, discounted semi-annually at a 6% annual interest rate; or (d) an
amount equal to the greatest of the fair market value of the Property, the
Discounted Basic Rents and the amount required to redeem the related Notes. Fair
market values are determined by agreement between Kmart and the Owner Trust or
by appraisal. If the Owner Trust receives the sum of the amounts described in
clauses (i) and (ii)(d) above, the Owner Trust will convey the Property to
Kmart. Because the Owner Trusts have assigned certain of their rights under each
Lease to the Note Trustee, only the Bond Trustee, as assignee of the rights of
the Note Trustee, and not the Owner Trusts, may exercise remedies following a
Lease Event of Default. The above-described amounts will accrue interest at the
Default Rate from the final payment date specified in the Owner Trust's notice
of default and termination of a Lease to the date of actual payment by Kmart.
In lieu of the acquisition by Kmart of a Property in accordance with the
Lease, Kmart shall be entitled to substitute a property (the "Substitute
Property") for such Property provided that as of the date of such substitution
(i) the fair market value of the Substitute Property is not less than the
greater of the (a) fair market value of the Property and (b) "Termination Value"
of the Property as such term is defined in the related Lease, (ii) the useful
life of the Substitute Property in not less than the useful life of the
Property, (iii) Kmart shall make certain representations and warranties with
respect to the Substitute Property as it had previously made with respect to the
Property, (iv) Kmart shall deliver an environmental assessment report, which
report shall be satisfactory, to the applicable Owner Trustee and the Note
Trustee and (v) the substitution shall not reduce any Rental Payments due under
the applicable Lease. If such substitution occurs, such Substitute Property
shall replace such Property as security for the Notes and Bonds, as described
herein.
CONSEQUENCES OF KMART'S BANKRUPTCY
In the event a bankruptcy proceeding is instituted by or in respect of
Kmart under the Bankruptcy Code, Kmart would have the right, subject to
bankruptcy court approval, to affirm or reject the Leases. If a Lease were
rejected, payments due thereunder would terminate, thereby leaving the Owner
Trusts without cash flow to make payments on the Bonds. In the event a Lease
were rejected, the Owner Trusts (and by virtue of the Bond Indenture and
assignments described herein, the Bond Trustee thereunder) would have a claim
for damages against Kmart but, under Section 502(b)(6) of the Bankruptcy Code,
such claim would be limited
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to a maximum amount equal to the rent reserved under such Lease, without
acceleration, for the greater of one year or 15 percent (not to exceed three
years) of the remaining term of the Lease (plus rent already due but unpaid).
This limitation would not apply to holders of debt securities that are direct
obligations of Kmart. Therefore, except during the final year of the Lease
terms, if Kmart were the subject of proceedings under the Bankruptcy Code and a
Lease were rejected, the damages that could be claimed for rejection, even
assuming full recovery on such claim, may not alone be sufficient to repay the
Bonds. In addition, it is possible that a bankruptcy court could recharacterize
the transactions described herein as a secured borrowing by Kmart from the Owner
Trusts, in which case the bankruptcy court could permit Kmart to use or dispose
of the Properties without making Lease payments to provide debt service on the
Bonds, subject to providing "adequate protection" (such as a lien on substitute
collateral) to the Owner Trusts. However, in the event of such a
recharacterization, the limitation on damages referred to above would presumably
be inapplicable.
THE ISSUER AND THE OWNER TRUSTS
The Issuer. The Issuer, a special-purpose corporation formed under the laws
of the State of New York, does not have, nor is it permitted or expected to
have, any significant assets or sources of funds other than the security for the
Bonds. The Bonds represent obligations solely of the Issuer, and the Bonds will
not be insured or guaranteed by Kmart, the Owner Participant, the Owner Trusts,
the Remainder Purchaser, the Note Trustee, the Bond Trustee, their affiliates or
any other person or entity. Consequently, Bond Owners must rely for repayment
upon payments under the Leases. None of the Note Indentures, the Bond Indenture
nor any of the Leases will include financial covenants or "event risk"
provisions that would afford Bond Owners protection in the event of a highly
leveraged or other transaction involving Kmart.
The Owner Trusts. The Owner Trusts are special purpose trusts established
pursuant to separate Trust Agreements. The activities of each of the Owner
Trusts are limited by the terms of the related Trust Agreement to purchasing,
owning, leasing and managing the related Properties, issuing the Notes and the
Mortgages and making payments on the Notes and other activities related thereto.
DESCRIPTION OF THE BONDS
The statements under this caption are summaries of the terms of the Bonds
and the Bond Indenture and do not purport to be complete. The summaries make use
of terms defined in and are qualified in their entirety by reference to all of
the provisions of the Bonds and the Bond Indenture, the forms of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
The Bonds are to be issued pursuant to the Bond Indenture, substantially in
the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The Bonds will consist of three series: the Series A
Bonds, the Series B Bonds and the Series C Bonds. The principal amount of each
series of Bonds is set forth on the cover page hereof.
REGISTRATION OF THE BONDS
Each series of Bonds will be offered for purchase in minimum denominations
of $1,000 and integral multiples thereof and will each initially be issued only
in fully registered form in the name of Cede, as the nominee of DTC, except as
provided below. Bonds may be surrendered by the Bondholder thereof for
registration of transfer or exchange for Bonds of the same series at the office
of the Bond Trustee. No service charge will be made for any transfer or exchange
of Bonds, but payment may be required of any tax or other governmental charges
that may be imposed in connection therewith. No person acquiring a beneficial
interest in a Bond will be entitled to receive a bond representing such person's
interest, except as set forth under "-- Definitive Bonds" below. Unless and
until Definitive Bonds are issued under the limited circumstances described
herein, all references to actions by Bondholders herein refer to actions taken
by DTC upon instructions from its Participants (as defined below), and all
references herein to distributions, notices, reports and statements to
Bondholders shall refer to distributions, notices, reports and statements to DTC
or Cede, as
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<PAGE> 25
the registered Bondholder, as the case may be, for distribution to the Bond
Owners in accordance with DTC procedures. See "-- Registration of the Bonds" and
"-- Definitive Bonds" below.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions between and among Participants through electronic book entries,
thereby eliminating the need for the physical movement of certificates.
Participants include securities brokers and dealers (including the Underwriter),
banks, trust companies and clearing corporations. Indirect access to the DTC
system is also available to banks, brokers, dealers, trust companies and other
institutions that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC will be required to make book-entry transfers of Bonds among
Participants and to receive and transmit distributions of principal of and
interest due on the Bonds through its Same Day Funds Settlement System.
Participants and Indirect Participants with which Bond Owners have accounts with
respect to the Bonds are similarly required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Bond Owners.
Bond Owners that are neither Participants nor Indirect Participants but
that desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Bonds may do so only through Participants and Indirect
Participants. In addition, Bond Owners will receive all distributions of
principal and interest from the Bond Trustee through DTC Participants. Under a
book-entry format, Bond Owners may experience some delay in their receipt of
payments, since such payments will be forwarded by the Bond Trustee to Cede, as
nominee for DTC. DTC will forward such payments to its Participants, which
thereafter will forward them to Indirect Participants or Bond Owners. The
forwarding of such distributions to the Bond Owners will be the responsibility
of such Participants. It is anticipated that the only registered Bondholder will
be Cede, as nominee of DTC. Therefore, Bond Owners will not be recognized by the
Bond Trustee as Bondholders, as that term is used herein, and Bond Owners will
be permitted to exercise the rights of Bondholders only indirectly through DTC
and its Participants.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability of
Bond Owners to pledge Bonds to persons or entities that do not participate in
the DTC system, or to otherwise act with respect to such Bonds, may be limited
due to the absence of physical certificates for such Bonds.
DTC has advised the Issuer that it will take action permitted to be taken
by a Bondholder under the Bond Indenture only at the direction of one or more
Participants to whose accounts with DTC the Bonds are credited. DTC has further
advised the Issuer that it will take such actions with respect to any percentage
of Bondholders only at the direction of and on behalf of Participants whose
holdings include undivided interests that satisfy any such percentage. DTC may
take conflicting actions with respect to other undivided interests to the extent
that such actions are taken on behalf of Participants whose holdings evidence
such undivided interests.
Kmart, the Owner Participant, the Owner Trusts, the Remainder Purchaser,
the Note Trustee and the Bond Trustee will have no liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Bonds held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests. In the event of the insolvency of DTC or a Participant or Indirect
Participant in whose name book-entry Bonds are registered, the ability of the
Bond Owners of such book-entry Bonds to obtain timely payment may be impaired.
In addition, in such event, if the limits of applicable insurance coverage by
the Securities Investor Protection Corporation are exceeded or if such coverage
is otherwise unavailable, ultimate payment of amounts distributable with respect
to such book-entry Bonds may be impaired.
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<PAGE> 26
The information in this section concerning DTC and DTC's book-entry system
has been obtained from DTC, and neither the Issuer nor Kmart takes any
responsibility for the accuracy thereof.
DEFINITIVE BONDS
The Bonds will be issued in fully registered, certificated form
("Definitive Bonds") to Bond Owners or their nominees, respectively, only if (i)
the Issuer or DTC advises the Bond Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Bonds and the Bond Trustee and the Issuer are unable to locate a
qualified successor, (ii) the Issuer, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Bond Indenture
Event of Default, Bond Owners representing in the aggregate not less than a
majority of the aggregate principal amount of such Bonds (a "Bond Majority in
Interest") advise the Bond Trustee and DTC through Participants, in writing,
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the Bond Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Bond Trustee is required to notify all Bond Owners through
Participants of the availability of Definitive Bonds. Upon surrender by DTC of
the fully registered global bonds representing each series of Bonds and receipt
of instructions for re-registration, the Bond Trustee will reissue the bonds as
Definitive Bonds to Bond Owners.
Distributions of principal of, premium, if any, and interest due on the
Bonds will thereafter be made by the Bond Trustee directly to the holders of
Definitive Bonds in whose names the Definitive Bonds were registered at the
close of business on each Record Date in accordance with the procedures set
forth herein and in the Bond Indenture. Such distributions will be made by check
payable to the order of the Bondholder mailed to the address provided by such
Bondholder or if such Bondholder owns of record one or more Bonds that have
principal denominations aggregating at least $5,000,000 and an account number is
included in the Register, by wire transfer in immediately available funds to a
bank account maintained in the United States. The final payment on any Bond,
however, will be made only upon presentation and surrender of such Bond at the
Bond Trustee's corporate trust office.
Definitive Bonds will be transferable and exchangeable at the corporate
trust office of the Bond Trustee. No service charge will be imposed for any
registration of transfer or exchange, but the Bond Trustee may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
DISTRIBUTIONS ON THE BONDS
On each Payment Date, an amount at least equal to all payments due on the
Notes on such Payment Date shall be transferred by Kmart to the Bond Trustee,
pursuant to its obligations under each of the Leases, as amended as of the
Closing Date, to make Rental Payments, as the right to receive such Rental
Payments will have been assigned by the Owner Trustees to the Note Trustee and
from the Note Trustee to the Bond Trustee. Such amounts shall be promptly
distributed by the Bond Trustee on the date of receipt, to the extent available
therefor, to pay in full the principal, interest and any Make-Whole Premium then
due on the related series of Bonds and, in case such amount shall be
insufficient to pay in full the whole amount so due and unpaid, then such
amounts shall be so distributed as payment of principal and interest, pro rata
among the Bonds of each series, without any preference or priority of one such
Bond over another, according to the aggregate amount due for principal, interest
and any Make-Whole Premium on the date of payment. If any Payment Date is not a
business day, such payment shall be made on the next succeeding business day,
without any accrued interest from such Payment Date. If on any Payment Date
amounts received from Kmart by the Bond Trustee are insufficient to provide for
all payments due to the Bondholders on such Payment Date, any past-due payments
of principal, and interest and any Make-Whole Premium due on Bonds of any series
will be distributed by the Bond Trustee to Bondholders on the date such amounts
are received by the Bond Trustee. To the extent permitted by applicable law,
amounts not paid on the appropriate Payment Date will accrue interest at a rate
1% above the rate shown on the cover page hereof for Bonds of such series
("Default Interest").
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<PAGE> 27
Payments of Interest. Interest will be payable semi-annually, in
immediately available funds, on the unpaid principal amount of each outstanding
series of Bonds at the applicable interest rate on each Payment Date, commencing
January 1, 1995. Interest shall be calculated on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest (other than Default Interest)
payable on any Payment Date shall accrue on each Bond from and including the
previous Payment Date (or from and including the Closing Date with respect to
the first Payment Date) to but excluding the Payment Date. Default Interest
shall accrue from the Payment Date on which any past-due payment was due.
Optional Prepayments. The Bonds may not be prepaid at the option of the
Issuer.
Scheduled Payments of Principal. The Bond Indenture will provide for the
payment of principal on the Bonds of each series, on scheduled Payment Dates
through the operation of the Sinking Fund. The aggregate principal amount of
Bonds of each series to be distributed on each such Payment Date, as well as the
aggregate principal amount payable on the final maturity date of each series of
Bonds, is set forth in the table below. In the event of any partial prepayment
of any series of Bonds other than by operation of the Sinking Fund, the
scheduled amount of each Sinking Fund payment with respect to the Bonds of such
series (and the amount due at the stated maturity of such Bonds) will be reduced
proportionately.
SINKING FUND PAYMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A BONDS SERIES B BONDS SERIES C BONDS
-------------- --------------- --------------
<S> <C> <C> <C>
July 1, 1994...................... 0.00 0.00 0.00
January 1, 1995................... 8,534,000.00 0.00 0.00
July 1, 1995...................... 0.00 0.00 0.00
January 1, 1996................... 4,330,000.00 0.00 0.00
July 1, 1996...................... 0.00 0.00 0.00
January 1, 1997................... 4,664,000.00 0.00 0.00
July 1, 1997...................... 0.00 0.00 0.00
January 1, 1998................... 5,024,000.00 0.00 0.00
July 1, 1998...................... 0.00 0.00 0.00
January 1, 1999................... 5,412,000.00 0.00 0.00
July 1, 1999...................... 0.00 0.00 0.00
January 1, 2000................... 5,831,000.00 0.00 0.00
July 1, 2000...................... 0.00 0.00 0.00
January 1, 2001................... 6,281,000.00 0.00 0.00
July 1, 2001...................... 0.00 0.00 0.00
January 1, 2002................... 1,924,000.00 0.00 0.00
July 1, 2002...................... 0.00 5,038,000.00 0.00
January 1, 2003................... 0.00 5,016,000.00 0.00
July 1, 2003...................... 0.00 2,674,000.00 0.00
January 1, 2004................... 0.00 2,215,000.00 0.00
July 1, 2004...................... 0.00 6,316,000.00 0.00
January 1, 2005................... 0.00 949,000.00 0.00
July 1, 2005...................... 0.00 6,730,000.00 0.00
January 1, 2006................... 0.00 1,184,000.00 0.00
July 1, 2006...................... 0.00 7,171,000.00 0.00
January 1, 2007................... 0.00 1,447,000.00 0.00
July 1, 2007...................... 0.00 7,643,000.00 0.00
January 1, 2008................... 0.00 1,743,000.00 0.00
July 1, 2008...................... 0.00 8,149,000.00 0.00
January 1, 2009................... 0.00 2,073,000.00 0.00
July 1, 2009...................... 0.00 8,690,000.00 0.00
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
SERIES A BONDS SERIES B BONDS SERIES C BONDS
-------------- --------------- --------------
<S> <C> <C> <C>
January 1, 2010................... 0.00 2,442,000.00 0.00
July 1, 2010...................... 0.00 9,271,000.00 0.00
January 1, 2011................... 0.00 2,851,000.00 0.00
July 1, 2011...................... 0.00 2,154,000.00 0.00
January 1, 2012................... 0.00 3,013,000.00 0.00
July 1, 2012...................... 0.00 2,433,000.00 0.00
January 1, 2013................... 0.00 3,195,000.00 0.00
July 1, 2013...................... 0.00 2,732,000.00 0.00
January 1, 2014................... 0.00 3,397,000.00 0.00
July 1, 2014...................... 0.00 3,052,000.00 0.00
January 1, 2015................... 0.00 3,622,000.00 0.00
July 1, 2015...................... 0.00 3,396,000.00 0.00
January 1, 2016................... 0.00 3,871,000.00 0.00
July 1, 2016...................... 0.00 3,766,000.00 0.00
January 1, 2017................... 0.00 1,690,000.00 0.00
July 1, 2017...................... 0.00 0.00 6,514,000.00
January 1, 2018................... 0.00 0.00 4,459,000.00
July 1, 2018...................... 0.00 0.00 4,604,000.00
$42,000,000.00 $117,923,000.00 $15,577,000.00
============= ============== =============
</TABLE>
[/R]
Prepayments of Principal with a Make-Whole Premium. Each series of Bonds
may be prepaid in part, pro rata, in the event that the corresponding Notes are
prepaid as a result of (i) Kmart's termination of any Lease due to economic
obsolescence, which termination shall not be earlier than January 1, 2004, or
(ii) Kmart's termination of any Lease due to the mining or removal of oil, gas
or minerals from a Property by an unrelated third party. See "DESCRIPTION OF THE
NOTES -- Distributions on the Notes -- Prepayments of Principal with a
Make-Whole Premium" herein. Such Bonds will be prepaid on a Payment Date,
provided that not less than 30 nor more than 45 days' notice is given by
first-class mail to each Bondholder of a Bond to be prepaid at its address
appearing in the Register at a price equal to the sum of (i) the principal
amount thereof plus (ii) accrued interest, if any, to the date of prepayment
plus (iii) the Make-Whole Premium.
The Make-Whole Premium with respect to the Bonds shall mean the sum of the
Make-Whole Premiums on all related Notes which have been prepaid. The
"Make-Whole Premium", if any, on any Note shall mean an amount equal to the
positive difference, as of the date of determination, between (i) the present
value of all future payments of principal and interest, including any principal
amount due at maturity, discounted semi-annually at an interest rate per annum
equal to (a) the average yield for "This Week", as provided in the Treasury
Constant Maturity Yield Index published by the Federal Reserve Bank of New York
in the Federal Reserve Statistical Release designated "H.15 (519) Selected
Interest Rates", or a successor publication, published next preceding two
business days prior to redemption, for instruments having a maturity
corresponding to the remaining average life of such Note (the "TCMYI") plus (b)
50 basis points, and (ii) the outstanding principal amount of such Note to be
prepaid; provided, however, that if there is no TCMYI for instruments having a
maturity corresponding to the average life of such Note, then the TCMYI shall
equal the straight line interpolation between the interest rates on the
respective Treasury issue both greater and lesser, most closely approximating
the average life of the Note (rounded to the fourth decimal place); and provided
further, that if the average life of such Note is less than one year, the
one-year TCMYI shall be used.
Prepayments of Principal at Par. Each series of Bonds may be prepaid in
part on any Payment Date at a price equal to the principal amount thereof,
together with accrued interest to the date of such prepayment, upon receipt by
the Bond Trustee of payments (i) resulting from the prepayment of the related
Notes or any portion of the Notes in the event of a condemnation or casualty
affecting all or a substantial portion of the related Property or (ii) in the
event that a portion of condemnation proceeds is paid to the holders of the
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<PAGE> 29
Notes following a partial condemnation of a Property. See "DESCRIPTION OF THE
NOTES -- Distributions on the Notes -- Prepayments of Principal at Par" herein.
The principal amount of any series of Bonds to be so prepaid will be equal to
the then-outstanding aggregate balances of the corresponding Notes relating to
the Property, the Lease of which is being terminated in connection with such
casualty or condemnation.
If Bonds are to be partially prepaid (except by operation of the Sinking
Fund), principal prepayments on a series of Bonds will be distributed pro rata,
without priority of one Bond over another, in the proportion that the aggregate
principal amount of each such Bond bears to the aggregate amount of all
outstanding Bonds of such series.
Each Bondholder will be entitled to receive a pro rata share of any
interest payment, Sinking Fund payment and prepayment made with respect to the
series of Bonds in which such Bond evidences an interest.
In the event that there shall have been any partial prepayment of the Bonds
(other than by operation of the Sinking Fund), the amount of each Sinking Fund
payment with respect to such Bonds subsequent to such prepayment shall be
reduced proportionately, and set forth in a new schedule of Sinking Fund
payments attached to the related Note Indentures provided by the Note Trustee to
the Bond Trustee based on information supplied to the Note Trustee by the Owner
Trustee.
SECURITY
The Bonds will be secured primarily by (i) the Pledge, (ii) the Note
Assignment and (iii) the Collateral Assignments from the Note Trustee to the
Bond Trustee. Each Series A Note, Series B Note and Series C Note will have a
maturity date and an interest rate corresponding to the interest rate on the
Series A Bonds, Series B Bonds and Series C Bonds, respectively. The aggregate
principal amount of each series of Notes with respect to all of the Properties
will be the same as the aggregate principal amount of the corresponding series
of Bonds. See "STRUCTURE OF THE TRANSACTION" and "DESCRIPTION OF THE NOTES"
herein.
EVENTS OF DEFAULT
If any one or more of the following events of default under the Bond
Indenture ("Bond Indenture Events of Default") shall occur:
(i) non-payment (a) of (1) any payment of interest accrued on any of
the Bonds or (2) any Sinking Fund payment on any of the Bonds, within five
days after notice that the same is due; or (b) of other sums which the
Issuer is obligated to pay under the Bond Indenture including any other
prepayment (together with any Make-Whole Premium) within 15 days after
notice that the same is due;
(ii) default by the Issuer in the due observance or performance of any
term, covenant or condition on its part to be performed under the Bond
Indenture (other than a default under clause (i) above) that would have a
material adverse effect on the lien of the Bond Indenture or the repayment
of the Bonds, continued unremedied for a period of 30 days after notice
thereof to the Issuer from the Bond Trustee or a Bond Majority in Interest,
except that if any such default cannot with due diligence be cured within a
period of 30 days, such default shall not be deemed to continue if the
Issuer proceeds promptly and with all due diligence to cure the default and
diligently completes the curing thereof;
(iii) any of the representations or warranties made by the Issuer is
found to be untrue in any material respect which would have a material
adverse effect on the lien of the Bond Indenture or the repayment of the
Bonds;
(iv) a Note Indenture Event of Default (as defined herein) shall have
occurred and be continuing;
(v) the Issuer shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or it shall consent to any such relief or to the
28
<PAGE> 30
appointment of or taking or possession by any such official in any
involuntary case or other proceeding commenced against it, or it shall make
a general assignment for the benefit of creditors; or
(vi) a decree or order for relief shall be entered by a court having
jurisdiction over the Issuer in any involuntary case under any bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a
trustee, receiver, liquidator, custodian or other similar official of the
Issuer, its interest in the Note Indentures or any substantial part of its
property, or ordering the winding-up or liquidation of its affairs, and
such decree or order shall remain undismissed or unstayed for a period of
90 consecutive days;
then (except in the case of a Bond Indenture Event of Default set forth in
clause (iv) above of less than all of the Note Indentures, which may not be a
basis to accelerate the Bonds) in any such event, the Bond Trustee may, or, upon
written direction of 25% of the affected Bondholders, the Bond Trustee shall,
upon notice to the Issuer (with a copy to Kmart and the Owner Trustee)
accelerate the maturity of the affected Bonds; provided, however, that in the
case of a Bond Indenture Event of Default set forth in clause (v) or clause (vi)
above, the maturity of the Bonds shall automatically be accelerated without
notice from any party to another. In such case, the unpaid principal amount of
the accelerated Bonds, with accrued interest thereon, shall become immediately
due and payable; provided, however, that a Bond Majority in Interest may rescind
such acceleration of the Bonds if such Bond Indenture Event of Default is cured.
The determination of a Bond Indenture Event of Default shall be made
separately with respect to each series of Bonds. The occurrence of a Bond
Indenture Event of Default with respect to a series of Bonds by itself shall not
constitute or trigger a Bond Indenture Event of Default with respect to any
other series of Bonds, although the same circumstances may give rise
simultaneously to Bond Indenture Events of Default for more than one series of
Bonds.
At any time after such acceleration of all of the Bonds and before any sale
of the trust estate created by the Bond Indenture, or any part thereof, shall
have been made pursuant to any sale as provided in the Bond Indenture, a Bond
Majority in Interest may rescind and annul such declaration and its consequences
if: (i) there shall have been paid to or deposited with the Bond Trustee a sum
sufficient to pay (a) all overdue installments of interest on all Bonds, (b) the
principal and any Make-Whole Premium on any Bonds that have become due otherwise
than by reason of such acceleration, and interest thereon at the respective
rates provided in the Bonds for late payments of principal or any Make-Whole
Premium and (c) to the extent that payment of such interest is lawful, interest
upon overdue installments of interest at the rate specified in the Bonds; and
(ii) all Bond Indenture Events of Default, other than the non-payment of the
principal of Notes which have become due solely by such acceleration, have been
cured or waived as provided in the Bond Indenture. No such rescission shall
affect any subsequent Bond Indenture Event of Default or impair any right with
respect to such subsequent Bond Indenture Event of Default.
The Bond Trustee must notify the Bondholders within 45 days after the
occurrence of any default which could become a Bond Indenture Event of Default
known to it, unless it has determined (except in the case of defaults in payment
of the Bonds) that withholding such notice is in the best interests of the
Bondholders as provided in Section 315(b) of the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Bond Indenture does not require Kmart
to furnish periodic evidence of compliance with the terms of the Leases.
ENFORCEMENT OF REMEDIES
The Bond Indenture provides that if a Bond Indenture Event of Default shall
have occurred and be continuing, the Bond Trustee may exercise certain rights or
remedies available to it under applicable law, including foreclosing on the lien
of the Bond Indenture as against the Asset Pool that relates to the affected
series of Bonds (subject to the rights of Kmart or any assignee or sublessee if
no Lease Event of Default has occurred); provided, however, that if a Bond
Indenture Event of Default arises solely by reason of one or more events or
circumstances that constitute a Note Indenture Event of Default under fewer than
all of the Note Indentures, neither the Bond Trustee nor the affected
Bondholders shall be entitled to accelerate the maturity of any of the Bonds and
the Bond Trustee and Bondholders shall only be entitled to exercise remedies
with
29
<PAGE> 31
respect to the portion of the Note Trust Estate relating to such Note Indenture
or Note Indentures and the Notes issued therefrom.
If a Lease Event of Default shall have occurred and be continuing, the Bond
Trustee as assignee of the Issuer's rights under the related Note Indenture and
of the related Lease and Mortgage shall be entitled to exercise remedies
afforded to the Note Trustee under the related Note Indenture, as well as the
remedies afforded to the Owner Trust by the related Lease for Lease Events of
Default. See "DESCRIPTION OF THE LEASES -- Events of Default" herein.
No Bond Owner shall have any right to institute any suit, action or
proceeding for the foreclosure of the lien of the Bond Indenture, for the
appointment of a receiver or for the enforcement of any remedy unless a Bond
Majority in Interest has directed the Bond Trustee in writing to institute such
action, suit or proceeding and has offered indemnity as provided in the Bond
Indenture, the Bond Trustee shall have failed to act for 30 days thereafter and
no inconsistent direction shall have been received from a Bond Majority in
Interest during such 30-day period. Nothing contained in the Bond Indenture,
however, impairs the right of any Bond Owner to enforce the payment of the
principal, interest and any Make-Whole Premium due on any Bond at or after the
maturity thereof.
The rights of the Bond Owners under the Bond Indenture are limited in
certain respects. A Bond Indenture Event of Default may exist without a Lease
Event of Default also existing and in such event Kmart may remain in possession
of the Properties and will not be required to pay more than the amounts of rent
required to be paid periodically under the Leases (in the absence of a Lease
Event of Default) even if the Bonds have been accelerated. Also, it is possible
that a court would not apply the measure of damages specified in the Lease in
the event of a Lease Event of Default.
DISCHARGE OF LIEN
The Bond Indenture will cease to be of further effect upon, among other
things, payment in full of the principal, interest and any Make-Whole Premium
due on all of the Bonds.
AMENDMENTS
Without the consent of any of the Bondholders, each of the Issuer and the
Bond Trustee shall enter into one or more supplemental Bond Indentures (each, a
"Supplemental Bond Indenture"), provided that such Supplemental Bond Indentures
are not inconsistent with the rights of Kmart under any Lease: to evidence the
succession of another corporation to the rights, obligations and interests of
Kmart or the Issuer; to subject additional property to the lien of the Bond
Indenture; to modify, eliminate or add provisions of the Bond Indenture as
necessary to qualify the Bond Indenture (including any Supplemental Bond
Indenture) under the Trust Indenture Act; to cure any ambiguity or to correct
any inconsistency in the Bond Indenture; to evidence the succession of a new
Bond Trustee or Tax Administrator or to add a co-trustee or separate trustee; to
make other amendments or provisions with respect to matters or questions arising
under the Bond Indenture that shall not be inconsistent with the provisions of
the Bond Indenture, provided that such amendment or provision shall not
adversely affect in any material respect the interest of the Bondholders; or to
make such other amendments or provisions as are necessary to protect the REMIC
status of the REMICs.
With the consent of a Bond Majority in Interest, the Issuer may, and the
Bond Trustee shall, enter into Supplemental Bond Indentures for the purpose of
adding provisions or changing the rights and obligations of the Bondholders and
of the Issuer; provided, however, that no such Supplemental Bond Indenture shall
(a) be inconsistent with the rights of Kmart under any Lease or (b) without the
consent of each holder of an outstanding Bond affected thereby: change the
stated maturity of the principal of, or any installment of interest, or the
dates or circumstances of payment of any Make-Whole Premium on any Bond, or
reduce the principal amount thereof or the interest thereon or any amount
payable upon the prepayment thereof, or change the circumstances for prepayment;
impair the right to institute suit for the enforcement of any such payment;
permit the creation of any lien prior to or pari passu with the lien of the Bond
Indenture; terminate the lien of the Bond Indenture or deprive any Bondholder of
the security afforded by the lien of the Bond Indenture; reduce the amounts
payable under the Notes assigned to the Bond Trustee or change the time for
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<PAGE> 32
the payment thereof so that such payments are less than the amounts necessary to
pay when due the principal, interest and any Make-Whole Premium on the
outstanding Bonds; reduce the percentage in principal amount of the outstanding
Bonds of all series, the consent of whose holders is required to approve such
Supplemental Bond Indentures or any waiver; or modify any of the provisions
concerning Supplemental Bond Indentures except to further restrict such
provisions. Promptly after the execution by the Issuer and the Bond Trustee of
any Supplemental Bond Indenture, the Bond Trustee shall transmit a written
notice, setting forth in general terms the substance of such Supplemental Bond
Indenture, to all Bondholders.
THE BOND TRUSTEE
The Bank of New York, a New York banking corporation, will act as the Bond
Trustee. Kmart has and may from time to time in the future have banking
relations with the Bond Trustee in the ordinary course of business.
The Bond Indenture provides that in the case of any Bond Indenture Event of
Default, the Bond Trustee will exercise such of the rights and powers vested in
it by the Bond Indenture, and will use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise under the circumstances in
the conduct of his or her own affairs. The Bond Trustee will not be liable for
any error of judgment made in good faith (unless the Bond Trustee is negligent
in ascertaining the pertinent facts) or any action taken or omitted to be taken
by it in good faith in accordance with the direction of a Bond Majority in
Interest. Subject to such provision, the Bond Trustee will be under no
obligation to exercise any of the rights and powers granted it under the Bond
Indenture at the direction of any Bondholder if the Bond Trustee determines in
good faith that the action so directed would involve it in personal liability.
DESCRIPTION OF THE NOTES
The statements under this caption are summaries of the terms of the Notes
and the Note Indentures, as amended and restated concurrently with the purchase
of the Interim Notes from the Initial Noteholder, and do not purport to be
complete. The summaries make use of terms defined in, and are qualified in their
entirety by reference to, all of the provisions of the Notes and the Note
Indentures, the forms of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Except as otherwise indicated, the
following summaries relate to the Notes and the Note Indenture relating to each
Property in respect of which such Notes are to be issued.
GENERAL
Each Note Indenture is an agreement between an Owner Trust and the Note
Trustee and relates to a single Property. Three series of Notes, each
corresponding to one of the series of Bonds, have been issued under each Note
Indenture. Each series of Notes will have the same maturity date, interest rate
and principal amount as the Bonds of the related series. The Notes issued
pursuant to each Note Indenture are secured as described below under "--
Security". The Notes, Note Indentures and Mortgages will not have cross-default
or cross-collateralization provisions. So long as the Notes are subject to the
lien of the Bond Indenture, the Bond Trustee shall be entitled to exercise all
the rights, privileges and remedies of the holders of Notes under each Note
Indenture.
Each Owner Trust has leased its corresponding Property to Kmart. Kmart is
obligated under each Lease to make Rental Payments to the related Owner Trust in
amounts that will be at least sufficient to pay when due all payments required
to be made on the Notes. The Notes are not direct obligations of, or guaranteed
by, Kmart. Payments under the Leases in excess of the amounts necessary to make
required payments on the Notes will be paid by the Bond Trustee to the Note
Trustee for distribution pursuant to the appropriate Note Indenture and will not
be available for distributions on the Notes or the Bonds, except that upon a
Note Indenture Event of Default, amounts received by the Bond Trustee shall be
distributed to the Note Trustee, to the extent such amounts are due to it for
the performance of its duties, and then to the Bondholders until they have
received the full amount of principal, interest and any Make-Whole Premium due
on the Notes, prior to distribution to the Note Trustee for distribution
pursuant to the appropriate Note Indenture to the appropriate
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Owner Trustee. Excepted Payments (as defined herein) will not be available for
distribution to the Bondholders. See "-- Remedies" herein. Kmart's rental
obligations as lessee under each Lease will be general obligations of Kmart.
DISTRIBUTIONS ON THE NOTES
Interest on the Notes is payable semi-annually, in immediately available
funds, on the unpaid principal amount of each of the Notes at the applicable
interest rate on each Payment Date, commencing July 1, 1994. Interest is
calculated on the basis of a 360-day year consisting of 12 months of 30 days
each. Interest payable on any Payment Date accrues on each Note from and
including the previous Payment Date (or from and including the Closing Date with
respect to the first Payment Date) to but excluding the Payment Date.
Scheduled Payments of Principal. The Note Indentures provide for the
payment of principal on the Notes on scheduled Payment Dates (the "Scheduled
Payment Dates") through the operation of the Sinking Fund. The aggregate
principal amount of Notes to be prepaid on each such Scheduled Payment Date, as
well as the aggregate principal amount payable on the final maturity date of
each series of Notes, will be set forth in the schedule attached to the related
Note. Payments of principal on the Notes of each series through the operation of
the Sinking Fund shall be distributed on a pro rata basis. In the event of any
partial prepayment of any series of Notes (other than through the operation of
the Sinking Fund), the amount of each sinking fund payment on such Notes (and
the amount due at the stated maturity of such series of Notes) will be reduced
proportionately and the schedules attached to the affected Notes will be
amended.
Prepayments of Principal with a Make-Whole Premium. The related Notes may
be prepaid, in part, in the event that (i) Kmart terminates any Lease due to
economic obsolescence or (ii) a Lease is terminated due to an unpermitted use of
the related Property by an unrelated third party involving the mining or removal
of oil, gas or minerals. See "DESCRIPTION OF THE LEASES -- Early Termination"
herein. Such Notes will be prepaid on a Payment Date, provided that not less
than 30 days' notice is given by first-class mail to each holder of a Note to be
prepaid at its address appearing in the Note register at a price equal to the
sum of (i) the principal amount thereof plus (ii) accrued interest, if any, to
the date of prepayment plus (iii) the Make-Whole Premium with respect to the
Notes.
Prepayments of Principal at Par. The related Notes may be prepaid in whole,
due to a condemnation or casualty described in clause (i), following, and in
part, due to a partial condemnation described in clause (ii), following, on any
Payment Date at a price equal to the principal amount thereof, together with
accrued interest to the date of such prepayment of such prepayment, on not less
than 30 days' notice by mail, upon receipt by the Note Trustee of payments (i)
resulting from the termination of a Lease by Kmart in the event of a
condemnation or casualty affecting all or a substantial portion of the related
Property in which case the principal amount of Notes to be prepaid will be equal
to the then-outstanding aggregate balances of the Notes corresponding to the
Lease being terminated or (ii) in the event that a portion of such condemnation
proceeds is paid to the Note Trustee pursuant to the Lease following a partial
condemnation of a Property where such Lease is not terminated, in which case the
principal amount of the Notes to be prepaid will equal the amount of such
condemnation proceeds allocated to the Note Trustee; provided that such amount
is greater than the lesser of (i) $500,000 and (ii) 10% of the purchase price of
the related Property. See "DESCRIPTION OF THE BONDS -- Distributions on the
Bonds -- Prepayments of Principal at Par" above.
Optional Prepayment. The Notes may not be prepaid at the option of the
Owner Trustee or the Issuer.
Any prepayments on the Notes (except through the operation of the Sinking
Fund) shall be made on a pro rata basis without preference or priority of any
Note over any other Note.
SECURITY
The Notes issued by each Owner Trust will be secured primarily by (i) the
related Lease Assignment, and (ii) the Mortgage on the related Property,
including the rights to receive payments under the foregoing (except for
Excepted Payments) and all rights (exclusive of Excepted Rights) of the Owner
Trustee, now
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existing or hereafter arising, to exercise any election or option or to make any
decision or determination or to give or receive any notice, consent, waiver or
approval or to take any other action under or in respect of any of the
foregoing, as well as all rights, powers and remedies on the part of the Owner
Trustee, now existing or hereafter arising and whether arising under any of the
foregoing or by statute or at law or equity or otherwise, arising out of any
Note Indenture Event of Default. Notes issued under each Note Indenture will not
be secured by any of the Properties securing Notes issued under any other Note
Indenture (including any other property acquired by any of the Owner Trusts).
"Excepted Payments" include, among other things, certain indemnity payments
by Kmart to the appropriate Owner Trustee or the Owner Participant, any amounts
payable under any Operative Document (as defined in the Note Indentures) to pay
such Owner Trustee's fee or to reimburse such Owner Trustee, the Owner
Participant or their affiliates for performing or complying with any of the
obligations of Kmart under any Operative Document, any payments to the Owner
Participant constituting payment of the purchase price for such Owner
Participant's interest in the Owner Trust, insurance proceeds (or self-insurance
payments or policy deductibles) payable to such Owner Trustee or to the Owner
Participant under liability insurance maintained by Kmart pursuant to the terms
of such Lease, or insurance proceeds payable under policies separately
maintained by the Owner Trustee or the Owner Participant in satisfaction of
Kmart's obligation to maintain such insurance under the Lease, and any payments
of interest to the extent attributable to the foregoing payments.
"Excepted Rights" shall mean (i) all rights with respect to Excepted
Payments of the person entitled thereto and (ii) all rights and privileges under
the Granting Clause Documents (as defined in the Note Indentures) or Operative
Documents expressly reserved to the appropriate Owner Trustee or the Owner
Participant with the Note Trustee pursuant to clauses (aa), (bb) and (cc) of the
granting clauses of the related Note Indenture for the periods specified in such
Note Indenture.
EVENTS OF DEFAULT
The following are Events of Default under each of the Note Indentures
("Note Indenture Events of Default"):
(i) non-payment (a) of (1) any payment of interest accrued on any of
the Notes or (2) any Sinking Fund payment on any of the Notes within five
days after notice that the same is due; or (b) of other sums that the
appropriate Owner Trustee is obligated to pay thereunder, but excluding any
Excepted Payments, within 15 days after notice that the same is due;
(ii) a Lease Event of Default shall have occurred and be continuing
(other than any such Lease Event of Default arising by reason of nonpayment
of, or failure to perform with respect to, any Excepted Payment when due);
provided that the Note Trustee or holders of Notes owning not less than a
majority in aggregate principal amount of all outstanding Notes under a
Note Indenture (a "Note Majority in Interest") have given to the
appropriate Owner Trustee, by registered or certified mail, a written
notice stating the Note Trustee's or such holders' intention to terminate
the Lease, commence action to foreclose on the Property or exercise any
other comparable remedies under the Lease at least 30 days prior to the
exercise thereof;
(iii) the related Owner Trust shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect, or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or it shall consent to any such relief or
to the appointment of or taking of possession by any such official in any
involuntary case or other proceeding commenced against it, or it shall make
a general assignment for the benefit of creditors;
(iv) a decree or order for relief shall be entered by a court having
jurisdiction over the related Owner Trust in any involuntary case under any
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a trustee, receiver, liquidator, custodian or other similar
official of such
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Owner Trust, its interest in the Note Trust Estate or any substantial part
of the Owner Trust's property, or ordering the winding-up or liquidation of
such Owner Trust or its affairs, and such decree or order shall remain
undismissed or unstayed for a period of 90 consecutive days;
(v) a default by the related Owner Trustee in the due observance or
performance of any material term, covenant or condition on its part to be
performed under any of the Operative Documents set forth therein (other
than a default under clause (i) or (ii) above) including any failure by the
related Owner Trustee to comply in any material respect with any covenant
contained in subparagraphs (aa), (bb) or (cc) of the granting clause of the
Note Indenture, continued unremedied for a period of 30 days after notice
thereof from or on behalf of the Note Trustee to such Owner Trustee, except
that if any such default cannot with due diligence be cured within a period
of 30 days, such default shall not be deemed to continue if such default is
curable and such Owner Trustee proceeds promptly and with all due diligence
to cure the default and diligently completes the curing thereof within 180
days; and
(vii) any of the representations or warranties made by the related
Owner Trustee in any of the Operative Documents is found to be untrue in
any material respect and any such breach impairs the lien of the Note
Indenture, has a material adverse effect on the repayment of the Notes or
results in a material diminution of the value of the Note Trust Estate.
REMEDIES
Subject to certain rights of the Owner Trustee and the Owner Participant to
cure certain Note Indenture Events of Default and to purchase the related Notes
after the occurrence of a Note Indenture Event of Default, as set forth in the
Note Indentures, during the continuance of any Note Indenture Event of Default,
the Note Trustee in its discretion may (or when so directed by a Note Majority
in Interest shall), or a Note Majority in Interest may, in any such case, by
notice in writing to the Owner Participant and the appropriate Owner Trustee
(and to the Note Trustee if given by holders of the outstanding related Notes),
declare the principal of all the outstanding related Notes and the interest
accrued thereon to be due and payable immediately, and thereupon the same shall
become immediately due and payable together, in the case of a Note Indenture
Event of Default that is a Lease Event of Default, with a Make-Whole Premium on
the principal amount then due. In the event that the Owner Trustee elects to
purchase the Notes after the occurrence of a Note Indenture Event of Default,
the purchase price to be paid to the holders of such Notes shall include a
Make-Whole Premium unless such Note Indenture Event of Default arises from a
Lease Event of Default relating to the bankruptcy or insolvency of Kmart.
At any time after such acceleration and before any sale of any portion of
the collateral securing the Note Indenture, a Note Majority in Interest may
rescind and annul such declaration and its consequences if: (i) there shall have
been paid to or deposited with the Note Trustee a sum sufficient to pay (a) all
overdue installments of interest on the related Notes, (b) the principal of and
premium, if any, on any related Notes that have become due otherwise than by
such acceleration and interest thereon at the respective rates provided in the
Notes for late payments of principal or premium, and (c) to the extent that
payment of such interest is lawful, interest upon overdue installments of
interest at the rate of 1% per annum over the weighted average rate of interest
for the Notes; and (ii) all Events of Default, other than the non-payment of the
principal of Notes that have become due solely by such acceleration, have been
cured or waived by a Note Majority in Interest. No such rescission shall affect
any subsequent Note Indenture Event of Default or impair any right with respect
to such subsequent Note Indenture Event of Default.
ENFORCEMENT OF REMEDIES
Subject to the limitations set forth in the Note Indentures, if a Note
Indenture Event of Default that constitutes a Lease Event of Default shall have
occurred and be continuing, then in every such case the Note Trustee, as
assignee and mortgagee or secured party thereunder or otherwise, may, to the
extent permitted by applicable law, exercise any or all of the rights and powers
and pursue any or all of the remedies under the related Lease, Mortgage, Note
Indenture and the Granting Clause Documents and, in connection therewith, may
take possession of all or part of the related Note Trust Estate and may exclude
the appropriate Owner
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Trustee and Kmart (provided that a Lease Event of Default has occurred and is
continuing) and, to the extent permitted by applicable law, all persons claiming
under either of them wholly or partly therefrom; provided, however, that,
notwithstanding any provision herein to the contrary, the Note Trustee shall not
exercise any remedies against the related Note Trust Estate unless a declaration
of acceleration of the Notes has been made. Any provision of the Lease, the Note
Indentures or any other Operative Document to the contrary notwithstanding, the
Note Trustee shall not foreclose the lien of the Note Indenture or of the
Mortgage or otherwise exercise remedies that would result in the exclusion of
the appropriate Owner Trustee from the Note Trust Estate, the Property or any
substantial part of either as a result of any Note Indenture Event of Default
that arises solely by reason of one or more events or circumstances that
constitute a Lease Event of Default, unless the Note Trustee has taken or is
concurrently taking action under the applicable Lease to dispossess Kmart, to
terminate the applicable Lease or to effect any comparable remedy thereunder.
Upon the occurrence and continuation of any Note Indenture Event of
Default, the Note Trustee may, and upon the request of a Note Majority in
Interest shall, (i) direct payment to it of all monies and enforce any agreement
or undertaking constituting a part of the related Note Trust Estate by any
action, suit, remedy or proceeding authorized or permitted by the related Note
Indenture or by law or by equity, and whether for the specific performance of
any agreement contained in such Note Indenture or for an injunction against the
violation of any of the terms thereof, (ii) enforce the liens and security
interests (a) granted by such Note Indenture on all or any part of the related
Note Trust Estate and (b) on all collateral securing the Notes by foreclosure, a
sale or action on the Notes or any other remedy available to it under applicable
law (subject to the rights of Kmart under the Lease) and (iii) sell, assign,
transfer and deliver, from time to time to the extent and in the manner
permitted by applicable law, all or any part of the related Note Trust Estate or
any interest therein, on such terms as the Note Trustee, in its discretion as
attorney-in-fact, may determine, or as may be required by applicable law. The
Note Trustee and any of the holders of the Notes may purchase property sold out
of the Note Trust Estate at any of the foregoing sales and may, if permitted by
applicable law, make a credit bid therefor in an amount of up to the aggregate
amount of all sums due under their respective Notes and the Note Indenture
(including, in the case of the Note Trustee, a credit bid therefor in an amount
of up to the aggregate amount due with respect to all of the outstanding Notes).
The Note Trustee may exercise any other right or remedy that may be
available to it under applicable law or proceed by appropriate court action to
enforce the terms of the Note Indentures or to recover damages for the breach
thereof. So long as the Issuer is the registered holder of any Note, none of the
Note Trustee, the Owner Trustee, or the Owner Participant will be authorized or
empowered to acquire title to any portion of the Note Trust Estate or to take
any action with respect to all or any portion of the Note Trust Estate if such
acquisition or action would cause any of the REMICs to fail to qualify as a
"real estate mortgage investment conduit" for federal income tax purposes.
Upon the request of a Note Majority in Interest, the Note Trustee shall
waive any past defaults that could result in a Note Indenture Event of Default
and their consequences and upon any such waiver such defaults shall cease to
exist, and any Note Indenture Events of Default arising therefrom shall be
deemed to have been cured, but no such waiver shall extend to any subsequent or
other default or impair any right with respect to such subsequent or other
default; provided, however, that in the absence of written instructions from the
holders of all related Notes then outstanding, the Note Trustee shall not waive
any such default in the payment of the principal, interest, any Make-Whole
Premium or other amounts due under, any related Note then outstanding, or in
respect of a covenant or provision thereof that cannot be modified or amended
without the consent of each holder of a related Note.
In the event of any default by Kmart in the payment of any installment of
basic rent the appropriate Owner Trustee or the Owner Participant, without the
consent of the Note Trustee or any holder of the Notes, may pay to the Note
Trustee a sum equal to the amount of all (but not less than all) principal and
interest as shall then be due and payable on the Notes secured by the related
Property, together with any interest on account of such payment being overdue.
However, the prior sentence shall not apply to any default by Kmart in the
payment of any installment of basic rent due under the Lease, if default by
Kmart in the payment of three or more consecutive installments of basic rent, or
in the payment of a total of six or more installments of basic rent, shall have
been cured by the appropriate Owner Trustee or the Owner Participant pursuant to
the
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foregoing sentence. In the event that such Owner Trustee or the Owner
Participant shall pay such amounts to the Note Trustee in satisfaction of
Kmart's obligation, no Note Indenture Event of Default has occurred and is
continuing and in the event that Kmart subsequently pays such amounts to the
Note Trustee, the Note Trustee will release such amounts received from Kmart to
the Owner Trustee or the Owner Participant. In the event of any default by Kmart
in the performance of any obligation under the corresponding Lease (other than
the obligation to make Rental Payments) or any other Operative Document, the
appropriate Owner Trustee or the Owner Participant, without the consent of the
Note Trustee or any holder of the Notes, may exercise rights under the
corresponding Lease to perform such obligation on behalf of Kmart. Solely for
the purpose of determining whether there exists a Note Indenture Event of
Default, (i) any such payment by such Owner Trustee or the Owner Participant
shall be deemed to remedy any default by Kmart in the payment of Rental Payments
theretofore due and payable and to remedy any default by such Owner Trustee in
the payment of any amount due and payable under the related Notes and (ii) any
such performance by such Owner Trustee or the Owner Participant of any
obligation of Kmart under such Lease or other related Operative Document shall
be deemed to remedy any default by Kmart in the performance of such obligation
and to remedy any related default by the Owner Trustee under the related Note
Indenture.
DISCHARGE OF LIEN
Each Note Indenture will cease to be of further effect when, among other
things, (i) the principal, interest and any Make-Whole Premium on all related
Notes has been paid, (ii) all related Notes have been delivered to the Note
Trustee for cancellation, or (iii) the relevant Owner Trust has deposited with
the Note Trustee in trust an amount sufficient to pay such Notes, including
principal, interest and any Make-Whole Premium to the date of such maturity or
redemption, together with all other sums then due and payable thereunder.
LIMITATION OF LIABILITY
The Notes are not direct obligations of, or guaranteed by, Kmart. None of
the Owner Trusts, the Owner Trustees, the Owner Participant or the Note Trustee,
or any affiliate thereof, shall be personally liable to any holder of a Note or
to the Note Trustee for any amounts payable under the Notes or for any liability
under such Note Indenture. All payments of principal, interest and any
Make-Whole Premium on the Notes issued with respect to any Property (other than
payments made in connection with a purchase of Notes by the Owner Participant)
will be made only from the assets subject to the lien of the Note Indenture or
the income and proceeds received by the Note Trustee therefrom (including Rental
Payments payable by Kmart under the related Lease).
AMENDMENTS
With the consent of a Note Majority in Interest, by directive delivered to
the Owner Trustee, Kmart and the Note Trustee, the Owner Trustee may, and the
Note Trustee shall, enter into one or more supplemental Note Indentures (each, a
"Supplemental Note Indenture") for the purpose of adding provisions or changing
the rights and obligations of the holders of the related Notes and of the Owner
Trustee under the Note Indenture; provided, however, that no such Supplemental
Note Indenture shall (i) be inconsistent with the rights of Kmart under the
Lease or (ii) without the consent of the holder of each outstanding Note
affected thereby: change the stated maturity or any date for payment of the
principal of, or any installment of interest on, or the dates or circumstances
of payment of the Make-Whole Premium, if any, on, any Note; reduce the principal
amount, interest on or any amount payable upon the prepayment of any Note, or
change the circumstances for prepayment thereof; impair the right to institute
suit for the enforcement of any such payment; permit the creation of any lien
prior to or pari passu with the lien of the Note Indenture; terminate the lien
of the Note Indenture; deprive any holder of any Note of the security afforded
by the lien of the Note Indenture; terminate the Lease; reduce the amounts
payable under the Lease or change the time for the payment thereof so that such
payments are less than the amounts necessary to pay when due the principal,
interest and any Make-Whole Premium on the outstanding Notes; reduce the
percentage in principal amount of the outstanding Notes of all series, the
consent of whose holders is required for any such Supplemental
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Note Indenture, or the consent of whose holders is required for any waiver;
modify any of the provisions with respect to Supplemental Note Indentures,
except to further restrict such provisions; or cause any Note to fail to be a
"qualified mortgage" within the meaning of Section 860G(a)(3) of the Code with
respect to the related REMIC. Promptly after the execution of any such
Supplemental Note Indenture, the Note Trustee shall transmit a written notice to
each holder of a related Note setting forth in general terms the substance of
such Supplemental Note Indenture.
Without the consent of any of the holders of the related Notes, each of the
Owner Trustee and the Note Trustee shall enter into one or more Supplemental
Note Indentures, provided such Supplemental Note Indenture (i) is not
inconsistent with the rights of Kmart under the Lease or (ii) except with the
consent of the holders of all related Notes then outstanding if as a result
thereof the amounts payable to the Owner Trustee under the Lease and assigned to
the Note Trustee hereunder shall not be sufficient to pay when due the principal
of, premium, if any, and interest on all outstanding Notes, for the following
purposes: to evidence the succession of another corporation to the rights,
interests and obligations of Kmart or to evidence the succession of another
corporation to the rights, interests and obligations of the Owner Trustee under
the related Note Indenture and the related Notes; to subject additional property
to the lien of the Note Indenture; to modify, eliminate or add to the provisions
of the Note Indenture to such extent as shall be necessary to qualify the Note
Indenture (including any Supplemental Note Indenture) under the Trust Indenture
Act of 1939; to cure any ambiguity or correct any inconsistency in such Note
Indenture; to evidence the succession of a new Note Trustee thereunder or add a
co-trustee or separate trustee; to make any other amendments or provisions with
respect to matters or questions arising under the Note Indenture which shall not
be inconsistent with the provisions of the Note Indenture, provided that such
amendment or provision shall not adversely affect in any material respect the
interest of the holders of the related Notes; or to make such other amendments
or provisions as are necessary to protect the REMIC status of the REMICs.
THE NOTE TRUSTEE
The Bank of New York, a New York banking corporation, will act as Note
Trustee. Kmart has and may from time to time in the future have banking
relations with the Note Trustee in the ordinary course of business.
The Note Indenture provides that in the case of any Note Indenture Event of
Default, the Note Trustee will exercise such of the rights and powers vested in
it by the Note Indenture, and will use the same degree of care and skill in its
exercise thereof as a prudent person would exercise under the circumstances in
the conduct of his or her own affairs. The Note Trustee will not be liable for
any error of judgment made in good faith (unless the Note Trustee is negligent
in ascertaining the pertinent facts) or any action taken or omitted to be taken
by it in good faith in accordance with the direction of a Note Majority in
Interest. Subject to such provision, the Note Trustee will be under no
obligation to exercise any of the rights and powers granted it under the Note
Indenture at the request of any holder of the Notes if the Note Trustee
determines in good faith that such action would involve it in personal
liability.
The Note Trustee may rely upon, and shall be protected in acting or
refraining from acting in reliance upon, any paper or document delivered by it
to be genuine and to have been signed or presented by the proper party or
parties. The Note Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Note Indenture at the request or direction
of any of the holders of the Notes unless such holders shall have offered to the
Note Trustee reasonable security or indemnity (including, without limitation,
the advancement of monies for out-of-pocket costs) against the costs, expenses
and liabilities which might be incurred by it in compliance with such request or
direction. The Note Trustee shall not be bound to make any investigation into
the facts or matters stated in any document but may, in its discretion, make
such further inquiry or investigation into such facts or matters as it may see
fit. If the Note Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the relevant books, records and
premises of the appropriate Owner Trustee, personally or by agent or attorney.
The Note Trustee may execute any of the trusts or powers under the Note
Indenture or perform any duties thereunder either directly or indirectly or by
or through agents or attorneys, and the Note Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney appointed
by it with due care.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Bonds. The discussion does not purport to deal with the federal income tax
consequences to all categories of investors, some of which may be subject to
special rules. The discussion focuses primarily on investors who will hold the
Bonds as "capital assets" (generally, property held for investment) within the
meaning of Section 1221 of the Code, but much of the discussion is applicable to
other investors as well. Investors should note that, although final regulations
recently were released under the REMIC provisions of the Code (the "REMIC
Regulations") by the United States Treasury Department (the "Treasury"), no
currently effective regulations or other administrative guidance has been issued
with respect to certain provisions of the Code that are or may be applicable to
the Bonds. Furthermore, the REMIC Regulations do not address many of the issues
that arise in connection with the formation and operation of a REMIC. In
addition, substantial uncertainty exists with respect to the application to the
Bonds of the guidance provided by the Treasury on original issue discount
("OID"). Hence, definitive guidance cannot be provided with respect to many
aspects of the tax treatment of the Bonds. Moreover, the summary is based on
current law, and there can be no assurance that the Internal Revenue Service
(the "IRS") will not take positions that would be materially adverse to
investors. Finally, the summary does not purport to address the anticipated
state or local income tax consequences to investors of owning and disposing of
the Bonds. Consequently, investors should consult their own tax advisors in
determining the federal, state or local, foreign, and any other tax consequences
to them of the purchase, ownership, and disposition of the Bonds.
For purposes of this discussion under "Certain Federal Income Tax
Considerations," the Series AR Bonds, Series BR Bonds, and Series CR Bonds are
not included within the term "Bonds."
REMIC QUALIFICATION
Elections will be made to treat each of three separate Asset Pools,
consisting principally of the Series A Notes, Series B Notes, and Series C
Notes, as three separate REMICs (the Pool A REMIC, the Pool B REMIC and the Pool
C REMIC, respectively) within the meaning of Code Section 860D. Hunton &
Williams, special tax counsel, will deliver its opinion on the Closing Date,
subject to the assumptions and representations set forth therein, that the Bonds
will constitute "regular interests" in their respective REMICs for federal
income tax purposes.
In order for an Asset Pool to be eligible for REMIC status, substantially
all of the assets of the Asset Pool must consist of "qualified mortgages" and
"permitted investments" as of the close of the third month beginning after the
closing date and at all times thereafter (the "Asset Qualification Test"). A
REMIC will be deemed to satisfy the Asset Qualification Test if no more than a
de minimis amount of its assets (i.e., assets with an aggregate adjusted basis
that is less than one percent of the aggregate adjusted basis of all the REMIC's
assets) are assets other than qualified mortgages and permitted investments. A
qualified mortgage is any obligation that is principally secured by an interest
in real property and that is either transferred to the REMIC on the closing date
or purchased by the REMIC pursuant to a fixed price contract within a three-
month period thereafter. Because the Notes are principally secured by the
related Properties and will be acquired by the REMICs on the Closing Date, they
will be considered "qualified mortgages" for purposes of the REMIC Provisions of
the Code.
Permitted investments include cash-flow investments, foreclosure property,
and qualified reserve assets. Cash-flow investments are investments of amounts
received with respect to qualified mortgages for a temporary period (not to
exceed 13 months) before distribution to holders of regular or residual
interests in the REMIC. The cash flow and investment procedures to be followed
under the Bond Indenture with respect to each REMIC will be structured to meet
the requirements for cash-flow investments. Foreclosure property generally is
property acquired by a REMIC in connection with the default or imminent default
of a qualified mortgage. Foreclosure property may not be held for more than two
years, unless it is established to the satisfaction of the Treasury that an
extension of the two-year period is necessary for the orderly liquidation of the
foreclosure property. The Treasury may grant one or more extensions, but any
such extension will not extend the grace period beyond the date that is six
years after the date such foreclosure property is acquired.
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Qualified reserve assets are intangible investment assets (other than REMIC
residual interests) that are part of a reasonably required reserve (a "Qualified
Reserve Fund") maintained by the REMIC to provide for full payment of expenses
of the REMIC or amounts due on the regular interests in the event of defaults or
delinquencies on qualified mortgages, lower than expected returns on cash-flow
investments, or interest shortfalls on qualified mortgages caused by prepayments
of those mortgages. Each Asset Pool may contain a reserve fund for payment of
the expenses of the related REMIC (although the assets of such funds cannot be
used for the payment of principal of and interest on the Bonds). Any such
reserve fund will be designed to be a Qualified Reserve Fund.
In addition to the foregoing asset qualification requirements, the various
interests in a REMIC also must satisfy certain conditions. Each of the interests
in a REMIC must be issued on the Closing Date (or within a specified 10-day
period) and belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions are made pro rata. A REMIC interest qualifies as a regular
interest if (i) it is issued on the startup day with fixed terms, (ii) it is
designated as a regular interest, (iii) it entitles its holder to a specified
principal amount and (iv) if it pays interest, which such interest either (a)
constitutes a specified non-varying portion of the interest on one or more of
the REMICs' qualified mortgages, (b) is payable at a fixed rate with respect to
the principal amount of the regular interest or (c) to the extent permitted
under the REMIC Regulations, is payable at a variable rate with respect to such
principal amount. Interest is payable at a single fixed rate on the Bonds.
Although the Make-Whole Premium potentially is payable with respect to the
Bonds, the REMIC Regulations provide that the payment on REMIC interests of
customary prepayment penalties received by the REMIC on its mortgage loans does
not prevent such interests from meeting the definition of REMIC regular
interests. Based on inquiries into the customary practices in the lending market
for long-term, fixed-rate commercial mortgage loans, the Issuer believes that
the Make-Whole Premium is a customary prepayment penalty.
The Series A Bonds, Series B Bonds and Series C Bonds will constitute a
single class of "regular interests" in the Pool A REMIC, Pool B REMIC and Pool C
REMIC, respectively. The Series AR Bonds, Series BR Bonds and Series CR Bonds
will constitute a single class of "residual interests" in the Pool A REMIC, Pool
B REMIC and Pool C REMIC, respectively. Thus, each of the REMICs will have a
single class of regular interests and a single class of residual interests.
STATUS OF REGULAR BONDS FOR VARIOUS PURPOSES
Bonds held by a Thrift Institution will constitute "qualifying real
property loans" within the meaning of Code Section 593(d)(1) to the extent and
in the same proportion that the assets of the related REMIC would be so treated.
Bonds held by a REIT will constitute "real estate assets" within the meaning of
Code Section 856(c)(5)(A), and interest on the Bonds will be considered
"interests on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) to the extent
that and in the same proportion that, for both purposes, the assets and income
of the assets of the related REMIC qualify for each of the foregoing treatments.
If 95 percent or more of the assets of a REMIC constitute qualifying assets for
Thrift Institutions and REITs, the related Bonds will qualify for the
corresponding status in their entirety. It is anticipated that 95 percent or
more of the assets of the REMICs will constitute such qualifying assets. Bonds
held by a RIC will not constitute "Government securities" within the meaning of
Code Section 851(b)(4)(A)(i), nor will they constitute assets set forth in Code
Section 7701(a)(19)(C) for domestic building and loan associations. Bonds held
by certain financial institutions will constitute an "evidence of indebtedness"
within the meaning of Code Section 582(c)(1).
EFFECT OF REMIC DISQUALIFICATION
If a REMIC failed to comply with one or more of the ongoing requirements of
the Code for REMIC status during one taxable year, the REMIC would not be
treated as a REMIC for such year and thereafter. If the REMIC status of an Asset
Pool were lost, the treatment of the Asset Pool and the related Bonds for
federal income tax purposes would be uncertain. The former REMIC might be
entitled to treatment as a grantor trust under the Code, in which case no
entity-level tax would be imposed on the former REMIC. However, there can be no
assurance that, in the event of REMIC disqualification, each Asset Pool or the
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assets of the Issuer would not be treated as a taxable mortgage pool under Code
Section 7701(i) or an association taxable as a corporation, in which case part
or all of the income derived from the Notes likely would be subject to corporate
income tax before any distributions could be made to Bond Owners. The Code
authorizes the Treasury to issue regulations that address situations where a
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of a REMIC would occur
absent regulatory relief. Such regulations have not yet been issued. Investors
should be aware that any relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC's income for the
period of time in which the requirements for REMIC status are not satisfied.
REMIC-LEVEL TAXES
Income from the "prohibited transactions" of a REMIC are taxed directly to
the REMIC at a 100% rate. Net income from one prohibited transaction may not be
offset by losses from other prohibited transactions. Prohibited transactions
generally include: (i) the disposition of qualified mortgages other than
pursuant to (a) the repurchase of a defective mortgage, (b) the substitution for
a defective mortgage within two years of the Closing Date, (c) a substitution
for any qualified mortgage within three months of the Closing Date, (d) the
foreclosure, default, or imminent default of a qualified mortgage, (e) the
bankruptcy or insolvency of the REMIC or (f) a qualified liquidation of the
REMIC; (ii) the receipt of income from assets that are not the type of mortgages
or investments that a REMIC is permitted to hold; (iii) the receipt of
compensation for services by the REMIC; and (iv) the receipt of gain from
disposition of cash-flow investments other than pursuant to a qualified
liquidation of the REMIC. A disposition of a qualified mortgage or cash-flow
investment will not give rise to a prohibited transaction, however, if the
disposition is required to prevent default on a regular interest resulting from
a default on one or more of the REMIC's qualified mortgages. The REMIC
Regulations also provide that the modification of a mortgage loan generally will
not be treated as a disposition of that loan if it is occasioned by a default or
a reasonably foreseeable default, an assumption of the mortgage loan, or the
waiver of a due-on-sale or encumbrance clause.
In addition, a REMIC generally is subject to tax at a 100% rate on any
contribution to the REMIC after the Closing Date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the Closing Date, (ii) is made to facilitate a qualified liquidation, (iii)
is a payment in the nature of a guarantee, (iv) constitutes a contribution by
the holders of the Residual Bonds to a Qualified Reserve Fund for the payment of
REMIC expenses or (v) is otherwise permitted by Treasury regulations yet to be
issued. The structure and operation of the REMICs generally will be designed to
avoid the imposition of both the 100% tax on contributions and the 100% tax on
prohibited transactions.
To the extent that a REMIC derives certain types of income from foreclosure
property (generally, income relating to dealer activities of the REMIC), it will
be taxed on such income at the highest corporate income tax rate. It is not
anticipated that any of the REMICs will receive significant amounts of such
income.
CURRENT INCOME ON THE BONDS
General
The Bond Trustee will report annually to the IRS and to Bondholders of
record with respect to income accrued on the Bonds. In doing so, the Bond
Trustee will rely on determinations of income made by the Tax Administrator.
Accrual of Income
Overview. The amount of income recognized in any period by the original
purchaser of a Bond will equal the amount of interest accrued on such Bond in
accordance with its terms. Bond Owners must use the accrual method of accounting
with respect to their income on the Bonds, even if they otherwise use the cash
method.
Under Code Section 1272(a)(6), which applies to the Bonds, the income
accrual on such Bonds is determined under a constant yield method that reflects
compounding and that takes into account the prepayment rate for the Notes
assumed in pricing the Bonds (the "Pricing Prepayment Assumption"). As a
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technical matter, the income on a Bond may be characterized as OID income rather
than interest income, because of the possibility that the Make-Whole Premium
will be paid on the Bonds. However, the prepayment assumption used in pricing
the Bonds reflects the expectation that no prepayments would occur on the Notes.
Therefore, the Tax Administrator does not intend to take into account any
projected payments arising from a Make-Whole Premium in computing the yield on a
Bond. Consequently, the yield that the Tax Administrator will use in reporting
the taxable income on a Bond will equal its stated rate of interest. If a
Make-Whole Premium becomes payable, the Bond Owner must include such premium in
its taxable income on the date on which the fact and amount of such Make-Whole
Premium is determinable.
The Treasury recently issued new final regulations relating to OID (the
"Final Regulations"), replacing a set of proposed regulations issued in 1992.
The Final Regulations are effective for instruments issued on or after April 4,
1994. The Final Regulations do not provide guidance directly applicable to
instruments, such as the Bonds, that are governed by Code section 1272(a)(6).
Nonetheless, under the Final Regulations, the Bonds (i) could be considered as
issued with OID equal to the difference between the issue price of such Bonds
and the total amount of payments (including both principal and interest)
expected to be received thereon and (ii), as a technical matter, would be
subject to the rules applicable to instruments providing for contingent
payments.
The Final Regulations did not replace existing proposed regulations dating
from 1986 that relate to the treatment of contingent payments (the "Original
Contingent Payment Rules"). The Treasury has released new proposed regulations
relating to the accrual of income on debt instruments that provide for one or
more contingent payments (the "Unofficial Contingent Payment Regulations").
Although the Unofficial Contingent Payment Regulations were intended to replace
the Original Contingent Payment Rules, the Unofficial Contingent Payment
Regulations were withheld from publication pursuant to a request issued by
President Clinton to allow for review by appropriate officials appointed by the
Clinton administration. Because the Unofficial Contingent Payment Regulations
were withdrawn in January 1993 and to date have not yet been formally issued,
there can be no assurance that the Unofficial Contingent Payment Regulations
will be issued in their original form. However, assuming that the Bonds are sold
at par, the income of an original purchaser of a Bond in any period should be
the same under both the Unofficial Contingent Payment Regulations and the
Original Contingent Payment Rules.
Subsequent Owners. Under current law, a subsequent purchaser could acquire
a Bond with market discount or amortizable premium. For purposes of determining
market discount or amortizable premium, the Original Contingent Payment Rules
provide that the Make-Whole Premium be separated from the remainder of the Bond
(the "Non-Contingent Component"). If a subsequent purchaser were to acquire a
Bond for less than its outstanding principal balance, it would be treated as
having acquired the Non-Contingent Component with market discount. Market
discount would accrue currently at a constant yield based on the Pricing
Prepayment Assumption, but would be included in such purchaser's income in a
particular period only to the extent that such purchaser receives principal
payments in such period. If a subsequent purchaser were to acquire a Bond for a
price greater than its outstanding principal balance, it would be deemed to have
acquired the Non-Contingent Component with amortizable premium, which it could
use to offset its interest income over the life of the Bond. Such premium would
accrue under the constant yield method, based on the Pricing Prepayment
Assumption. Under the Original Contingent Payment Rules, a subsequent purchaser
of a Bond would include any Make-Whole Premium in its taxable income when the
fact and amount of the Make-Whole Premium became determinable, regardless of
whether it had acquired the Bond with market discount or amortizable premium.
Under the Unofficial Contingent Payment Regulations, a subsequent Bond
Owner would be treated, for purposes of computing its income thereon, as if it
were an initial purchaser, and neither the market discount nor the amortizable
premium rules would apply. However, because the Unofficial Contingent Payment
Regulations would be inconsistent with current law with respect to the treatment
of market discount and amortizable premium, it is not anticipated that such
Regulations, if finalized, would apply retroactively.
In view of the complexities and current uncertainties as to income
inclusions with respect to the Bonds, particularly with respect to the
contingent payment accounting rules that might apply, each investor should
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consult its own tax advisor to determine the appropriate amount and method of
income inclusion on such Bonds for federal income tax purposes.
GAIN OR LOSS ON DISPOSITION
If a Bond is sold, the Bond Owner thereof will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the Bond. The adjusted basis of a Bond generally will equal its cost to the
Bond Owner, increased by any OID or market discount previously includible in
such Bond Owner's gross income with respect to the Bond (including any interest
income technically characterized as OID), and reduced by the portion of the
basis of the Bond allocable to payments on the Bond previously received by such
Bond Owner. Under current law, any gain on the sale of a Bond would be ordinary
income to the extent of accrued but unrecognized market discount but otherwise
would be capital gain to a Bond Owner who holds such Bond as a capital asset.
Any gain on the sale or disposition of a Bond generally would be treated as
ordinary interest income under the Unofficial Contingent Payment Regulations,
but, since such regulations would be inconsistent with current law with respect
to the characterization of gain, such Regulations, if finalized, would not be
expected to apply retroactively to the Bonds. Any loss on the disposition of a
Bond generally would be a capital loss to a Bond Owner who holds such Bond as a
capital asset. However, any gain or loss on the disposition of a Bond by a Bond
Owner that is a bank, thrift, or similar institution described in Code Section
582 would be treated as ordinary gain or loss.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
Bond Owners that are individuals, estates, or trusts, including those that
own such Bonds indirectly through certain pass-through entities, will be subject
to limitations with respect to certain itemized deductions described in Code
Section 67, to the extent that such deductions, in the aggregate, do not exceed
two percent of the holder's adjusted gross income. Because each of the REMICs
will be considered as a "single-class REMIC" under temporary Treasury
regulations, each Bond Owner will be allocated a share of the related REMIC's
"allocable investment expenses", which will be subject to those limitations.
Those expenses will consist principally of the fees paid to the Bond Trustee and
the Tax Administrator (insofar as such fees are attributable to the related
REMIC) but also may include extraordinary expenses of the related REMIC if such
expenses arise. The Bond Trustee or the Tax Administrator will provide each Bond
Owner with an annual statement indicating such Bond Owner's proportionate share
of the expenses of the Bond Trustee and the Tax Administrator under the Bond
Indenture. To the extent that the income reported to the Bond Owner was grossed
up for such expenses, the Bond Owner may deduct its share of such expenses
subject to the limitations described in this paragraph. To the extent that the
income reported to the Bond Owner was net of such expenses, the Bond Owner will
be required to increase its taxable income by expenses disallowed under such
limitations. Furthermore, itemized deductions of individual Bond Owners will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate return
for taxable year 1991 and adjusted for inflation each year thereafter) or (ii)
80% of such itemized deductions otherwise allowable. As a result, such Bond
Owners may have aggregate taxable income in excess of the aggregate amount of
interest payments received on their Regular Bonds. Investors who are
individuals, trusts, or estates should consult their own advisors as to the
suitability of an investment in the Regular Bonds.
ADMINISTRATIVE MATTERS
The Tax Administrator will prepare the required federal, state, and local
income tax and information returns for the REMICs, which will be filed by the
Issuer. The REMICs will be subject to the procedural and administrative rules of
the Code applicable to partnerships, including the determination of any
adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit by the IRS in a unified administrative proceeding. The Tax
Administrator will hold a Residual Bond in each REMIC and will act as the
REMIC's "tax matters person" to represent that REMIC as a whole for certain
administrative and judicial purposes. If the Tax Administrator is unable to
fulfill its duties as tax matters person and fails to
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designate a successor, the holder of the largest Percentage Interest of the
Residual Bonds relating to a particular REMIC shall become the successor tax
matters person of such REMIC.
TAXATION OF CERTAIN FOREIGN INVESTORS
Income on Bonds of Bond Owners who are "non-U.S. persons" (as defined
below) generally will be considered "portfolio interest" and, therefore,
generally will not be subject to 30% United States withholding tax, provided
that such foreign person (i) is not a "10-percent shareholder" in the Issuer
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) that is related to the Issuer
and (ii) provides the Bond Trustee or the person who otherwise would be required
to withhold tax from such income (the "Withholding Agent") with an Internal
Revenue Service Form W-8 or a substitute statement, signed under penalties of
perjury, identifying the beneficial owner and stating, among other things, that
the beneficial owner of the Bond is a non-U.S. person (a "Foreign Person
Certification"). If a Foreign Person Certification is not provided, a 30%
withholding tax will apply unless it is reduced or eliminated pursuant to an
applicable tax treaty or unless the income on the Regular Bond is effectively
connected with the conduct of a trade or business within the United States by
such non-U.S. person. In the case of an applicable tax treaty, the Bond Owner
must provide the Withholding Agent with an Internal Revenue Service Form 1001
and will be subject to United States federal income tax withholding except as
provided by such treaty. In the case where the income on a Bond is effectively
connected with the conduct of a United States trade or business, the Bond Owner
must provide the Withholding Agent with an Internal Revenue Service Form 4224
and will be subject to United States federal income tax at regular rates. For
the purposes of this discussion, the term "non-U.S. person" means any person
other than a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to United States federal income tax regardless of the source of its
income.
Recently enacted tax legislation denies portfolio interest treatment to
certain types of contingent interest. That legislation should not apply to
Make-Whole Premiums received by a non-U.S. person, based upon an exception for
contingent payments the amount of which is determined with reference to the
current yield on publicly traded property. However, the scope of the new
legislation is not entirely clear. Investors who are non-U.S. persons should
consult their own tax advisors regarding the specific tax consequences to them
of potential Make-Whole Premium payments with respect to a Bond.
BACKUP WITHHOLDING
Under federal income tax law, a Bond Owner may be subject to "backup
withholding" under certain circumstances. Backup withholding may apply to a Bond
Owner that is a United States person if the Bond Owner, among other things, (i)
fails to furnish its social security number or other taxpayer identification
number ("TIN") to the Withholding Agent, (ii) furnishes the Withholding Agent
with an incorrect TIN, (iii) fails to report properly interest and dividends or
(iv) under certain circumstances, fails to provide the Withholding Agent with a
certified statement, signed under penalties of perjury, that the TIN provided to
the Withholding Agent is correct and that the Bond Owner is not subject to
backup withholding. Backup withholding may apply, under certain circumstances,
to a Bond Owner that is a foreign person if the Bond Owner fails to provide the
Withholding Agent with a Foreign Person Certification. Backup withholding
applies to "reportable payments", which include, in the case of the Bonds, all
payments to the extent of accrued OID, as well as distributions of proceeds from
a sale of the Bonds. The backup withholding rate is 31%. Backup withholding,
however, does not apply to payments on a Bond made to certain exempt recipients,
such as tax-exempt organizations, and to certain non-U.S. persons. Bond Owners
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Bond.
DUE TO THE COMPLEXITY OF THESE RULES AND THE CURRENT UNCERTAINTY AS TO THE
MANNER OF THEIR APPLICATION TO THE BONDS, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE BONDS.
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ERISA CONSIDERATIONS
ERISA imposes certain restrictions on employee benefit plans subject
thereto ("Plans"), and on persons who are parties in interest or disqualified
persons with respect to such Plans, that may apply to a Plan's proposed
investment in the Bonds. Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under Code Section 410(d)),
are not subject to the restrictions of ERISA, and assets of such plans may be
invested in the Bonds without regard to the ERISA considerations described
below, subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Code Section 401(a) and
exempt from taxation under Code Section 501(a) is subject to the prohibited
transaction rules set forth in Code Section 503.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Any Plan fiduciary that proposes to cause a Plan to acquire any of the
Bonds should consult with its counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of such Bonds.
The U.S. Department of Labor has granted to Bear, Stearns & Co. Inc. (the
"Underwriter") an administrative exemption (Prohibited Transaction Exemption
90-30; Exemption Application No. D-8207, 55 Fed. Reg. 21,461 (1990)) (the
"Exemption") from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Code Section 4975 with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates
denominated as debt instruments representing interests in a REMIC, such as the
Asset Groups (as defined and established in the Bond Indenture), that are issued
by and are debt obligations of REMICs consisting of certain receivables, loans
and other obligations ("Collateral") that meet the conditions and requirements
of the Exemption. The Exemption covers collateral such as the Notes.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(i) the acquisition of the Bonds by a Plan is on terms (including the
price for the Bonds) that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party;
(ii) the rights and interests evidenced by the Bonds acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Bonds;
(iii) the Bonds acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from any of S&P, Moody's, D&P or Fitch Investors Service, Inc.
("Fitch");
(iv) the Bond Trustee must not be an affiliate of any member of the
Restricted Group (as defined below);
(v) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Bonds represents not more than
reasonable compensation for underwriting the Bonds; the sum of all payments
made to and retained by the Issuer pursuant to the Note Assignment
represents not more than the fair market value of such collateral; and the
sum of all payments made to and retained by the Note Trustee and Bond
Trustee represent not more than reasonable compensation for such persons'
services under the respective indenture and reimbursements of their
respective reasonable expenses in connection therewith; and
(vi) the Plan investing in the Bonds is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act.
Each REMIC must also meet the following requirements:
(i) the REMIC's assets must consist solely of assets of the type that
have been included in other investment pools;
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(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of Bonds; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Bonds.
Moreover, the Exemption may provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least 50 percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least 50 percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the Collateral contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
25 percent of all of the certificates of that class outstanding at the time of
the acquisition; and (iv) immediately after the acquisition, no more than 25
percent of the assets of the Plan with respect to which such person is a
fiduciary are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The Exemption does
not apply to Plans sponsored by the Issuer, the Underwriter, the Bond Trustee,
the Note Trustee, any obligor with respect to Notes pledged to any of the REMICs
constituting more than five percent of the aggregate unamortized principal
balance of the assets of any of the REMICs, or any affiliate of such parties
(the "Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption
or any other administrative exemption from the prohibited transaction provisions
of ERISA and the Code, and the potential consequences in their specific
circumstances, prior to making an investment in the Bonds. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the Bonds is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated as of June , 1994 (the "Underwriting Agreement"), among the Issuer,
Kmart and the Underwriter, the Issuer has agreed to sell to the Underwriter the
entire aggregate principal amounts of the Bonds set forth on the cover hereof.
In the Underwriting Agreement, the Underwriter has agreed, subject to the terms
and conditions set forth therein, to purchase all of the Bonds offered hereby if
any Bonds are purchased. In the event of a default by the Underwriter, the
Underwriting Agreement may be terminated. Kmart and the Issuer have been advised
by the Underwriter that the Underwriter proposes initially to offer the Bonds to
the public at the public offering prices set forth on the cover page of this
Prospectus, and to certain dealers at such prices less concessions not in excess
of [ ]% of the principal amount of the Series A Bonds, [ ]% of the principal
amount of the Series B Bonds and [ ]% of the principal amount of the Series C
Bonds. The Underwriter may allow and such dealers may reallow concessions not in
excess of [ ]% of the principal amount of the Series A Bonds, [ ]% of the
principal amount of the Series B Bonds and [ ]% of the principal amount of the
Series C Bonds. After the initial public offering, the public offering prices
and such concessions may be changed.
The Owner Participant has made available an amount equal to 2.0% of the
purchase price paid by the Owner Trusts to acquire their respective interests in
the Properties, a portion of which was used to pay certain transaction expenses
in connection with the Interim Financing and the remainder of which shall be
used to reimburse the Issuer and Kmart for underwriting discounts and
commissions and certain other transaction expenses in connection with the
offering of the Bonds. Kmart has agreed to pay First Fidelity Mortgage
Corporation ("First") and Winthrop Financial Associates ("Winthrop") a fee for
financial advisory services in an aggregate amount equal to 1.5% of the purchase
price paid by the Owner Trusts to acquire their
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respective interests in the Properties. To the extent certain transaction
expenses, including underwriting discounts and commissions, exceed the amount
reimbursable by the Owner Participant, such excess will be paid by Kmart and
offset against the financial advisory fees payable to First and Winthrop.
Prior to their issuance there has been no market for the Bonds nor can
there be any assurance that one will develop or, if one does develop, that it
will provide Bond Owners with liquidity or it will continue for the life of the
Bonds. The Underwriter has advised Kmart that it intends to act as a market
maker in the Bonds, subject to applicable provisions of federal and state
securities laws and other regulatory requirements, but is under no obligation to
do so and any such market-making may be discontinued at any time.
The Underwriting Agreement provides that Kmart will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriter may be required to
make in respect thereof.
LEGAL OPINIONS
Hunton & Williams, New York, New York has acted as special tax counsel to
Kmart, solely with respect to the discussion set forth in "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein. Certain legal matters will be passed upon for
Kmart by Dickinson, Wright, Moon, Van Dusen & Freeman, Detroit, Michigan and for
the Underwriter by Brown & Wood, New York, New York. Brown & Wood also has acted
as special counsel to the Issuer, solely with respect to the validity of the
Bonds offered hereby.
RATINGS
It is a condition to the issuance of the Bonds offered hereby that they be
rated at least "A3" by Moody's, "BBB+" by S&P and "A-" by D&P. A security rating
is not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. Each
security rating should be evaluated independently of similar ratings on
different types of securities. The ratings take into account the structural and
legal aspects associated with the Bonds, the characteristics of the Leases, and
the credit quality of Kmart. The ratings on the Bonds do not address the payment
to the Bondholders of any Make-Whole Premium or any payment to the Bondholders
of interest at the Default Rate.
As of May 31, 1994, Moody's, S&P and D&P assigned the ratings of "A3",
"BBB+" and "A-", respectively, to the senior unsecured debt of Kmart. There can
be no assurance that the ratings set forth above may not be changed by the
respective rating agency at any time.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K of Kmart for the year ended January
26, 1994, have been so incorporated in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of said firm as
experts in auditing and accounting. The appraisals regarding the Properties
referenced in the Prospectus were prepared by Marshall and Stevens Incorporated,
independent appraisers.
46
<PAGE> 48
INDEX OF PRINCIPAL TERMS
Set forth below is a list of defined terms used in this Prospectus and the
pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
TERM PAGE(S)
--------------------------------------------------------------------------------- ----------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
Asset Pools...................................................................... 7
Asset Qualification Test......................................................... 38
Bankruptcy Code.................................................................. 19
Bond Indenture................................................................... 3
Bond Indenture Events of Default................................................. 28
Bond Majority in Interest........................................................ 24
Bond Owner....................................................................... 7
Bond Trustee..................................................................... Cover, 3
Bondholders...................................................................... 3
Bonds............................................................................ 3
Borders.......................................................................... 9
Cede............................................................................. 2
Closing Date..................................................................... 3
Code............................................................................. 7
Collateral....................................................................... 44
Collateral Assignments........................................................... 5
Commission....................................................................... 2
D&P.............................................................................. 11
Default Interest................................................................. 25
Default Rate..................................................................... 17
Definitive Bonds................................................................. 24
Discounted Basic Rents........................................................... 22
DTC.............................................................................. Cover, 6
ERISA............................................................................ 8
Estate for Years Interests....................................................... 6
Excepted Payments................................................................ 33
Excepted Rights.................................................................. 33
Exchange Act..................................................................... 2
Exemption........................................................................ 44
Final Regulations................................................................ 41
First............................................................................ 46
Fitch............................................................................ 44
Foreign Person Certification..................................................... 43
Indirect Participants............................................................ 23
Initial Noteholder............................................................... 6
Interim Financing................................................................ 6
IRS.............................................................................. 38
Issuer........................................................................... Cover, 3
Kmart............................................................................ Cover
Lease Event of Default........................................................... 21
Leasehold Estates................................................................ 6
Lease............................................................................ Cover, 6
Lease Assignment................................................................. 5
Leases........................................................................... Cover
Make-Whole Premium............................................................... 27
Moody's.......................................................................... 11
Mortgage......................................................................... 5
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
TERM PAGE(S)
--------------------------------------------------------------------------------- ----------
<S> <C>
Net Worth Standard............................................................... 19
Non-Contingent Component......................................................... 41
Note Assignment.................................................................. 5
Note Indenture Events of Default................................................. 33
Note Indenture................................................................... 5
Note Majority in Interest........................................................ 33
Note Trustee..................................................................... 5
Note Trust Estate................................................................ 5
Notes............................................................................ Cover, 5
OID.............................................................................. 38
Options to Lease................................................................. 14
Original Contingent Payment Rules................................................ 41
Owner Participant................................................................ 5
Owner Trustee.................................................................... 5
Owner Trusts..................................................................... 5
Participants..................................................................... 23
Payment Date..................................................................... 3
Permitted Liens.................................................................. 18
Plans............................................................................ 44
Pledge........................................................................... 5
Pricing Prepayment Assumption.................................................... 40
Proceeds......................................................................... 7
Properties....................................................................... Cover, 6
Pool A REMIC..................................................................... Cover, 7
Pool B REMIC..................................................................... Cover, 7
Pool C REMIC..................................................................... Cover, 7
Qualified Reserve Fund........................................................... 39
Record Date...................................................................... 3
Registration Statement........................................................... 2
REIT............................................................................. 8
Remainder Purchaser.............................................................. 6
REMIC Regulations................................................................ 38
REMICs........................................................................... Cover, 7
Rental Payments.................................................................. 4
Residual Bonds................................................................... 7
Restricted Group................................................................. 45
Retirement Price................................................................. 20
RIC.............................................................................. 8
S&P.............................................................................. 11
Sale Agreement................................................................... 18
Sale-Leaseback Transactions...................................................... 5
Scheduled Payment Dates.......................................................... 31
Securities Act................................................................... 2
Series A Bonds................................................................... 3
Series B Bonds................................................................... 3
Series C Bonds................................................................... 3
Series A Notes................................................................... Cover, 5
Series B Notes................................................................... Cover, 5
Series C Notes................................................................... Cover, 5
Sinking Fund..................................................................... 3
Supplemental Bond Indenture...................................................... 30
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
TERM PAGE(S)
--------------------------------------------------------------------------------- ----------
<S> <C>
Supplemental Note Indenture...................................................... 36
Tax Administrator................................................................ 7
TCMYI............................................................................ 27
Thrift Institution............................................................... 8
TIN.............................................................................. 43
Treasury......................................................................... 38
Trust Agreement.................................................................. 5
Trust Indenture Act.............................................................. 29
Underwriter...................................................................... Cover, 44
Underwriting Agreement........................................................... 45
Unofficial Contingent Payment Regulations........................................ 41
Winthrop......................................................................... 46
Withholding Agent................................................................ 43
</TABLE>
49
<PAGE> 51
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY KMART OR BY THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF KMART SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................ 2
Reports to Bondholders by the
Bond Trustee....................... 2
Incorporation of Certain Documents by
Reference.......................... 2
Prospectus Summary................... 3
Kmart................................ 9
Summary of Consolidated
Financial Information.............. 12
Diagram of Transaction Structure..... 13
Structure of the Transaction......... 14
Use of Proceeds...................... 15
Description of the Properties........ 15
Description of the Leases............ 17
The Issuer and the Owner Trusts...... 23
Description of the Bonds............. 23
Description of the Notes............. 31
Certain Federal Income Tax
Considerations..................... 38
ERISA Considerations................. 44
Underwriting......................... 45
Legal Opinions....................... 46
Ratings.............................. 46
Experts.............................. 46
Index of Principal Terms............. 47
</TABLE>
UNTIL THE DATE 90 DAYS FROM THE DATE HEREOF, ALL DEALERS EFFECTING
TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WHEN ACTING
AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$175,500,000
SECURED LEASE BONDS, SERIES A, B AND C
DUE, RESPECTIVELY, JANUARY 1, 2002,
JANUARY 1, 2017 AND JULY 1, 2018
THE BONDS ARE PAYABLE FROM RENT
RELATING TO 24 PROPERTIES TO BE
PAID UNDER LEASES BY
KMART CORPORATION
--------------------
PROSPECTUS
--------------------
BEAR, STEARNS & CO. INC.
June , 1994
------------------------------------------------------
------------------------------------------------------
<PAGE> 52
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.*
The following expenses are expected to be incurred in connection with this
Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 56,228.00
Printing Fee................................................... 159,000.00*
Blue Sky Fees and Expenses..................................... 25,000.00*
Accounting Fees................................................ 30,000.00*
Rating Agency Fees............................................. 225,000.00*
Legal Fees..................................................... 1,633,000.00*
Trustee's Fees and Expenses.................................... 55,000.00*
Financial Advisory Fees........................................ 1,000,000.00*
Miscellaneous.................................................. 50,000.00*
-------------
Total..................................................... $3,233,228.00*
============
</TABLE>
-------------------------
* All of the above items except the registration fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's By-Laws and the Michigan Business Corporation Act permit
the Registrant's officers and directors to be indemnified under certain
circumstances for expenses and, in some instances, for judgments, fines or
amounts paid in settlement of civil, criminal, administrative and investigative
suits or proceedings, including those involving alleged violations of the
Securities Act of 1933 (the "Act"). In addition, the Registrant maintains
directors' and officers' liability insurance which, under certain circumstances,
would cover alleged violations of the Act. Insofar as indemnification for
liabilities arising under the Act may be permitted to officers and directors
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Therefore, in the event that a claim for such indemnification is asserted by any
officer or director the Registrant (except insofar as such claim seeks
reimbursement by the Registrant of expenses paid or incurred by an officer or
director in the successful defense of any action, suit or proceeding) will,
unless the matter has theretofore been adjudicated by precedent deemed by the
Registrant to be controlling, submit to a court of appropriate jurisdiction the
question of whether or not indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of FGHK, Inc.*
3.2 By-Laws of FGHK, Inc.*
4.1 Form of Collateral Trust Indenture.
4.2 Form of First Supplemental and Restated Trust Indenture, Assignment of Lease and
Rents and Security Agreement.*
4.3 Form of Secured Lease Bonds, Series A, B and C -- included as part of Exhibit 4.1.
4.4 Form of Notes, Series A, B and C -- included as part of Exhibit 4.2.*
4.5 Mortgage.*
4.6 Form of Beneficial Interest Assignment.*
4.7 Form of Assignment Agreement.*
</TABLE>
II-1
<PAGE> 53
<TABLE>
<S> <C>
4.8 Assignment of Rights.*
4.9 Form of First Amendment to Assignment of Rights.*
5.1 Opinion of Brown & Wood as to the legality of the securities being registered.*
8.1 Opinion of Hunton & Williams as to tax matters.*
12 Statement of computation of Earnings to Fixed Charges.
23.1 Consent of Price Waterhouse.
23.2 Consent of Hunton & Williams -- included in Exhibit 8.1.*
23.3 Consent of Brown & Wood -- included in Exhibit 5.1.*
23.4 Consent of Dickinson, Wright, Moon, Van Dusen & Freeman.*
23.5 Consent of Marshall & Stevens Incorporated.
24 Power of Attorney.*
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Bond
Trustee.*
99.1 Lease.*
99.2 Form of First Amendment to Lease.*
99.3 Ground Lease between Homart Community Centers, Inc., a Delaware corporation, and
Kmart Corporation dated as of July 16, 1992, with respect to property located in San
Diego, California.*
99.4 Ground Lease between Ventura Pacific Capital Group VI, a California limited
partnership, and Kmart Corporation dated as of October 7, 1992, with respect to
property located in Moorpark, California.*
99.5 Master Indemnification Agreement.*
99.6 First Amendment to Master Indemnification Agreement.*
</TABLE>
-------------------------
* Previously filed and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
B. FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY REFERENCE
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 54
C. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Debt Securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Troy and State of Michigan on May 31,
1994.
KMART CORPORATION
By /S/ JOSEPH E. ANTONINI*
(JOSEPH E. ANTONINI)
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities indicated on May 31, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------------------------- ---------------------------
<C> <S>
/S/ JOSEPH E. ANTONINI* Chairman of the Board,
--------------------------- President (Principal
(JOSEPH E. ANTONINI) Executive Officer) and
Director
/S/ THOMAS F. MURASKY* Executive Vice President
--------------------------- (Principal Financial and
(THOMAS F. MURASKY) Accounting Officer)
/S/ LILYAN H. AFFINITO* Director
---------------------------
(LILYAN H. AFFINITO)
Director
---------------------------
(JOSEPH A. CALIFANO, JR.)
/S/ WILLIE C. DAVIS* Director
---------------------------
(WILLIE C. DAVIS)
/S/ ENRIQUE C. FALLA* Director
---------------------------
(ENRIQUE C. FALLA)
/S/ JOSEPH P. FLANNERY* Director
---------------------------
(JOSEPH P. FLANNERY)
*By: /S/ ANTHONY N. PALIZZI
ANTHONY N. PALIZZI
Attorney-in-fact
<CAPTION>
SIGNATURE TITLE
--------------------------- ---------------------------
<C> <S>
/S/ DAVID B. HARPER* Director
---------------------------
(DAVID B. HARPER)
/S/ F. JAMES MCDONALD* Director
---------------------------
(F. JAMES MCDONALD)
/S/ RICHARD S. MILLER* Director
---------------------------
(RICHARD S. MILLER)
/S/ J. RICHARD MUNRO* Director
---------------------------
(J. RICHARD MUNRO)
/S/ DONALD S. PERKINS* Director
---------------------------
(DONALD S. PERKINS)
/S/ GLORIA M. SHATTO* Director
---------------------------
(GLORIA M. SHATTO)
/S/ JOSEPH R. THOMAS* Director
---------------------------
(JOSEPH R. THOMAS)
</TABLE>
II-4
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
------- ----------- ----------
<S> <C> <C>
1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of FGHK, Inc.*
3.2 By-Laws of FGHK, Inc.*
4.1 Form of Collateral Trust Indenture.
4.2 Form of First Supplemental and Restated Trust Indenture, Assignment of
Lease and Rents and Security Agreement.*
4.3 Form of Secured Lease Bonds, Series A, B and C -- included as part of
Exhibit 4.1.
4.4 Form of Notes, Series A, B and C -- included as part of Exhibit 4.2.*
4.5 Mortgage.*
4.6 Form of Beneficial Interest Assignment.*
4.7 Form of Assignment Agreement.*
4.8 Assignment of Rights.*
4.9 Form of First Amendment to Assignment of Rights.*
5.1 Opinion of Brown & Wood as to the legality of the securities being
registered.*
5.2 Opinion of Day, Berry & Howard as to the legality of the securities being
registered.*
8.1 Opinion of Hunton & Williams as to tax matters.*
12 Statement of computation of Earnings to Fixed Charges.
23.1 Consent of Price Waterhouse.
23.2 Consent of Hunton & Williams -- included in Exhibit 8.1.*
23.3 Consent of Brown & Wood -- included in Exhibit 5.1.1.*
23.4 Consent of Dickinson, Wright, Moon, Van Dusen & Freeman.*
23.5 Consent of Marshall & Stevens Incorporated.
24 Power of Attorney.*
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of
the Bond Trustee.*
99.1 Lease.*
99.2 Form of First Amendment to Lease.*
99.3 Ground Lease between Homart Community Centers, Inc., a Delaware
corporation, and Kmart Corporation dated as of July 16, 1992, with respect
to property located in San Diego, California.*
99.4 Ground Lease between Ventura Pacific Capital Group VI, a California limited
partnership, and Kmart Corporation dated as of October 7, 1992, with
respect to property located in Moorpark, California.*
99.5 Master Indemnification Agreement.*
99.6 First Amendment to Master Indemnification Agreement.*
</TABLE>
-------------------------
* Previously filed and incorporated herein by reference.
<PAGE> 57
APPENDIX
Appendix of Graphic Materials Pursuant to Regulation S-T Item 304(a)
<TABLE>
<CAPTION>
Page Number Description of Graphic or Image
----------- -------------------------------
<S> <C>
13 Diagram of Transaction Structure
</TABLE>
<PAGE> 1
EXHIBIT 4.1
COLLATERAL TRUST INDENTURE
BETWEEN
FGHK, Inc.
and
The Bank of New York,
as Bond Trustee
AND AS TAX ADMINISTRATOR
Dated as of MAY , 1994
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I .
---------
<S> <C> <C>
A . Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
<CAPTION>
ARTICLE II .
----------
<S> <C> <C>
2. The Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1. Book-Entry Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.1. Issuance and Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1.2. Communication through Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2. Issuance of Definitive Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.3. Registration, Exchange or Transfer of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.4. ADDITIONAL Requirements for Transfer of
Residual Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.4.1. Registration or Exemption under the Securities
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.4.2. Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.5. Payment of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.6. Miscellaneous REMIC Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.1. REMIC Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.2. Designations of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.3. Startup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.4. Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.5. Tax Matters Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6.6. REMIC Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.7. Mutilated, Destroyed, Lost and Stolen Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
<CAPTION>
ARTICLE III
-----------
<S> <C> <C>
3. Redemption of Bonds; Sinking Fund and Payment
of Bonds at Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1. Establishment of Bond Accounts and Reserve
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.1.1. Deposits into the Bond Account; Certain
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2. Interest and Sinking Fund Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.1. Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.2.2. Reductions for Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.3. Redemption of Bonds Through Operation of Sinking Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.4 [RESERVED.] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.5. No Redemption or Prepayment Prior to Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.6. Redemption Other Than Through Operation of the
Sinking Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.7. Holding in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.8. Partial Redemption References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
3.9. Notice of Redemption to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.9.1. Specifications of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.10. Payment on Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.11. Termination of Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.12. Additional Redemption Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.12.1. Termination of REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.12.2. Authorization by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.13. Reserve Funds; Final Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.13.1. Reserve Fund Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.13.2. Amounts Related to Residual Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.13.3. Amounts Remaining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.14. EXECUTION OF SUPPLEMENTAL ASSIGNMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
<CAPTION>
ARTICLE IV
----------
<S> <C> <C>
4. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
<CAPTION>
ARTICLE V
---------
<S> <C> <C>
5. Affirmative COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
<CAPTION>
ARTICLE VI
----------
<S> <C> <C>
6. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
<CAPTION>
ARTICLE VII
-----------
<S> <C> <C>
7. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
<CAPTION>
ARTICLE VIII
------------
<S> <C> <C>
8. Remedies; Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.1. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.2. Power of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.3. Enforcement of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.4. Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<CAPTION>
ARTICLE IX
----------
<S> <C> <C>
9. Authorization to Execute Instruments, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
<CAPTION>
ARTICLE X
---------
<S> <C> <C>
10. Title Upon Sale; Receipt of a Sufficient Discharge to Purchaser . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
<PAGE> 4
ARTICLE XI
[RESERVED]
<TABLE>
<CAPTION>
Page
----
ARTICLE XII
-----------
<S> <C> <C>
12. Sale a Bar Against the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
<CAPTION>
ARTICLE XIII
------------
<S> <C> <C>
13. Waiver of Appraisement, Valuation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
<CAPTION>
ARTICLE XIV
-----------
<S> <C> <C>
14. Appointment of Receiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
<CAPTION>
ARTICLE XV
----------
ARTICLE XVI
-----------
<S> <C> <C>
16. Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
16.1. Supplemental Indentures without Consent of
Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
16.2. Supplemental Indentures with Consent of
Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
16.3. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
16.4. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
<CAPTION>
ARTICLE XVII
------------
<S> <C> <C>
17. Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
<CAPTION>
ARTICLE XVIII
-------------
<S> <C> <C>
18. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
<CAPTION>
ARTICLE XIX
-----------
<S> <C> <C>
19. Direction of Action by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
<CAPTION>
ARTICLE XX
----------
<S> <C> <C>
20. The Bond Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
20.1. Scope of Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
20.1.1. Actions under this Bond Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
20.1.2. Actions upon Request of Majority in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
20.1.3. Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
20.1.4. Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
20.1.5. Risk of Bond Trustee's Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
20.1.6. Execution of Continuation Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
20.1.7. Actions under the Note Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
20.2. Reliances, Permitted Actions and Limitations
on Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
20.3. Limited Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
20.4. Holding Stipulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
20.5. Requirements of Organization and Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
20.6. Resignation and Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
20.6.1. Notice of Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
20.6.2. Removal upon Cessation of Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
20.6.3. Removal by a Majority in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
20.6.4. Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
20.7. Successor Bond Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
20.7.1. Acceptance of Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
20.7.2. Eligibility upon Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
20.7.3. Notice of Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
20.8. Merger or Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
20.9. Limitation on Note Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
20.10. Title, Management and Disposition of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
20.10.1. Actions Prior to Sale of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
20.10.2. Protection of Interests in REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
20.10.3. Deposits to Bond Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
20.10.4. Reimbursement of Bond Trustee Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
20.10.5. Disposition Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
20.10.6. Reports Pursuant to the Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
20.10.7. Prohibited Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
20.10.8. Acquisition of Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
20.11. Bond Trustee's Fees; Tax Administrator's
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
<CAPTION>
ARTICLE XXI
-----------
<S> <C> <C>
21. Performance by the Note Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
<CAPTION>
ARTICLE XXII
------------
<S> <C> <C>
22. Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
<CAPTION>
ARTICLE XXIII
-------------
<S> <C> <C>
23. Certificate as to No Default; Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
<CAPTION>
ARTICLE XXIV
------------
<S> <C> <C>
24. Additional Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
ARTICLE XXV
-----------
<S> <C> <C>
25. Termination and Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
25.2. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
<CAPTION>
ARTICLE XXVI
------------
<S> <C> <C>
26. Terms Subject to Applicable Law; Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
<CAPTION>
ARTICLE XXVII
-------------
<S> <C> <C>
27. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
28. No Recourse to the Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
<CAPTION>
ARTICLE XXIX
------------
<S> <C> <C>
29. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
29.1. Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
29.2. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
29.3. Benefits of Bond Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
<CAPTION>
ARTICLE XXX
-----------
<S> <C> <C>
30. Bond Trustee's Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
</TABLE>
<TABLE>
<CAPTION>
ARTICLE XXXI
------------
<S> <C> <C>
31. TAX ADMINISTRATOR'S ACCEPTANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Exhibit A. Form of Series [A][B][C] Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Exhibit B. Form of Series [AR][BR][CR] Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Exhibit C. Form of Reverse of Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Exhibit D. Form of Depository Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Exhibit E. Form of Transferor Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
Exhibit F. Form of Investment Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Exhibit G. Form of Rule 144A Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Exhibit H. Form of Transfer Affidavit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H-1
Exhibit I. [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
EXHIBIT J. FORM OF SUPPLEMENTAL ASSIGNMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . J-1
Schedule I. Schedule of Sinking Fund Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SI-1
</TABLE>
v
<PAGE> 7
Reconciliation and tie between Trust Indenture Act of 1939 and
Collateral Trust Indenture, dated as of MAY __, 1994
<TABLE>
<CAPTION>
Trust Bond Indenture
Indenture Act Section Article or Section
--------------------- ------------------
<S> <C> <C>
Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.5
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.6.1, 20.6.2(a)
Section 312(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.10 et seq.
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(a)
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(b)
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(b)
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(b)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.10
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5(b)
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1.1, 20.1.4
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.1.1, 20.1.4(d)
Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2, 20.1.2
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2, 20.1.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.2, 20.1.2
Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 et seq.
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 et seq.
Section 318(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19(a)(i)
(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19(a)(ii)
</TABLE>
__________________________
NOTE: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
Attention should also be directed to Section 318(c) of the Trust
Indenture Act, which provides that the provisions of Sections 310 to and
including 317 of the Trust Indenture Act are a part of and govern every
qualified indenture, whether or not physically contained therein.
<PAGE> 8
COLLATERAL TRUST INDENTURE
This Collateral Trust Indenture (this "Bond Indenture"), dated as of
MAY , 1994, between FGHK, Inc., a New York corporation (the "Issuer"),
and The Bank of New York, a New York banking corporation, solely as trustee
(THE "BOND TRUSTEE") AND AS TAX ADMINISTRATOR (THE "TAX ADMINISTRATOR")
and not in its individual capacity.
W I T N E S S E T H :
WHEREAS, each Owner Trustee (as defined herein), not in its individual
capacity, but solely as Owner Trustee under the relevant Trust Agreement, has
authorized the issuance of certain mortgage notes (the "Notes") pursuant to the
terms of the Note Indentures and, to secure the Notes and in order to provide
for the authentication and delivery thereof by the relevant Note Trustee, each
Owner Trustee has duly authorized the execution and delivery of each of the
Note Indentures;
WHEREAS, the Leases, provisions of which have been referred to in the
text of this Bond Indenture, were executed and delivered contemporaneously with
the Note Indentures;
WHEREAS, the Issuer, as holder of the Notes, and the Bond Trustee
desire to enter into, execute and deliver this Bond Indenture, pursuant to
which the Issuer will execute and deliver, and the Bond Trustee will initially
authenticate, secured-lease bonds in the forms of Exhibit A, Exhibit B and
Exhibit C hereto, respectively (collectively, the "Bonds");
WHEREAS, each Note Trustee, pursuant to the related Note Indenture,
has executed and delivered to the Bond Trustee, for the benefit of the
Bondholders, an Assignment Agreement, assigning to the Bond Trustee, as
trustee hereunder, inter alia, all of the Note Trustee's rights, powers and
interest in, to and under the related Note Indenture and the collateral
thereunder; and
WHEREAS, the Issuer desires by this Bond Indenture to provide, among
other things, (a) for the issuance of the Bonds, (b) for the pledge by the
Issuer to the Bond Trustee, as part of the Trust Estate hereunder, among other
things, of all of the Issuer's right, title and interest in and to the Notes,
(c) for the assignment of its interest in the Note Indentures and (d) for the
assignment of all payments and other amounts received
<PAGE> 9
hereunder or in respect of the Notes in accordance with the terms hereof, as
security for, among other things, the Issuer's obligations to the holders of
the Bonds (the "Holders") for the ratable benefit and security of such Holders;
NOW, THEREFORE, THIS BOND INDENTURE WITNESSETH, that in consideration
of the aforesaid indebtedness in respect of the Bonds and the trust referred to
below and to secure the prompt payment of such indebtedness, the Issuer has
granted, bargained, sold, aliened, warranted, remised, conveyed, assigned,
transferred, mortgaged, hypothecated, deposited, pledged, set over, released
and confirmed, and by these presents does grant, bargain, sell, alien, warrant,
remise, convey, assign, transfer, mortgage, hypothecate, deposit, pledge, set
over, release and confirm unto the Bond Trustee and successors in trust, the
following property and rights (collectively, together with certain rights and
property transferred by the Note Trustees to the Bond Trustee pursuant to the
Assignment, the "Trust Estate") now owned or held or hereafter acquired by the
Issuer and in which the Issuer further grants to the Bond Trustee a security
interest:
(i) the Notes;
(ii) the Issuer's rights and interests under the Note Indentures;
(iii) any and all other sums and other property which may from time to time
become rightfully subject to the lien of this Bond Indenture or which come into
the rightful possession or become rightfully subject to the control of the Bond
Trustee or a receiver lawfully appointed pursuant to this Bond Indenture or any
instrument included in the Trust Estate, it being the intention of the Issuer,
and the Issuer hereby agrees, that the property hereafter acquired by the
Issuer, including as holder of the Notes but excepting only the amounts of
Additional Rent paid by Kmart in respect of Issuer Expenses (as defined in the
Lease) pursuant to each Lease, shall forthwith, upon the acquisition thereof,
be and become subject to the lien of this Bond Indenture as if such property
were now owned by the Issuer and were specifically described herein; and
(iv) all proceeds of the property referred to in this granting clause, in
each case as and for additional security for the payment of the Bonds and all
other sums secured or intended to be secured hereby.
TO HAVE AND TO HOLD the Trust Estate unto the Bond Trustee, in trust
for the ratable benefit and security of the Holders,
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without preference, except as otherwise expressly provided herein, for
the life of the trust established hereby.
IN TRUST, however, for the purposes set forth in this Bond Indenture.
This Bond Indenture is (a) a collateral trust indenture covering the
Trust Estate and (b) a security agreement under the New York UCC. Upon the
occurrence of an Event of Default, the Bond Trustee shall, in addition to other
rights and remedies granted to it, have all the rights granted to a secured
party pursuant to the New York UCC.
The Issuer, for itself, its successors and assigns, covenants and agrees
with the Bond Trustee, as follows:
ARTICLE I.
A. Definitions. As used in this Bond Indenture, the following capitalized
terms shall have the respective meanings set after them:
Affiliate - With respect to any specified Person, any other Person directly
or indirectly controlling or controlled by or under direct or indirect
common control with such Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
Asset Group - Each of the Pool A Asset Group, the Pool B Asset Group and the
Pool C Asset Group.
Assignment - Each of the 24 Assignment Agreements, dated as of the date
hereof, from each of the Note Trustees to the Bond Trustee, as collateral
security for the payment of the Bonds.
Average Life - As of the date of determination, with respect to the
corresponding Notes the quotient obtained by dividing (a) the sum of the
products of the numbers of years from the date of determination to the dates of
each successive scheduled principal payment of the corresponding Notes
multiplied by the amount of such principal payment by (b) the sum of all such
principal payments.
Benefit Plan Affidavit - Has the meaning specified in Section 2.4.1(b) of
this Bond Indenture.
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Benefit Plan Opinion - An Opinion of Counsel satisfactory to the Tax
Administrator (and upon which the Tax Administrator and the Bond Trustee are
authorized to rely) to the effect that the proposed transfer will not (a) cause
the assets of the Trust Estate to be regarded as plan assets for purposes of
the Plan Asset Regulations, (b) give rise to any fiduciary duty under ERISA, on
the part of the Issuer, the Tax Administrator or the Bond Trustee or (c) result
in, or be treated as, a prohibited transaction under Sections 406 or 407 of
ERISA or Section 4975 of the Code.
Bond - Any of the Secured Lease Bonds, Series A, Series B, Series C,
Series AR, Series BR or Series CR in the forms of Exhibit A, Exhibit B or
Exhibit C hereto, respectively, as the context may indicate.
Bond Account - Any of the Pool A Bond Account, the Pool B Bond Account
or the Pool C Bond Account.
Bond Indenture - This Collateral Trust Indenture as originally executed or
as it may from time to time be supplemented, modified or amended by one or
more indentures or other instruments supplemental hereto entered into
pursuant to the applicable provisions hereof.
Bond Owner - Any Person acquiring a beneficial interest in Book-Entry
Bonds of any Series, which ownership shall be reflected on the books of the
Depository or on those of a Depository Participant or an indirect Depository
Participant.
Bond Trustee - The Bank of New York, a New York banking corporation, as
trustee of the trust established hereby and any successor bond trustee
hereunder.
Book-Entry Bonds - Any of the Offered Bonds, which initially shall be
registered in the name of the Depository or its nominee, the ownership of which
is reflected on the books of the Depository or on the books of a person
maintaining an account with the Depository (whether directly, as a "Depository
Participant", or indirectly, as an indirect Depository Participant) in
accordance with the rules of the Depository and as described in Article 2.
Business Day - Has the meaning assigned in the Note Indentures.
Closing Date - MAY , 1994.
Code - The Internal Revenue Code of 1986, as amended.
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Commencement Date - The first Payment Date on which interest or
principal is payable under the terms of the Bonds.
Corporate Trust Office - The principal office of the Bond Trustee at
which at any particular time its corporate trust business shall be
administered; at the date hereof the Corporate Trust Office is located at 101
Barclay Street, New York, New York 10286.
Default - Any condition or event which constitutes or would constitute
an Event of Default hereunder either with or without notice, lapse of time, or
both.
Definitive Bonds - Has the meaning specified in Section 2.1.1 of this
Bond Indenture.
Depository - The initial Depository shall be the Depository Trust
Company ("DTC"), the nominee of which is Cede & Co., or any other organization
agreed to by the parties hereto and registered as a "clearing agency" pursuant
to Section 17A of the Exchange Act. The Depository shall initially be the
registered Holder of the Book-Entry Bonds. The Depository shall at all times
be a "clearing corporation" as defined in Section 8-102(3) of the New York UCC.
Depository Agreement - With respect to any Series of Book-Entry Bonds,
the agreement among the Issuer, the Bond Trustee and the initial Depository,
dated as of the Closing Date and substantially in the form of Exhibit D hereto.
Depository Participant - A broker, dealer, bank or other financial
institution or other person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
Directly Operate - With respect to any REO, the furnishing or rendering
of services to the tenants thereof, the management or operation of such REO,
the holding of such REO primarily for sale to customers, the performance of any
construction work thereon or any use of such REO in a trade or business
conducted by the Trust Estate, in each case other than through an Independent
Contractor; provided, however, that a Person designated by, and acting on
behalf of the Bond Trustee shall not be considered to Directly Operate an REO
Property solely because such Person on behalf of the Bond Trustee establishes
rental terms, chooses tenants, enters into or renews leases, deals with taxes
and insurance, or makes decisions as to repairs or capital expenditures with
respect to such REO.
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Disqualified Organization - Either (a) the United States, (b) any state or
political subdivision thereof, (c) any foreign government, (d) any
international organization, (e) any agency or instrumentality of any of the
foregoing, (f) any tax-exempt organization (other than a cooperative described
in section 521 of the Code) that is exempt from federal income tax unless such
organization is subject to tax under the unrelated business taxable income
provisions of the Code, (g) any organization described in section 1381(a)(2)(C)
of the Code or (h) any other entity identified as a disqualified organization
by the REMIC Provisions. A corporation will not be treated as an
instrumentality of the United States or any state or political subdivision
thereof if all of its activities are subject to tax and, with the exception of
the Federal Home Loan Mortgage Corporation, a majority of its board of
directors is not selected by such governmental unit.
ERISA - The Employee Retirement Income Security Act of 1974, as amended.
Event of Default - Has the meaning specified in Article VII of this Bond
Indenture.
Exchange Act - The Securities Exchange Act of 1934, as amended.
Extended Period - Has the meaning specified in Section 20.10.1 of this
Bond Indenture.
Extension - Has the meaning specified in Section 20.10.1 of this Bond
Indenture.
Fee Properties - Collectively, those of the Properties other than the
Leasehold Properties.
Global Bonds - Physical certificates representing the Offered Bonds issued
in the name of and delivered to the Depository to facilitate the issuance of
the Book-Entry Bonds.
Holder or Bondholder - The Person in whose name a Bond is registered in the
Register.
Independent Contractor - Either (a) any Person that would be an "independent
contractor" with respect to any Pool REMIC or the Trust Estate within the
meaning of section 856(d)(3) of the Code if such Pool REMIC or the Trust
Estate were a real estate investment trust (except that, in applying that
section, more than 35% of the outstanding principal balance of any Series of
Bonds shall be deemed to be more than 35% of the interest in both the related
Pool REMIC and Trust Estate), so long as the Trust
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<PAGE> 14
Estate does not receive or derive any income from such Person, the relationship
between such Person and the Trust Estate is at arm's length and such Person is
not an employee of the REMICs, the Bond Trustee or the Tax Administrator, all
within the meaning of Treasury Regulation Section 1.856-4(b)(5), or (ii) any
other Person (including the Tax Administrator) upon receipt by the Bond Trustee
of an Opinion of Counsel to the effect that the taking of any action in respect
of any REO by such Person, subject to any conditions therein specified, that is
otherwise herein contemplated to be taken by an Independent Contractor will not
cause such REO to cease to qualify as "foreclosure property" within the meaning
of section 860G(a)(8) of the Code (determined without regard to the exception
applicable for purposes of section 860D(a) of the Code), or cause any income
realized in respect of such REO to fail to qualify as Rents from Real Property.
Investment Letter - Has the meaning specified in Section 2.4.1 of this
Bond Indenture, a form of which is attached hereto as Exhibit F.
IRS - The Internal Revenue Service.
Issuer - FGHK, Inc., a New York corporation, its successors and
assigns.
Issuer Documents - The Note Assignment, this Bond Indenture, the
Bonds, the pledge of the Notes to the Bond Trustee, the Master Indemnification
Agreement and the First Amendment to the Master Indemnification Agreement.
Kmart - Kmart Corporation, a Michigan corporation, its successors and
assigns.
Lease Event of Default - Has the meaning assigned in the Leases to the
term "Event of Default" thereunder.
Leasehold Estate - Collectively, the interests of the related Owner
Trustee in a Leasehold Property created by the related ground lease and a fee
estate in the improvements located thereon.
Leasehold Properties - Collectively, those Properties listed on
Schedule G to the Purchase Agreement and designated as "Leasehold Properties"
thereon.
Leases - Collectively, the leases of the Properties, each dated as of
December 15, 1993, as amended as of the date hereof, between the Owner Trustee,
as lessor, and Kmart, as lessee, as supplemented or amended (each individually,
a "Lease").
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Majority in Interest - Collectively, the Holders of a majority of the
aggregate principal amount of the Offered Bonds then outstanding.
Make-Whole Premium - The sum of the Make-Whole Premiums on all related
Notes being redeemed. The "Make-Whole Premium", if any, on any Note shall mean
an amount equal to the positive difference, as of the date of determination,
between (a) the present value of all future payments of principal and interest,
including any principal amount due at maturity, discounted semi-annually at an
interest rate per annum equal to (i) the average yield for "This Week", as
provided in the Treasury Constant Maturity Yield Index published by the Federal
Reserve Bank of New York in the Federal Reserve Statistical Release designated
"H.15(519) Selected Interest Rates", or a successor publication, published next
preceding two business days prior to redemption, for instruments having a
maturity corresponding to the remaining Average Life of such Note (the "TCMYI")
plus (ii) 50 basis points, and (b) the outstanding principal amount of such
Note to be redeemed; provided, however, that if there is no TCMYI for
instruments having a maturity corresponding to the Average Life of such Note,
then the TCMYI shall equal the straight-line interpolation between the
interest rates on the two respective Treasury issues greater and lesser, most
closely approximating the average life of the Note (rounded to the fourth
decimal place); and provided further that if the Average Life of such Note is
less than one year, the one-year TCMYI shall be used.
Master Indemnification Agreement - The Master Indemnification
Agreement dated as of December 15, 1993, as amended on the date hereof, between
Kmart and the Owner Participant, the Remainder Purchaser, the Owner Trustee,
the Remainder Owner Trustee, the Note Trustee, the Bond Trustee, the Issuer and
the Holders of the Residual Bonds, as the same may be amended, modified or
supplemented from time to time in accordance with the provisions thereof.
Mortgages - The mortgages, deeds of trust and deeds to secure debt,
dated as of December 15, 1993, as amended on the date hereof, each creating a
first-mortgage lien on the related Property, including the improvements
thereon, from the Owner Trustee, as mortgagor, to or for the benefit of the
Note Trustee, as mortgagee, for the benefit of the Issuer, as the Holder of
the Notes, as at such time supplemented or amended.
New Lease - Any lease of an REO entered into on behalf of the Trust
Estate, including any lease renewed, modified or extended on behalf of the
Trust Estate (if the Bond Trustee, or its agent, has the right to renegotiate
the terms of such lease).
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New York UCC- The Uniform Commercial Code of the State of New York.
Non-U.S. Person - A foreign person within the meaning of Treasury
Regulations Section 1.860G-3(a)(1) (i.e., a person other than (a) a citizen or
resident of the United States, (b) a corporation, limited-liability company,
partnership or other entity that is organized under the laws of the United
States or any jurisdiction thereof or therein or (c) an estate or trust that is
subject to United States federal income taxation regardless of the source of
its income) that would be subject to United States income tax withholding
pursuant to Section 1441 or 1442 of the Code on income derived from a Residual
Bond.
Note Assignment - The assignment dated the date hereof, from the
Issuer to the Bond Trustee, assigning the Notes and the rights of the Issuer
under the Note Indentures to the Bond Trustee.
Note Indenture Event of Default - Has the meaning assigned to the term
"Event of Default" in the Note Indentures.
Note Indentures - With respect to each of the Properties, the related
Trust Indenture, Assignment of Lease and Rents and Security Agreement, dated as
of December 15, 1993, as supplemented and restated as of the date hereof,
between the applicable Owner Trustee and the Note Trustee, as the same may be
amended, modified or supplemented from time to time in accordance with the
provisions thereof.
Note Trustee - The Bank of New York, not in its individual capacity,
but solely as trustee under the various Note Indentures, or any successor
trustee thereunder.
Notes - The Series A Notes, Series B Notes and Series C Notes issued
by the applicable Owner Trustee pursuant to the Note Indentures; a Series A
Note, a Series B Note and a Series C Note will be issued in respect of each
Property.
Offered Bonds - The Series A Bonds, Series B Bonds and Series C Bonds,
each in the form of Exhibit A and Exhibit C hereto.
Officer's Certificate - A certificate of the Issuer signed by the President,
any Vice President or other officer authorized to so sign by either the Board
of Directors or the by-laws of the Issuer.
Opinion of Counsel - A written opinion of counsel in form and substance
acceptable to the Bond Trustee.
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Owner Participant - The owner participant under the Purchase Agreement.
Owner Trust - The owner trust established pursuant to the relevant Trust
Agreement.
Owner Trustee - With respect to the Property located in the State of
Ohio, Society National Bank, acting not in its individual capacity, but solely
as owner trustee under the related Trust Agreement; with respect to the 23
other Properties, Shawmut Bank Connecticut, National Association, acting not in
its individual capacity, but solely as owner trustee under each of the related
Trust Agreements.
Payment Date - Each date on which scheduled payments of principal or
interest are due and payable on the Bonds, except that if any Payment Date
falls on a day that is not a Business Day, then the Payment Date shall be the
succeeding Business Day.
Permitted Investments - An interest-bearing investment (a) having a
credit rating no lower than the rating on the highest rated Series of Offered
Bonds, except in the case of a deposit with the Bond Trustee in its capacity as
a bank (an "In-House Deposit"), (b) that matures no later than the Business Day
immediately preceding the next succeeding Payment Date or, in the case of an
In-House Deposit, no later than such Payment Date, and (c) that does not
evidence the right to receive only the interest on obligations underlying the
investment or provide a yield to maturity at par higher than 120% of the yield
to maturity at par of such obligations.
Permitted Transferee - A person to whom a Residual Bond may be transferred
consistent with the provisions of Section 2.4 hereof.
Person - Any individual, corporation, limited-liability company, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
Plan Asset Regulations - The Department of Labor regulations set forth
in 29 C.F.R. Section 2510.3-101, as amended from time to time.
Pool A Asset Group - The portion of the assets of the Issuer which
have been pledged or assigned to the Trust Estate consisting of the Series A
Notes, certain interests of the Note Trustee assigned to the Bond Trustee
pursuant to the Assignment, the Pool A Bond Account, the Pool A Reserve Fund
and all amounts or assets received with respect thereto.
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Pool A Bond Account - The separate account created and initially
maintained by the Bond Trustee in the name of the Bond Trustee for the benefit
of the Holders of the Series A Bonds and Series AR Bonds and designated "The
Bank of New York, in trust for the registered holders of the Secured Lease
Bonds, Series A and Series AR". Funds in the Pool A Bond Account shall be held
in trust for the Holders of the Series A Bonds and Series AR Bonds for the uses
and purposes set forth in this Bond Indenture.
Pool A REMIC - The REMIC comprised of the Pool A Asset Group.
Pool A Reserve Fund - The Reserve Fund established pursuant to Section
3.1 hereof to be used for the payment of the Bond Trustee's fees and other
expenses of the Pool A REMIC.
Pool B Asset Group - The portion of the assets of the Issuer which
have been pledged or assigned to the Trust Estate consisting of the Series B
Notes, certain interests of the Note Trustee assigned to the Bond Trustee
pursuant to the Assignment, the Pool B Bond Account, the Pool B Reserve Fund
and all amounts or assets received with respect thereto.
Pool B Bond Account - The separate account created and initially maintained
by the Bond Trustee in the name of the Bond Trustee for the benefit of the
Holders of the Series B Bonds and Series BR Bonds and designated "The Bank of
New York, in trust for the registered holders of the Secured Lease Bonds,
Series B and Series BR". Funds in the Pool B Bond Account shall be held
in trust for the Holders of the Series B Bonds and Series BR Bonds for the uses
and purposes set forth in this Bond Indenture.
Pool B REMIC- The REMIC comprised of the Pool B Asset Group.
Pool B Reserve Fund - The Reserve Fund established pursuant to Section
3.1 hereof to be used for the payment of the Bond Trustee's fees and other
expenses of the Pool B REMIC.
Pool C Asset Group - The portion of the assets of the Issuer which
have been pledged or assigned to the Trust Estate consisting of the Series C
Notes, certain interests of the Note Trustee assigned to the Bond Trustee
pursuant to the Assignment, the Pool C Bond Account, the Pool C Reserve Fund
and all amounts or assets received with respect thereto.
Pool C Bond Account - The separate account created and initially
maintained by the Bond Trustee in the name of the Bond Trustee for the benefit
of the Holders of the Series C Bonds and Series CR Bonds and designated "The
Bank of New York, in trust
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for the registered holders of the Secured Lease Bonds, Series C and Series CR".
Funds in the Pool C Bond Account shall be held in trust for the Holders of the
Series C Bonds and Series CR Bonds for the uses and purposes set forth in this
Bond Indenture.
Pool C REMIC - The REMIC comprised of the Pool C Asset Group.
Pool C Reserve Fund- The Reserve Fund established pursuant to Section
3.1 hereof to be used for the payment of the Bond Trustee's fees and other
expenses of the Pool C REMIC.
Properties - The Fee Properties and the Leasehold Properties (each
individually, a "Property").
Purchase Agreement - Has the meaning specified in each Note Indenture,
as appropriate.
Record Date - As to any Payment Date, the 15th day of the calendar month
prior to the month in which such Payment Date occurs.
Redemption Date - Has, for each Series of Bonds, the meaning specified
in the Note Indentures with respect to the related Series of Notes.
Redemption Price - With respect to any Bond or portion thereof to be
redeemed, 100% of the unpaid principal amount thereof, or of the portion to be
redeemed, plus accrued interest thereon through the Redemption Date and, where
specifically provided for herein, the applicable Make-Whole Premium, if any,
pursuant to Section 3.6(b) of this Bond Indenture.
Register - Has the meaning specified in Section 2.3 of this Bond Indenture.
Registrar - The Bond Trustee and any successor Registrar or additional
Registrar as may be appointed by the Issuer.
Remainder Purchaser - FGHK, Ltd., A Wyoming Limited Liability Company, its
successors and assigns.
REMIC - A "real estate mortgage investment conduit" within the meaning of
the REMIC Provisions.
REMICs - Has the meaning specified in Section 2.6.1 of this Bond Indenture.
REMIC Provisions - Provisions of the federal income tax law relating to
REMICs, which appear at sections 860A through 860G of
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Subchapter M of Chapter 1 of the Code, and related provisions, and proposed,
temporary and final regulations promulgated thereunder and published rulings
and announcements, as the foregoing may be in effect from time to time as well
as CORRESPONDING provisions of applicable state laws.
Rents from Real Property - With respect to any REO, gross income of the
character described in Code section 856(d) and Treasury regulations thereunder.
REO - A Property acquired by the Bond Trustee as the result of a
default on one or more Notes through foreclosure, deed-in-lieu of foreclosure,
or other mechanism in accordance with the applicable Note Indenture.
REO Disposition - The receipt by the Bond Trustee of insurance
proceeds and other payments and recoveries (including liquidation proceeds)
from the sale or other disposition of an REO.
Reserve Fund - Any of the Pool A Reserve Fund, the Pool B Reserve Fund
or the Pool C Reserve Fund, as appropriate.
Reserve Fund Amounts - Has the meaning specified in Section 3.13.1 of
this Bond Indenture.
Residual Bonds - The Series AR Bonds, Series BR Bonds and Series CR
Bonds, each in the form of Exhibit B and Exhibit C hereto.
Responsible Officer - Has the meaning assigned in the Note Indentures.
Rule 144A Letter - Has the meaning specified in Section 2.3.1 of this
Bond Indenture, a form of which is attached hereto as Exhibit G.
Securities Act - The Securities Act of 1933, as amended.
Series - With respect to the Bonds, collectively, all of the Bonds
designated as either the Series A Bonds, Series AR Bonds, Series B Bonds,
Series BR Bonds, Series C Bonds or Series CR Bonds and, with respect to the
Notes, collectively, all of the Notes designated as either Series A Notes,
Series B Notes or Series C Notes.
Series A Bonds - $ principal amount of % Secured Lease
Bonds, Series A, due _______________, the form of which is attached hereto as
Exhibit A and Exhibit C.
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Series A Notes - The 24 mortgage notes designated as "Series A Notes"
thereon, from the appropriate Owner Trustee, as maker, to the Issuer, as payee,
in an aggregate principal amount equal to $__________, and any notes issued in
exchange therefor or in replacement thereof.
Series AR Bonds - The Secured Lease Bonds, Series AR, representing the
residual interest in the Pool A REMIC, having no principal amount and entitled
to no scheduled payments of principal or interest, the form of which is
attached hereto as Exhibit B and Exhibit C.
Series B Bonds - $_________ principal amount of ____ % Secured Lease
Bonds, Series B, due _______________, the form of which is attached hereto as
Exhibit A and Exhibit C.
Series B Notes - The 24 mortgage notes designated as "Series B Notes"
thereon, from the appropriate Owner Trustee, as maker, to the Issuer, as payee,
in an aggregate principal amount equal to $__________, or any notes issued
in exchange therefor or in replacement thereof.
Series BR Bonds - The Secured Lease Bonds, Series BR, representing the
residual interest in the Pool B REMIC, having no principal amount and entitled
to no scheduled payments of principal or interest, the form of which is
attached hereto as Exhibit B and Exhibit C.
Series C Bonds - $________ principal amount of ___ % Secured Lease
Bonds, Series C, due _______________, the form of which is attached hereto as
Exhibit A and Exhibit C.
Series C Notes - The 24 mortgage notes designated as "Series C Notes"
thereon, from the appropriate Owner Trustee, as maker, to the Issuer, as payee,
in an aggregate principal amount equal to $__________, or any notes issued in
exchange therefor or in replacement thereof.
Series CR Bonds - The Secured Lease Bonds, Series CR, representing the
residual interest in the Pool C REMIC, having no principal amount and entitled
to no scheduled payments of principal or interest, the form of which is
attached hereto as Exhibit B and Exhibit C.
Sinking Fund - With respect to each Series of Bonds, the sinking fund
for each such Series to be established and to operate as provided in Section
3.2 of this Bond Indenture.
Special Tax Consent - The written consent of the Holder of a Residual
Bond to any tax (or risk thereof) arising out of a
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<PAGE> 22
proposed transaction or activity that may be imposed upon such Holder or that
may affect adversely the value of such Holder's Residual Bond.
Special Tax Opinion - An Opinion of Counsel that a proposed transaction
or activity will not (a) adversely affect the status of any REMIC as a REMIC or
of the Offered Bonds as the regular interests therein, (b) affect the payment
of interest or principal on the Offered Bonds or (c) result in the encumbrance
of the collateral held by the Bond Trustee by a tax lien.
Startup Day - With respect to each of the REMICs, MAY , 1994.
Stated Maturity - When used with respect to any Bond or any
installment of interest thereon, the date specified in such Bond as the fixed
date on which the principal of such Bond or such installment of interest is due
and payable, except that if such date does not fall on a Business Day, then the
Stated Maturity shall be the succeeding Business Day.
SUPPLEMENTAL ASSIGNMENT AGREEMENT - THE SUPPLEMENTAL ASSIGNMENT
AGREEMENT, DATED AS OF THE DATE HEREOF, FROM THE BOND TRUSTEE TO EACH OF
THE NOTE TRUSTEES, WITH RESPECT TO EXCEPTED PAYMENTS (AS DEFINED IN THE NOTE
INDENTURES) AND CERTAIN OTHER MONIES NOT COMPRISING PART OF THE TRUST
ESTATE, A FORM OF WHICH IS ATTACHED HERETO AS EXHIBIT J.
Supplemental Indenture - Any supplemental indenture to this Bond
Indenture executed by the Bond Trustee pursuant to Article XVI hereof.
Tax Administrator - The Bank of New York or any designee qualified
under the REMIC Provisions to perform the functions of the Tax Administrator
hereunder (including the function of serving as the Tax Matters Person) WHO
SHALL, IF SO REQUIRED, HAVE SATISFIED THE REQUIREMENTS OF SECTION 2.4 OF
THIS BOND INDENTURE WITH RESPECT TO THE TRANSFER TO IT OF AN INTEREST IN THE
RESIDUAL BONDS.
Tax Matters Person - The Person or Persons designated from time to time
hereunder to act as tax matters person (within the meaning of the REMIC
Provisions) of a REMIC.
Transferee Agreement - Has the meaning specified in Section 2.4.1 of
this Bond Indenture, a form of which is attached hereto as Exhibit H.
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Transferor Certificate - Has the meaning specified in Section 2.4.1 of
this Bond Indenture, a form of which is attached hereto as Exhibit E.
Treasury Constant Maturity Yield Index - The average yield for "This
Week" as reported by the Federal Reserve Board in Federal Reserve Statistical
Release H.15 (519) (or, if such Statistical Release is no longer published, any
publicly available source of similar market data).
Trust Agreements - The 24 Trust Agreements, each dated as of December
15, 1993 and each between the Owner Participant and the appropriate Owner
Trustee with respect to a separate Property.
Trust Estate - As defined in the securing clause of this Bond
Indenture.
Trust Indenture Act - The Trust Indenture Act of 1939, as amended.
U.S. Person - A Person other than a Non-U.S. Person.
Withholding Agent - The Bond Trustee or its designated paying agent or
other person who is liable to withhold federal income tax from a distribution
on a Residual Bond under section 1441 and 1442 of the Code and the regulations
thereunder.
ARTICLE II.
2. The Bonds.
2.1. Book-Entry Bonds.
2.1.1. Issuance and Registration.
The Offered Bonds initially shall each be issued in the form of one or
more physical certificates (the "Global Bonds") representing the Book-Entry
Bonds, to be delivered to the Depository by or on behalf of the Issuer in the
form attached hereto as Exhibits A and C (Reverse of Bonds). The Bonds shall
be issuable in the denominations set forth below. The aggregate principal
amount of Bonds that may be authenticated and delivered hereunder is limited to
the aggregate sum of $___________, except for Bonds authenticated and delivered
pursuant to Sections 2.2 or 2.3 hereof. Each fully registered Bond shall be
dated the date of its authentication. Each fully registered Bond shall be
numbered, lettered or otherwise distinguished in such manner or in accordance
with such plans as the Issuer executing the same may determine with the
approval of the Bond Trustee. Each fully
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registered Bond may be issued with appropriate insertions, omissions,
substitutions or variations, and may have imprinted or otherwise reproduced
thereon such legend or legends, not inconsistent with the provisions of this
Bond Indenture, as may be required to comply with any law or with any rules or
regulations pursuant thereto, or with the rules of any securities market in
which the Bond of such series is admitted to trading, or to conform to general
usage.
Each of the Bonds shall be issuable in a minimum denomination of $1000
and integral multiples thereof. The Series A Bond, Series B Bond and Series C
Bond initially shall each be issued only as a single Bond in registered form in
the denominations of $________, $________ and $________, respectively. Series
AR Bonds, Series BR Bonds and Series CR Bonds shall each be issued only as a
single Bond in registered form without denomination.
The Bonds shall be executed on behalf of the Issuer by any of its
authorized officers. The signature of any of such authorized officer on the
Bond may be manual or facsimile. The Bonds shall be authenticated by the Bond
Trustee.
Bonds bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Issuer shall bind the Issuer,
notwithstanding that any of such individuals have ceased to hold such offices
prior to the authentication and delivery of such Bond or did not hold such
offices at the date of execution of this Bond Indenture.
No Bond shall be secured by or entitled to any benefit under this Bond
Indenture or be valid or obligatory for any purpose unless there appears on
such Bond a certificate of authentication in the form provided for in the
Bonds, executed by the Bond Trustee by the manual signature of one of its
authorized officers or signatories, and such certificate upon any Bond shall be
conclusive evidence, and the only evidence, that such Bond has been duly
authenticated and delivered hereunder.
The Offered Bonds shall initially be registered on the Register in the
name of the Depository or its nominee, and no Bond Owner shall be entitled to
receive a Definitive Bond representing such Bond Owner's interest in such
Bonds, except as provided in Section 2.2 hereof. Unless and until definitive,
fully registered Bonds ("Definitive Bonds") have been issued to the Bond Owners
of such Bonds pursuant to Section 2.2:
a. the Issuer and the Bond Trustee may deal with the Depository and
the Depository Participants for all purposes
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(including the making of distributions) as the authorized
representative of such Bond Owners;
b. transfer of the Book-Entry Bonds may not be registered by the Bond
Trustee except to another Depository;
c. the rights of such Bond Owners shall be exercised only through the
Depository and the Depository Participants and shall be limited to those
established by law, by agreements between such Bond Owners and the Depository
and/or the Depository Participants and by the reasonable rules and procedures
of the Depository and Depository Participants. Pursuant to the Depository
Agreement, unless and until Definitive Bonds are issued with respect to the
Offered Bonds pursuant to Section 2.2.1, the Depository will make book-entry
transfers among the Depository Participants and receive and transmit
distributions of principal and interest on the related Bonds to such Depository
Participants;
d. the Depository may collect its usual and customary fees, charges and
expenses from its Depository Participants;
e. the Bond Trustee may rely and shall be fully protected in relying upon
information furnished by the Depository with respect to its Depository
Participants and furnished by the Depository Participants with respect to
indirect participating firms and Persons shown on the books of such indirect
participating firms as direct or indirect Bond Owners;
f. to the extent that the provisions of this Section conflict with any
other provisions of this Bond Indenture, the provisions of this Section shall
control; and
g. neither the Issuer nor the Bond Trustee nor any Affiliate thereof will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of a Book-Entry
Bond or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
For purposes of any provision of this Bond Indenture requiring or permitting
actions with the consent of, or at the direction of, Holders, such direction or
consent may be given by Bond Owners (acting through the Depository and the
Depository Participants) owning Book-Entry Bonds evidencing the requisite
percentage of principal amount of such Series of Bonds.
2.1.2. Communication through Depository. Whenever any notice or other
communication is required to be given to Holders of any Series of Offered
Bonds, unless and until Definitive Bonds
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shall have been issued to the related Bond Owners, the Bond Trustee shall
give all such notices and communications to the Depository, who shall
communicate them to the Depository Participants.
2.2. Issuance of Definitive Bonds. If, after Book-Entry Bonds have been
issued, (a) either the Issuer or the Depository advises the Bond Trustee that
the Depository is no longer willing or able to discharge properly its
responsibilities under the Depository Agreement with respect to such Bonds and
the Bond Trustee and the Issuer are unable to locate a qualified successor, (b)
at its sole option, the Issuer advises the Bond Trustee that it elects to
terminate the book-entry system with respect to such Bonds through the
Depository or (c) after the occurrence and continuation of an Event of Default,
a Majority in Interest advises the Bond Trustee and the Depository in writing
through the Depository Participants that the continuation of a book-entry
system with respect to such Bonds through the Depository (or its successor) is
no longer in the best interests of such Bond Owners, then the Bond Trustee
shall notify all such Bond Owners, through the Depository, of the occurrence of
any such event and of the availability of Definitive Bonds to Bond Owners
requesting the same. The Issuer shall thereupon execute and deliver to the
Bond Trustee Definitive Bonds and shall direct the Bond Trustee to authenticate
and deliver such Definitive Bonds upon surrender to the Bond Trustee of the
Global Bonds by the Depository, accompanied by registration instructions from
the Depository for registration. Neither the Issuer nor the Bond Trustee shall
be liable for any delay in delivery of such instructions and each may
conclusively rely on, and shall be protected in relying on, such instructions.
Upon the issuance of such Definitive Bonds, all references herein to
obligations imposed upon or to be performed by the Depository shall be deemed
to be imposed upon and performed by the Bond Trustee, to the extent applicable
with respect to such Definitive Bonds and the Bond Trustee shall recognize the
Holders of such Definitive Bonds as Holders hereunder.
2.3. Registration, Exchange or Transfer of Bonds. The Bond Trustee is
hereby appointed Registrar for the purpose of registering Bonds and transfer of
Bonds as herein provided. The Bond Trustee, as Registrar, shall cause to be
kept at the Corporate Trust Office a register (the "Register") for the
registration, subject to such reasonable regulations as it may prescribe, of
Bonds and of transfers of Bonds of each Series. If the Issuer, with the
written consent of a Majority in Interest, appoints a successor Registrar or
additional Registrars, the registers maintained by all such Registrars shall,
collectively, comprise the Register. The ownership of the Bonds (including,
for purposes of Article XIX hereof) shall be proved by the
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Register. Prior to due presentment for registration of transfer, the
Person in whose name any Bond is registered on the Register shall be deemed to
be the absolute owner of such Bond for the purpose of receiving payment of
principal of, premium, if any, and interest on such Bond and for all other
purposes whatsoever, regardless of any notice to anyone to the contrary.
Upon surrender for registration of transfer of any Bond at the Corporate
Trust Office and provided that all requirements for transfer established
hereunder have been satisfied, the Issuer shall execute, and the Bond Trustee
shall authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Bonds of the same Series, of any authorized
denominations and of a like aggregate principal amount. No transfer of Bonds
shall be effective unless such transfer has been recorded in the Register.
At the option of any Holder, such Holder's Bonds of any Series may be
exchanged for other Bonds of the same Series in authorized denominations of an
equal aggregate principal amount, upon surrender of the Bonds to be exchanged
at the Corporate Trust Office. Whenever any Bonds are so surrendered for
exchange, the Issuer shall execute, and the Bond Trustee shall authenticate and
deliver, the Bonds that the Holder making the exchange is entitled to receive.
All Bonds issued upon any registration of transfer or exchange of Bonds shall
be the valid obligations of the Issuer, evidencing the same obligations, and
entitled to the same security and benefits under this Bond Indenture, as the
Bonds surrendered upon such registration of transfer or exchange so that
neither gain nor loss in interest shall result from such registration of
transfer, exchange or replacement.
Every Bond presented or surrendered for registration of transfer or exchange
shall (if so required by the Registrar) be duly endorsed by, or be accompanied
by a written instrument of transfer in form satisfactory to the Bond Trustee
duly executed by, the Holder thereof or its attorney duly authorized in
writing.
All Bonds surrendered for payment or redemption in whole, or registration of
transfer or exchange shall, if surrendered to any Person other than the Bond
Trustee, be delivered to the Bond Trustee for cancellation. The Issuer may at
any time deliver to the Bond Trustee for cancellation any Bonds previously
authenticated and delivered hereunder that the Issuer may have acquired in any
manner whatsoever and all Bonds so delivered shall be promptly canceled by the
Bond Trustee. No Bonds shall be authenticated in lieu of or in exchange for
any Bonds canceled
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as provided in this Section 2.3, except as expressly permitted by this Bond
Indenture. All canceled Bonds held by the Bond Trustee shall be held or
disposed of by the Bond Trustee in accordance with its standard retention or
disposal policy as is in effect at the time unless the Issuer shall direct that
they be returned to it; provided that such direction is timely and the Bonds
have not been previously disposed of by the Bond Trustee in the absence of such
direction and in accordance with the foregoing policy.
No service charge shall be made for any registration of transfer or exchange
of Bonds, but the Registrar may require payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection with any
registration of transfer or exchange of Bonds.
2.4. ADDITIONAL Requirements for Transfer of Residual Bonds.
2.4.1. Registration or Exemption under the Securities Act.
(a) No transfer to an effective registration statement under the
Securities Act and any applicable state securities laws or is exempt from the
registration requirements under the Securities Act and such state securities
laws. In the event that a transfer is to be made in reliance upon an exemption
from the Securities Act and such laws, in order to assure compliance therewith,
the Holder desiring to effect such transfer and such Holder's prospective
transferee shall each certify to the Bond Trustee in writing the facts
surrounding the transfer in substantially the forms set forth in Exhibit E (the
"Transferor Certificate") and either Exhibit F (the "Investment Letter") or
Exhibit G (the "Rule 144A Letter"). In the event that such transfer is to be
made within three years from the date of the initial issuance of Bonds pursuant
hereto (other than a transfer as to which the proposed transferee has provided
a Rule 144A Letter), there shall also be delivered to the Bond Trustee an
Opinion of Counsel that such transfer may be made pursuant to an exemption from
the Securities Act and such state securities laws. The Issuer shall provide to
any Holder of a Residual Bond and any prospective transferee designated by any
such Holder, information regarding the related Bonds and such other information
as shall be necessary to satisfy the conditions of eligibility set forth in
Rule 144A(d)(4) for transfer of any such Bond without registration thereof
under the Securities Act pursuant to the registration exemption provided by
Rule 144A. The Bond Trustee and Kmart shall cooperate with the Issuer in
providing such information, including providing to the Issuer such information
regarding the Bonds and other matters regarding the Trust Estate as the Issuer
shall reasonably request to meet its obligation under the preceding sentence;
provided, however, that the Bond Trustee shall only be obligated to provide
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information with respect to (i) amounts paid or owing to Bondholders,
(ii) Defaults known to it, (iii) the number of registered Bondholders or (iv)
the terms of the Bonds and this Bond Indenture, including restrictions on the
transfer of Bonds. Each Holder of a Residual Bond desiring to effect such
transfer shall, and does BY ITS ACCEPTANCE OF A RESIDUAL BOND, agree to
indemnify the Bond Trustee, the Tax Administrator, Kmart, the Issuer, the Owner
Participants and the Owner Trustees against any liability that may result if
the transfer is not so exempt or is not made in accordance with such federal
and state laws. Such indemnification obligation shall survive termination of
this Bond Indenture and payment in full of the Bonds.
(b) No transfer of a Residual Bond shall be made unless the transferee
provides the Tax Administrator and the Bond Trustee with (i) an agreement of
the transferee substantially in the form of Exhibit H (a "Transferee
Agreement") hereto and (ii) either (A) an affidavit substantially in the form
of Exhibit BPA to Exhibit H hereto that the proposed transferee is not a
"benefit plan investor" described in or subject to the Plan Asset Regulations
(a "Benefit Plan Affidavit") or (B) a Benefit Plan Opinion.
(c) The Bond Trustee shall not register any transfer of a Residual Bond
(including any beneficial interest therein) unless it shall have received the
written consent of the Tax Administrator. The Tax Administrator shall not give
such consent to any proposed transfer to any investor that is a Disqualified
Organization or in any case where such transfer would result in the Issuer or
the Trust Estate being deemed to be an "investment company" within the meaning
of the Investment Company Act of 1940, as amended. As prerequisites to the Tax
Administrator's consent to any other transfer, the proposed transferee
(including an initial purchaser) of a Residual Bond, or any beneficial interest
therein, must provide the Tax Administrator and the Bond Trustee with (i) the
items specified in paragraph (b) above, (ii) (A) if the transferee is a
Non-U.S. Person, an affidavit in substantially the form attached as Exhibit B-1
to Exhibit H hereto and (B) if the transferee is a U.S. Person, an affidavit in
substantially the form attached as Exhibit B-2 to Exhibit H hereto and (iii) if
the proposed transferee is a Non-U.S. Person, a certificate, signed by the
transferor, stating whether the Residual Bond has "tax avoidance potential" as
defined in Treasury Regulations Section 1.860G-3(a)(2) (a "TAPRI
Certificate"). Notwithstanding the fulfillment of the prerequisites described
above, the Tax Administrator may withhold its consent to a transfer, but only
to the extent necessary to avoid a risk of (i) disqualification of the related
REMIC as a REMIC or (ii) the imposition of a tax upon any REMIC. In addition,
the Tax Administrator shall not give its consent to the
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transfer of less than an entire interest in a Residual Bond unless the interest
transferred is an undivided interest or the transferor or the transferee
provides the Tax Administrator with an Opinion of Counsel that the transfer
will not jeopardize the REMIC status of the related REMIC.
(d) If a tax or a reporting cost is borne by any REMIC as a result of the
transfer of a Residual Bond, or any beneficial interest therein, in violation
of the restrictions set forth in this Section, the Bond Trustee, upon
notification from the Tax Administrator, may pay such tax or reporting cost
with amounts that otherwise would have been paid to the transferee of such
Residual Bond (or beneficial interest therein). In that event, neither the
transferee nor the transferor shall have any right to seek repayment of such
amounts from the Bond Trustee, the Issuer, any REMIC, the Tax Administrator,
Other Holders or Kmart (Whether pursuant to the Master Indemnification
Agreement or otherwise).
(e) Any attempted or purported transfer of any ownership interest in a
Residual Bond in violation of the provisions of this Section 2.4.1 shall be
absolutely null and void and shall vest no rights in the purported transferee.
If any purported transferee shall become a Holder of a Residual Bond in
violation of the provisions of this Section 2.4.1, then the last preceding
Permitted Transferee shall be restored to all rights as Holder thereof
retroactive to the date of registration of Transfer of such Residual Bond. The
Bond Trustee shall be under no liability to any Person for any registration of
transfer of a Residual Bond not permitted by Section 2.4.1 and this Section
2.4.1 or for making any payments due on such Bond to the Holder thereof or
taking any other action with respect to such Holder under the provisions of
this Bond Indenture. The Bond Trustee shall be entitled but not obligated to
recover from any Holder of a Residual Bond that was in fact not a Permitted
Transferee at the time it became such a Holder or, at such subsequent time as
it became other than a Permitted Transferee, all payments made on such Residual
Bond at and after either such time. Any such payments so recovered by the Bond
Trustee shall be paid and delivered by the Bond Trustee to the current
Permitted Transferee, if any, or the last preceding Permitted Transferee of
such Bond.
(f) The Tax Administrator shall make available, upon receipt of a written
request from the Bond Trustee, all information necessary to compute any tax
imposed under section 860E(e) of the Code as a result of a transfer of an
ownership interest in a Residual Bond to any Person who is not a Permitted
Transferee.
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The restrictions on transfers set forth in this Section 2.4.1, to the extent
they relate to REMIC qualification, shall cease to apply with respect to
transfers occurring after delivery to the Bond Trustee of an Opinion of Counsel
to the effect that the elimination of such restrictions will not cause the
Trust Estate, or any portion thereof, to fail to qualify as a REMIC at any time
that the Residual Bonds are outstanding or result in the imposition of any tax
on the Trust Estate, a Holder or another Person. Each Person holding or
acquiring any ownership interest in a Residual Bond consents BY ITS
HOLDING OR ACQUISITION THEREOF to any amendment of this Bond Indenture which is
reasonably necessary (a) to ensure that the record ownership of, or any
beneficial interest in, a Residual Bond is not transferred, directly or
indirectly, to a Person that is not a Permitted Transferee and (b) to provide
for a means to compel the transfer of a Residual Bond which is held by a Person
that is not a Permitted Transferee to a Holder that is a Permitted Transferee.
2.4.2. Payment of Expenses. The preparation and delivery of the
certificates and Opinions of Counsel referred to in this Section 2.4 shall not
be an expense of the Trust Estate, the Bond Trustee, the Owner Trustee or
Kmart.
2.5. Payment of the Bonds. The Issuer shall duly and punctually pay, or
cause to be paid, the principal of, interest on and premium, if any, on the
Bonds in accordance with their respective terms; provided, however, that the
Issuer's obligations with respect to the Series A Bonds and Series AR Bonds
shall be recourse solely to the Pool A Asset Group, its obligations with
respect to the Series B Bonds and Series BR Bonds shall be recourse solely to
the Pool B Asset Group, and its obligations with respect to the Series C Bonds
and Series CR Bonds shall be recourse solely to the Pool C Asset Group. All
payments shall be made without demand therefor or, except for a final payment
in full, presentation of the Bonds, and shall be delivered to the Bond Trustee
at the Corporate Trust Office, in lawful money of the United States. Upon
receipt of any such payment and its conversion into immediately available
funds, the Bond Trustee will promptly remit to the Holders its ratable share,
either by (a) in the case of any Holder holding a Bond having an initial
principal amount equal to or greater than $5,000,000, by wire transfer in the
form of federal or other immediately available funds to an account in the
United States designated by such Holder provided that an account number is
included in the Register or (b) by check payable to the order of such Holder
sent by first-class mail to such address as is specified by such Holder. Each
payment on the Bonds, whether made by wire transfer or by check, shall contain
a designation that such payment is from the account of the Issuer. Final
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payment in full of any Bond shall be made only against surrender of such Bond
to the Bond Trustee at its Corporate Trust Office.
2.6. Miscellaneous REMIC Provisions.
2.6.1. REMIC Elections. The Issuer shall make elections to treat each of
the Pool A Asset Group, the Pool B Asset Group and the Pool C Asset Group as a
separate REMIC under section 860D of the Code (the "Pool A REMIC", "Pool B
REMIC" and "Pool C REMIC", respectively, and collectively, the "REMICs"). Any
inconsistencies or ambiguities in this Bond Indenture or in the administration
of the trust shall be resolved in a manner that preserves the validity of such
REMIC elections.
2.6.2. Designations of Bonds. The Series A Bonds, the Series B Bonds and
the Series C Bonds are hereby designated as "regular interests" in the Pool A
REMIC, Pool B REMIC and Pool C REMIC, respectively, and the Series AR Bonds,
the Series BR Bonds and the Series CR Bonds are hereby designated as the single
class of "residual interests" in each of the related REMICs, as defined in
section 860G(a) of the Code. Each owner of a Residual Bond agrees, BY
ITS ACCEPTANCE OF ITS INTEREST IN SUCH RESIDUAL BOND, to pay any taxes assessed
against it as holder of the "residual interest" in the related REMIC. The tax
year of each of the REMICs shall be the calendar year, and each REMIC shall use
the accrual method of accounting.
2.6.3. Startup. The Startup Day is hereby designated as the "startup day"
for each of the REMICs within the meaning of section 860G(a)(9) of the Code.
2.6.4. Maturities. The final scheduled Payment Date for any Series of Bonds
is hereby set to coincide with the Payment Dates set forth in the following
table:
<TABLE>
<CAPTION>
Series Final Scheduled Payment Date
--------------- ----------------------------
<S> <C>
Series A Bonds _______________
Series B Bonds _______________
Series C Bonds _______________
Series AR Bonds _______________
Series BR Bonds _______________
Series CR Bonds _______________
</TABLE>
The Residual Bonds shall remain outstanding, whether or not receiving current
distributions of interest or principal, for the life of the related REMIC.
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2.6.5. Tax Matters Person. The Tax Administrator is hereby designated as
"tax matters person" with respect to the Trust Estate and each of the REMICs as
defined in the REMIC Provisions, and, in connection therewith, shall hold a
percentage interest of 0.01% of each of the Series AR Bonds, Series BR Bonds
and Series CR Bonds.
2.6.6. REMIC Administration. (a) Notwithstanding any other provisions of
this Bond Indenture, the Bond Trustee or other Withholding Agent shall comply
with all federal withholding requirements respecting payments to Holders of
interest or original issue discount on the Bonds that the Bond Trustee
reasonably believes are applicable under the Code. The consent of Holders
shall not be required for such withholding. In the event the Bond Trustee or
other Withholding Agent does withhold any amount from interest or original
issue discount payments to any Holder pursuant to federal withholding
requirements, the Bond Trustee shall indicate with any payment to such Holders
the amount withheld. In addition, the Bond Trustee or other Withholding Agent
may (i) withhold an amount equal to any taxes due upon disposition of a
Residual Bond from future distributions made with respect to the Residual Bond
to the transferee (after giving effect to the withholding of taxes imposed on
such transferee), and (ii) pay the withheld amount to the IRS unless
satisfactory written evidence of payment of the taxes due by the transferor has
been provided to the Bond Trustee or such Withholding Agent. Moreover, the
Bond Trustee or other Withholding Agent may (i) hold distributions on a
Residual Bond, without interest, pending determination of amounts to be
withheld, (ii) withhold any other amounts required to be withheld pursuant to
United States federal income tax law, if any, from distributions that otherwise
would be made to such transferee on each Residual Bond that it holds, and (iii)
pay to the IRS all such other amounts withheld.
(b) The Tax Administrator shall pay any and all tax-related expenses (not
including taxes) of the Trust Estate and the REMICs, including but not limited
to any professional fees or expenses related to audits or any administrative or
judicial proceedings with respect to any of the REMICs that involves the IRS or
state tax authorities.
(c) The Tax Administrator shall prepare any necessary forms for election
as well as all of each REMIC's federal, state AND LOCAL tax and
information returns. The Issuer shall sign and the Tax Administrator shall
file such returns on behalf of each REMIC. The expenses of preparing and
filing such returns shall be borne by the Tax Administrator.
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(d) The Tax Administrator shall perform all reporting and other
tax-compliance duties that are the responsibility of each REMIC under the REMIC
Provisions or state or local tax law. However, notwithstanding the foregoing,
the Bond Trustee shall perform all reporting on Forms 1099 and otherwise with
respect to interest and discount (if any) paid or accrued to the Holders of the
Offered Bonds. Among its other duties, if required by the REMIC Provisions,
the Tax Administrator, acting as agent of each REMIC, shall provide (i) to the
Treasury or other governmental authority such information as is necessary for
the application of any tax relating to the transfer of a Residual Bond to any
Disqualified Organization and (ii) to the Bond Trustee such information as is
necessary for the Bond Trustee to discharge its obligations under the REMIC
Provisions to report tax information to the Holders of the Offered Bonds.
(e) To the extent that the Tax Administrator is responsible under this
Section for reporting, filing, or performing other administrative duties and
such reporting, filing, or other duties THAT are the legal responsibility
of the Bond Trustee, the Issuer OR THE TAX MATTERS PERSON, the
Tax Administrator (i) shall prepare such reports or filings for signature by
the Bond Trustee, THE ISSUER OR THE TAX MATTERS PERSON (IF THE TAX
ADMINISTRATOR IS NOT THE TAX MATTERS PERSON) and (ii) shall act as the agent of
the Bond Trustee, THE ISSUER OR THE TAX MATTERS PERSON (IF THE TAX
ADMINISTRATOR IS NOT THE TAX MATTERS PERSON) in the performance of such other
duties to the maximum extent permitted by law and by the Bond Trustee or the
Issuer, as the case may be. The Issuer, the Bond Trustee, the Tax
Administrator and the Holders of Residual Bonds shall carry out their
respective responsibilities under this Section 2.6.6 in a timely fashion.
(f) The Issuer, the Tax Administrator, the Bond Trustee (to the extent it
has been instructed by the Issuer or the Tax Administrator) and the Holders of
Residual Bonds shall take any action or cause any REMIC to take any action
necessary to create or maintain the status of such REMIC as a REMIC under the
REMIC Provisions and shall assist each other as necessary to create or to
maintain such status.
(g) The Issuer, the Tax Administrator, the Bond Trustee (to the extent it
has been instructed by the Issuer or the Tax Administrator) and the Holders of
Residual Bonds shall not take any action or fail to take any action, or cause
any REMIC to take any action or fail to take any action that, if taken or not
taken, as appropriate, could endanger the status of any such REMIC as a REMIC
unless the Bond Trustee and the Tax Administrator have received an Opinion of
Counsel (at the expense of the party seeking to take or to fail to take such
action) to
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the effect that the contemplated action or failure to act will not endanger
such status.
(h) The Holders of the Residual Bonds shall be required by the terms of
each Residual Bond to pay, and shall pay when due, their pro rata share of any
and all taxes imposed on the related REMICs or on the Trust Estate (in the
proportion that the assets of the related REMICs bear to the total assets of
the Trust Estate) by federal or state governmental authorities (other than the
taxes paid by another party pursuant to Article XXII hereof).
(i) If the Tax Administrator is unable for any reason to fulfill its
duties as Tax Matters Person AND SHALL HAVE FAILED TO DESIGNATE A
SUCCESSOR THAT SATISFIES THE REQUIREMENTS SET FORTH IN THE DEFINITION OF
"TAX ADMINISTRATOR" HEREIN TO REPLACE IT AND FULFILL SUCH DUTIES, the holder of
the largest Percentage Interest of the Residual Bonds (as set out on the faces
of such Bonds) relating to a particular REMIC shall become the successor Tax
Matters Person of such REMIC.
(j) Neither the Issuer nor the Bond Trustee shall enter into any
arrangement by which the Bond Trustee will receive a fee or other compensation
for services rendered pursuant to this Bond Indenture, which fee or other
compensation is paid from the Trust Estate, other than as expressly
contemplated by this Bond Indenture.
2.7. Mutilated, Destroyed, Lost and Stolen Bonds. Upon receipt by the
Issuer and the Bond Trustee of evidence satisfactory to them of the theft,
loss, destruction or mutilation of any Definitive Bond and (in the case of any
such theft, loss or destruction) of indemnity satisfactory to them, and upon
surrender and cancellation of such Definitive Bond if mutilated, the Issuer
shall execute, and the Bond Trustee shall thereupon authenticate and deliver, a
new Bond of like tenor and of the same Series with the same interest rate and
Stated Maturity in lieu of such stolen, lost, destroyed or mutilated Bond;
provided that if any such Bond shall have matured or shall be about to mature,
in lieu of issuing a substitute Definitive Bond the Bond Trustee may pay the
same without surrender thereof. Any indemnity Bond shall name as obligee the
Bond Trustee.
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ARTICLE III
3. Redemption of Bonds; Sinking Fund and Payment of Bonds at Stated Maturity.
3.1. Establishment of Bond Accounts and Reserve Funds. On or prior to the
Startup Day, the Bond Trustee shall cause to be established, and the Bond
Trustee shall maintain, the Bond Accounts and the Reserve Funds as trust
accounts held by the corporate trust department of the Bond Trustee, in the
name of the Bond Trustee for the benefit of Bond Owners as described herein.
The Pool A Bond Account and the Pool A Reserve Fund shall be established for
the sole benefit of the Bond Owners of the Series A Bonds and Series AR Bonds,
the Pool B Bond Account and the Pool B Reserve Fund shall be established for
the sole benefit of the Bond Owners of the Series B Bonds and Series BR Bonds
and the Pool C Bond Account and the Pool C Reserve Fund shall be established
for the sole benefit of the Bond Owners of the Series C Bonds and Series CR
Bonds. Amounts held in a Bond Account or a Reserve Fund must be held in cash
or in Permitted Investments; provided, however, that a Reserve Fund may hold
debt obligations of Kmart or interests therein.
3.1.1. Deposits into the Bond Account; Certain Withdrawals. (a) Upon
receipt, the Bond Trustee shall promptly deposit into (i) the Pool A Bond
Account all amounts received with respect to the Series A Notes, (ii) the Pool
B Bond Account all amounts received with respect to the Series B Notes and
(iii) the Pool C Bond Account all amounts received with respect to the Series C
Notes, whether received as rental payments or otherwise. The Bond Trustee
shall not be held liable for the non-payment by or on behalf of the Note
Trustee of monies owing under the Note Indentures or the Notes or monies on any
Notes. If such amounts are received after such Payment Date, such monies shall
be promptly withdrawn from the Bond Accounts and distributed by the Bond
Trustee on the date of receipt, to the extent available therefor pursuant to
the terms hereof, to pay in full the principal of, premium, if any, on and
interest then due on the related Series of Bonds as set forth in such Bonds
(including any Make-Whole Premium thereon) and, in the case such amounts shall
be insufficient to pay in full the whole amount so due and unpaid, then all
such amounts shall be so distributed as payment of interest and principal, pro
rata among Bonds of the related Series, without any preference or priority of
one such Bond over another, according to the aggregate amount due for
principal, premium, if any, and interest (including any Make-Whole Premium
thereon) at the date of payment.
Notwithstanding any other provision herein, if with respect to any Payment
Date, the amount received by the Bond Trustee with
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respect to a Bond Account is in excess of the amount currently due or overdue
on the related Series of Notes pursuant to the Note Indentures, the Bond
Trustee shall distribute such excess amount from such Bond Account to the
appropriate Note Trustee for distribution pursuant to the terms of the related
Note Indenture on such Payment Date or promptly after the receipt of such
amounts if such amounts are received after such Payment Date; provided,
however, that in no event shall any amount received by the Bond Trustee with
respect to the Notes of a particular Series be applied to make payments on, or
otherwise be applied for the benefit of, Bonds that are not of a corresponding
Series. The Bond Trustee shall not apply any such excess amount in any other
manner, including to payment of amounts due on the Bonds on future Payment
Dates.
3.2. Interest and Sinking Fund Payments.
3.2.1. Distribution. (a) On each Payment Date, the Bond Trustee shall
distribute from the related Bond Account to the applicable Holders (i)
interest, calculated as set forth in the Bonds and (ii) the principal amount of
Bonds required to be paid by operation of the Sinking Fund on each such Payment
Date specified in Schedule I without, except in the case of the final payment
on or before the Stated Maturity of the Bonds, presentment or surrender of the
Bonds.
On any Payment Date on which payments of interest and principal on any Bond
do not constitute payment in full of such Bond, such payments shall be made by
check mailed to the Holder of such Bond to such address as such Holder shall
specify or if such Holder holds Bonds having an aggregate initial principal
amount of at least $5,000,000 so specifies in written notice to the Bond
Trustee received no fewer than five BUSINESS DAYS prior to such Payment
Date, and provided an account number is included in the Register, payments will
be made by wire transfer in immediately available funds to such account. Final
payment on or before the Stated Maturity of any Bond shall be made only against
surrender of such Bond at the Corporate Trust Office.
(b) The obligations of the Owner Trustee to make, and of the Bond Trustee
and the Note Trustees to apply, payments of principal, interest or premium on
the Notes shall be deemed satisfied and discharged to the extent of monies
received by the Bond Trustee as Rent or otherwise pursuant to this Bond
Indenture or the Assignments (other than Excepted Payments) and to the extent
such monies would be available to make payments on the Notes if such monies
were applied pursuant to Article 4 of the Note Indenture (and regardless of
whether such monies are in fact so applied).
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3.2.2. Reductions for Redemption. In the event that there shall have been
any partial redemption of the Bonds (other than by operation of the Sinking
Fund), the amount of each Sinking Fund payment with respect to such Bonds
subsequent to such redemption shall be reduced proportionately, and set forth
in a new schedule of Sinking Fund payments on the Notes provided by the Note
Trustee to the Bond Trustee.
3.3. Redemption of Bonds Through Operation of Sinking Fund. Payments of
principal on the Bonds of each Series pursuant to the operation of the Sinking
Fund shall be paid on each of the Bonds of such Series on a pro rata basis.
3.4. [RESERVED.]
3.5. No Redemption or Prepayment Prior to Maturity. Except as provided in
Sections 3.2 and 3.6 hereof, the Bonds may not be redeemed or prepaid prior to
their respective Stated Maturity dates.
3.6. Redemption Other Than Through Operation of the Sinking Fund. The
outstanding Bonds shall be redeemed in whole or in part:
(a) at the Redemption Price, without premium, in the event of a redemption
of the Notes or any portion of the Notes pursuant to Section 6.1(b)(i) or
6.1(b)(iii) of the Note Indentures or in the event that any of the Notes are
redeemed pursuant to Section 3.1 of the Note Indentures; and
(b) at the Redemption Price, which shall include the Make-Whole Premium,
in the event of a redemption of the Notes or any portion of the Notes pursuant
to Section 6.1(b)(ii) of the Note Indentures.
In the case of any partial redemption pursuant to this Section 3.6, each
outstanding Bond shall be redeemed on a pro rata basis, without priority of one
over the other, in the proportion that the aggregate unpaid principal amount of
the Bond held by the Holder bears to the aggregate unpaid principal amount of
all outstanding Bonds of all Series.
3.7. Holding in Trust. Upon receipt thereof, the Bond Trustee shall hold in
trust for the benefit of the Holders of the related Series all amounts
received, if any, pursuant to the Master Indemnification Agreement with respect
to the Series A Notes, Series B Notes or Series C Notes, and distributed in
accordance with Section 3.1.1 hereof.
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3.8. Partial Redemption References. For all purposes of this Bond
Indenture, unless the context otherwise requires, all provisions relating to
the redemption of Bonds shall relate, in the case of any Bond redeemed or to be
redeemed only in part, to the portion of the principal of such Bond which has
been or is to be redeemed.
3.9. Notice of Redemption to Holders.
3.9.1. Specifications of Notice. Notice of redemption other than through
the operation of the Sinking Fund shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 45 days prior to the Redemption
Date (provided, however, that the Bond Trustee shall not be required to give
such notice until it shall have had five days' actual notice of a partial
redemption of the Notes), to each Holder of Bonds to be redeemed, at its
address appearing in the Register. All notices of redemption shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) if less than all outstanding Bonds are to be redeemed, the
identification (and, in the case of partial redemption, the principal amount)
of the particular Bonds to be redeemed;
(d) whether a Make-Whole Premium is to be paid in connection with
such redemption, and, if so, the amount thereof; and
(e) that on the Redemption Date the Redemption Price will become due
and payable upon each such Bond, and that interest thereon shall cease to
accrue on and after said date.
3.10. Payment on Redemption. Regardless of whether notice of redemption
shall have been given as aforesaid, the Bonds to be redeemed shall, on the
Redemption Date, become due and payable at the Redemption Price, and from and
after such date (unless there shall be a default in the payment of the
Redemption Price) such Bonds or redeemed portions, as appropriate, shall cease
to bear interest; provided that installments of interest with respect to Bonds
whose Stated Maturity is on or after the Redemption Date shall be payable to
the Holders of such Bonds on the relevant Redemption Date according to their
terms without diminution with respect to such Redemption.
If any Bond called for redemption shall not be so paid upon such Redemption
Date, the principal and premium (if any) shall,
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until paid, bear interest from the Redemption Date at the rate provided
in such Bond.
3.11. Termination of Obligations. The respective obligations and
responsibilities under this Bond Indenture of the Issuer, the Tax Administrator
and the Bond Trustee (other than the obligations of the Bond Trustee to make
payments to Holders as hereafter set forth) shall terminate upon payment to the
Holders of all amounts held by or on behalf of the Bond Trustee and required
hereunder to be so paid.
3.12. Additional Redemption Requirements.
3.12.1. Termination of REMIC. In the event of a complete redemption of all
outstanding Offered Bonds of a particular Series, the related REMIC shall be
terminated in accordance with the following additional requirements, unless the
Bond Trustee receives (a) a Special Tax Opinion and (b) a Special Tax Consent
from each of the Holders of the Residual Bonds (unless the Special Tax Opinion
specially provides that no REMIC-level tax will result from such redemption):
(i) within 90 days prior to the date of such redemption, the
Bond Trustee on behalf of the related REMIC shall adopt a plan of
complete liquidation meeting the requirements of a qualified
liquidation under the REMIC Provisions (which plan may be adopted by
the Bond Trustee's attachment of a statement specifying the first day
of the 90-day liquidation period to the REMIC's final federal income
tax return);
(ii) upon making final payment on the Offered Bonds of a
particular Series (including the deposit of any unclaimed funds
otherwise payable to the holders of the Offered Bonds in a separate
fiduciary account), the Bond Trustee shall distribute or credit to the
Holders of the related Residual Bonds all cash on hand and any other
assets of the related Asset Group after such final payment (other than
cash retained to meet claims), and the related REMIC shall terminate at
that time; and
(iii) in no event shall the final payment on the related Bonds
be made after the 90th day from the date on which the plan of complete
liquidation is adopted.
3.12.2. Authorization by Holders. By their acceptance of the Residual
Bonds, the Holders thereof hereby (a) authorize such action as may be necessary
to adopt a plan of complete liquidation of the related REMIC and (b) agree to
take such
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action as may be necessary to adopt a plan of complete liquidation of the
related REMIC upon the written request of the Bond Trustee, which authorization
shall be binding upon all successor Holders of Residual Bonds.
3.13. Reserve Funds; Final Disbursements.
3.13.1. Reserve Fund Amounts. Any amounts held in or received from any Bond
Owner of a Residual Bond with respect to a Reserve Fund ("Reserve Fund
Amounts") shall be applied by the Bond Trustee to pay the expenses of the
related REMIC, including the portion of the Bond Trustee's or Tax
Administrator's fees allocable to such REMIC. Any Reserve Fund Amounts
remaining after the payment of such expenses shall be held in the Reserve Fund
for the payment of future expenses. In the event that any Reserve Fund Amounts
remain in a Reserve Fund after the date on which the related Offered Bonds have
been paid in full or otherwise retired, such Amounts shall be distributed to
the Owners of the related Residual Bonds. Reserve Fund Amounts may be used
only for the expenses of the related REMIC, which expenses do not include sums
due with respect to the Offered Bonds. The portion of the Bond Trustee's fees
or Tax Administrator's fees that is allocable to a REMIC is the total amount of
such fees then due divided by the number of REMICs with respect to which
Offered Bonds remain outstanding.
3.13.2. Amounts Related to Residual Bonds. Any amounts received by the Bond
Trustee from the Bond Owner of a Residual Bond for the payment of the expenses
of the related REMIC shall be deposited in the related Reserve Fund.
3.13.3. Amounts Remaining. Any amounts remaining in an Asset Group after
the payment in full of the related Series of Offered Bonds, the payment of
expenses related to such Asset Group, and the distribution of Reserve Fund
Amounts as set forth in Section 3.13.1. hereof shall be distributed to the
Holders of the Residual Bonds relating to such Asset Group.
3.14. Execution of Supplemental Assignment Agreement. The Bond
Trustee is authorized and directed to execute and deliver the Supplemental
Assignment Agreement in the form attached hereto as Exhibit J, and the Bond
Trustee shall have no liability to any other party hereto or to any bondholder
for any actions taken in conformity with the terms thereof.
ARTICLE IV
4. Representations and Warranties. The Issuer represents and warrants that
(a) it has full power, authority and legal
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right to execute and deliver this Bond Indenture and the Note Assignment and to
grant a first lien upon the Trust Estate, (b) it is the holder of the Notes and
the beneficiary under the Note Indentures, free and clear of all liens and
encumbrances (other than those created by the Note Assignment), (c) this Bond
Indenture constitutes a valid first lien upon the Trust Estate, (d) except
pursuant to the pledge of the Notes to the Bond Trustee and as provided in the
Note Assignment, none of the Notes has been assigned or encumbered by the
Issuer and (e) all things have been done which are necessary to make the Bonds,
when executed by the Issuer and authenticated and delivered by the Bond Trustee
hereunder and duly issued by the Issuer, the valid obligations of the Issuer,
and to constitute this Bond Indenture a security agreement and contract for the
security of the Bonds, in accordance with the terms of the Bonds and this Bond
Indenture.
ARTICLE V
5. Affirmative Covenants. Until this Bond Indenture and the lien created
hereby shall terminate in accordance with Article XXV hereof, the Issuer
covenants as follows:
(a) Recordation, Filing, etc. At all times the Issuer shall cause this
Bond Indenture and each amendment or modification hereof or supplement hereto
and the Assignment (and such financing statements covering the Trust Estate,
and continuation statements in respect thereof, under the Uniform Commercial
Code as in effect in Alaska, Arizona, California, Florida, Georgia, Illinois,
New York, Ohio, Oklahoma, Rhode Island, Texas, Virginia and West Virginia as
may be necessary or appropriate) to be recorded, registered and filed and kept
recorded, registered and filed in such manner and in such places as are
appropriate, and comply with all applicable statutes and regulations, in order
to establish, preserve and protect the lien of this Bond Indenture as a first
lien on the Trust Estate and the rights of the Holders hereunder. The Bond
Trustee shall pay all taxes, fees and other charges incurred in connection with
such recording, registration, filing and compliance which taxes, fees and other
charges shall be reimbursable to the Bond Trustee under the provisions of 20.11
hereof.
(b) Annual Officer's Certificate. Within 120 days after the end of each
of the Issuer's fiscal years, the Issuer shall furnish the Bond Trustee with an
Officer's Certificate, stating that to the best of the signer's knowledge after
making due inquiry, the Issuer is not in default in the performance or
observance of any of the terms of this Bond Indenture, or if the Issuer shall
be in default to his or her knowledge, specifying
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all such defaults, and the nature thereof, and the steps being taken to remedy
the same.
(c) Corporate Existence. The Issuer shall preserve and keep in full force
and effect its existence, rights and franchises and comply in all material
respects with all laws applicable to it; provided that the Issuer may abandon
or terminate any right or franchise in any State other than that of its
formation if such abandonment or termination will not adversely affect the
interests of the Holders in any material respect.
ARTICLE VI
6. Negative Covenants. Without the prior written consent of all
Certificateholders, the Issuer shall not:
(a) create, incur, assume or suffer to exist any indebtedness whatsoever,
direct, contingent or otherwise, except (i) the indebtedness contemplated by
this Bond Indenture and (ii) unsecured indebtedness maturing subsequent to the
maturity of the Bonds, all of which shall be subordinate in right of payment to
the prior payment in full of all indebtedness secured by this Bond Indenture;
(b) directly or indirectly create or permit to be created any mortgage,
charge, lien or encumbrance on, or attachment or pledge of, or conditional sale
or other title-retention agreement with respect to, the Trust Estate or any
part thereof, its interest or that of the Bond Trustee for the benefit of the
Holders therein, or any sums payable pursuant to the Notes, except (i) this
Bond Indenture, (ii) the Assignments, (iii) the Note Assignment and (iv) liens
arising out of or created by any statute, the discharge of which cannot under
the terms of such statute at the particular time be effected by the Issuer;
provided, however, that any such statutory liens will promptly be discharged as
and when such discharge is possible or permissible;
(c) purchase or agree to purchase or lease any real or personal property;
(d) engage in any business or other undertaking other than the business of
acquiring, owning, mortgaging, and conveying the Trust Estate and financing the
cost thereof, all as contemplated by the original certificate of incorporation
of the Issuer; or
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(e) make any advance or loan to, or invest in or purchase any security of,
or assume, guarantee, purchase or otherwise become directly or indirectly
liable upon the obligation of, any person, partnership, corporation,
association or other entity, or make any commitment so to do.
ARTICLE VII
7. Events of Default. If any one or more of the following events
(individually, an "Event of Default") shall occur:
(a) non-payment (i) of (A) any payment of interest accrued on any of the
Bonds or (B) any Sinking Fund payment on any of the Bonds, in either case
within five days after notice to the Issuer and to the Owner Trustee that the
same is due; or (ii) of other sums that the Issuer is obligated to pay
hereunder within 15 days after notice to the Issuer that the same are due;
(b) default by the Issuer in the due observance or performance of any
term, covenant or condition on its part to be performed under this Bond
Indenture (other than a default under subsection (a) above) which would have a
material adverse effect on the lien of this Bond Indenture or the repayment of
the Bonds, continued unremedied for a period of 30 days after notice thereof to
the Issuer from the Bond Trustee or a Majority in Interest, except that if any
such default cannot with due diligence be cured within a period of 30 days,
such default shall not be deemed to continue if the Issuer proceeds promptly
and with all due diligence to cure the default and diligently completes the
curing thereof;
(c) any of the representations or warranties made by the Issuer is found
to be untrue in any material respect which would have a material adverse effect
on the lien of this Bond Indenture or the repayment of the Bonds;
(d) a Note Indenture Event of Default shall have occurred and be
continuing;
(e) the Issuer shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in
effect, or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its
property, or it shall consent to any such relief or to the appointment of or
taking or possession by any such official in any involuntary case or other
proceeding commenced against it, or
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it shall make a general assignment for the benefit of creditors; or
(f) a decree or order for relief shall be entered by a court having
jurisdiction over the Issuer in any involuntary case under any bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a
trustee, receiver, liquidator, custodian or other similar official of the
Issuer, its interest in the Note Indentures or any substantial part of its
property, or ordering the winding-up or liquidation of its affairs, and such
decree or order shall remain undismissed or unstayed for a period of 90
consecutive days;
then (except in the case of an Event of Default set forth in clause (d) above
of less than all of the Note Indentures, which may not be a basis to accelerate
the Bonds) in any such event, the Bond Trustee may, or upon written direction
of TWENTY-FIVE PERCENT of the affected Holders, the Bond Trustee shall,
upon notice to the Issuer (with a copy to Kmart and the Owner Trustee)
accelerate the maturity of the affected Bonds; provided, however, that in the
case of an Event of Default set forth in clause (e) or clause (f) above, the
maturity of the Bonds shall automatically be accelerated without notice from
any party to another. In such case, the unpaid principal amount of the
accelerated Bonds, with accrued interest thereon, shall become immediately due
and payable; provided, however, that FIFTY PERCENT OF THE AFFECTED
BONDHOLDERS may rescind such acceleration of the Bonds if such Event of Default
is cured. For purposes of this Article VII, the determination of an Event of
Default shall be made separately with respect to each Series of Bonds. The
occurrence of an Event of Default with respect to a Series of Bonds by itself
shall not constitute or trigger an Event of Default with respect to any other
Series of Bonds, although the same circumstances may give rise simultaneously
to Events of Default for more than one Series of Bonds.
The Bond Trustee must notify the Holders and Kmart within 45 days after the
occurrence of any Default known to it, unless it has determined (except in the
case of Defaults in payment of the Bonds) that withholding such notice is in
the best interests of the Holders as provided in Section 315(b) of the Trust
Indenture Act.
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ARTICLE VIII
8. Remedies; Rescission.
8.1. Remedies. Subject to Sections 8.3 and 8.4 hereof, if an Event of
Default shall have occurred and be continuing, the Bond Trustee may, and upon
the direction of the Majority in Interest, shall proceed by suit or suits at
law or in equity and exercise any and all of the rights, powers and remedies
provided in any applicable state Uniform Commercial Code, or by any other
appropriate remedy to protect and enforce its rights and those of each Holder
hereunder, whether for the specific performance of any covenant or agreement
contained herein, or for an injunction against the violation of any of the
terms hereof, or in aid of the exercise of any right, power or remedy available
to any of them, or to enforce the payment of the Bonds, or to foreclose the
lien of this Bond Indenture as against the portion of the Trust Estate
consisting of the Asset Group that relates to the affected Series of Bonds and
to have any part of such Asset Group sold, in any manner permitted by law,
under the judgment or decree of a court or courts of competent jurisdiction, or
otherwise. All rights of action under this Bond Indenture or in respect of the
Bonds may, if permitted by applicable law, be enforced by the Bond Trustee
without the possession of any of the Bonds and without the production of the
Bonds or this Bond Indenture at any trial or other proceeding relative thereto.
All costs and expenses (including, without limitation, reasonable attorneys'
fees) incurred by the Bond Trustee in connection with any such suit or
proceeding shall constitute additional indebtedness secured by this Bond
Indenture and shall be paid by the Issuer to the Bond Trustee upon demand.
8.2. Power of Sale. Subject to Sections 8.3 and 8.4 hereof, if an Event of
Default shall have occurred and be continuing, the Bond Trustee may, and upon
the direction of the Majority in Interest, shall sell, assign, transfer and
deliver the whole or, from time to time, any part of the Asset Group that
relates to the affected Series of Bonds, or any interest in any part thereof,
at any private sale or by public auction, with or without demand, advertisement
or notice of the time or place of sale or adjournment thereof or otherwise, for
cash, on credit or for other property, for immediate or future delivery, and
for such price or prices and on such terms as the Bond Trustee in its sole
discretion may determine (subject to the rights of the Holders set forth in
Article XIX), or as may be required by applicable law. To the extent that
prior notice must be given as to any such sale, the Issuer agrees that ten
days' prior notice shall be deemed reasonable.
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8.3. Enforcement of Remedies. Notwithstanding any provision herein to the
contrary, if an Event of Default arises solely by reason of one or more events
or circumstances that constitute a Note Indenture Event of Default under one or
more of the Note Indentures, except in the case of a default specified in
Section 8.1(b) of each Note Indenture by reason of a corresponding Lease Event
of Default under and as described in Section 21(v) of each Lease, neither the
Bond Trustee nor a Majority in Interest shall be entitled to accelerate the
maturity of any of the Bonds and the Bond Trustee and Holders shall only be
entitled to take action permitted under Sections 8.1, 8.2 and 14 hereof with
respect to the portion of the Trust Estate relating to such Note Indenture or
Note Indentures in default and the Notes issued therefrom.
8.4. Rescission. At any time after acceleration of all of the Bonds
pursuant to Article VII hereof and before any sale of the Trust Estate, or any
part thereof, shall have been made as provided in this Article VIII, a Majority
in Interest may, in their sole and absolute discretion, by notice delivered to
the Issuer and the Bond Trustee, rescind and annul such declaration and its
consequences if (a) there shall have been paid to or deposited with the Bond
Trustee a sum sufficient to pay (i) all overdue installments of interest on all
Bonds, (ii) the principal of and premium, if any, on any Bonds which have
become due otherwise than by reason of such acceleration, and interest thereon
at the effective rates provided in the Bonds for late payments of principal or
premium and (iii) to the extent that payment of such interest is lawful,
interest upon overdue installments of interest at the rate specified in the
Bonds; and (b) all Events of Default, other than the non-payment of the
principal of Notes which have become due solely by such acceleration, have been
cured or waived as provided herein. No such rescission shall affect any
subsequent Event of Default or impair any right consequent thereon.
ARTICLE IX
9. Authorization to Execute Instruments, etc. The Issuer irrevocably
appoints the Bond Trustee as its true and lawful attorney, which appointment is
coupled with an interest and is irrevocable, in the Issuer's name and stead and
on its behalf, for the purpose of (a) executing on behalf of the Issuer and
filing any and all financing and continuation statements, assignments or other
notices and any necessary amendments to all financing statements in respect of
the Trust Estate as further security for the Bonds, naming the Bond Trustee as
the secured party and (b) if an Event of Default shall have occurred and be
continuing, effectuating any sale, assignment, transfer or
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delivery of the Trust Estate or any part thereof or any interest therein for
the enforcement of this Bond Indenture whether pursuant to foreclosure, power
of sale or otherwise pursuant to Article VIII hereof.
ARTICLE X
10. Title Upon Sale; Receipt of a Sufficient Discharge to Purchaser. Upon
the sale of the Trust Estate or any part thereof or any interest therein,
whether pursuant to foreclosure, power of sale or otherwise, the purchaser
shall acquire good title thereto, free of the lien of this Bond Indenture and
free of all rights of redemption, whether statutory, equitable or otherwise, in
the Issuer to the extent permitted by applicable law. The receipt of the
officer making the sale under judicial proceedings or of the Bond Trustee shall
be sufficient discharge to the purchaser for the purchase money, and such
purchaser shall not be obligated to see to the application thereof.
ARTICLE XI
[RESERVED]
ARTICLE XII
12. Sale a Bar Against the Issuer. The sale of the Trust Estate or any part
thereof or any interest therein, whether pursuant to foreclosure, power of sale
or otherwise under this Bond Indenture, shall forever bar any claim with
respect thereto by the Issuer.
ARTICLE XIII
13. Waiver of Appraisement, Valuation, etc. The Issuer hereby waives, to
the full extent it may lawfully do so, the benefit of all appraisement,
valuation, stay, moratorium, statute of limitations, exemption from execution,
extension and redemption laws now or hereafter in force and all rights of
marshalling in the event of the sale of the Trust Estate or any part thereof or
any interest therein. The Issuer also hereby waives all errors, defects and
imperfections in any proceeding instituted by the Bond Trustee or any Holder
under this Bond Indenture.
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ARTICLE XIV
14. Appointment of Receiver. Subject to Sections 8.3 and 8.4 hereof, if an
Event of Default shall have occurred and be continuing for a period of 10 days,
the Bond Trustee and each Holder shall, as a matter of right, be entitled to
the appointment of a receiver or receivers of the Trust Estate or any part
thereof (provided, however, that with respect to an Event of Default set forth
in Section 7(d) hereof, such right may be exercised only with respect to the
portion of the Trust Estate relating to any Note Indenture under which an
underlying Note Indenture Event of Default has occurred), whether such
receivership is incidental to a proposed sale thereof or otherwise, and the
Issuer hereby consents to the appointment of such a receiver or receivers and
will not oppose any such appointment.
ARTICLE XV
[RESERVED]
ARTICLE XVI
16. Supplemental Indentures.
16.1. Supplemental Indentures without Consent of Bondholders. Without the
consent of any of the Bondholders, each of the Issuer and the Bond Trustee
shall enter into one or more Supplemental Indentures, in form satisfactory to
the Bond Trustee, for the following purposes, provided such Supplemental
Indentures are not inconsistent with the rights of Kmart under any Lease:
(a) subject to the provisions of the Issuer Documents, to evidence the
succession of another corporation to the rights, obligations and interests of
Kmart or to evidence the succession of another corporation to the rights,
obligations and interests of the Issuer, and the assumption by any such
successor of the covenants of the Issuer contained herein and in the Bonds;
(b) to convey, transfer and assign to the Bond Trustee, as the case may be,
and to subject additional property to the lien of this Bond Indenture, with the
same force and effect as though included in the Granting Clause hereof, and to
correct or amplify the description of any property at any time subject to the
lien of this Bond Indenture or to assure, convey and confirm unto the Bond
Trustee, as the case may be, any
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property subject or required to be subject to the lien of this Bond Indenture;
(c) to modify, eliminate or add to the provisions of this Bond Indenture to
such extent as shall be necessary to qualify this Bond Indenture (including any
Supplemental Indenture) under the Trust Indenture Act, or under any similar
Federal statute hereafter enacted;
(d) to cure any ambiguity or to correct any provision herein which may be
defective or inconsistent with any other provision herein;
(e) to evidence the succession of a new Bond Trustee OR TAX
ADMINISTRATOR hereunder or to add a co-trustee or separate trustee and to make
provisions as to the rights and duties of any such additional trustee OR
SUCCESSOR TAX ADMINISTRATOR and as to the appointment and dismissal of any such
additional trustee OR SUCCESSOR TAX ADMINISTRATOR;
(f) to make any other amendments or provisions with respect to matters or
questions arising under this Bond Indenture which shall not be inconsistent
with the provisions of this Bond Indenture; provided that such amendment or
provision shall not adversely affect in any material respect the interest of
the Bondholders; or
(g) to make such other amendments or provisions as are necessary to protect
the REMIC status of the REMICs as described in this Bond Indenture.
16.2. Supplemental Indentures with Consent of Bondholders. With the consent
of a Majority in Interest, the Issuer may, and the Bond Trustee, subject to
Section 16.3 hereof, shall, enter into Supplemental Indentures for the purpose
of adding any provisions to or changing in any manner the rights and
obligations of the Bondholders and of the Issuer under this Bond Indenture;
provided, however, that no such Supplemental Indenture shall (a) be
inconsistent with the rights of Kmart under any Lease or (b) without the
consent of each Holder of an outstanding Bond affected thereby:
(i) change the Stated Maturity of the principal of, or any installment of
interest, or the dates or circumstances of payment of premium, if any, on any
Bond, or reduce the principal amount thereof or the interest thereon or any
amount payable upon the redemption thereof, or change the circumstances for
redemption or change the place of payment where, or the coin or currency in
which, any Bond or the premium, if any, or the interest thereon is payable,
or
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impair the right to institute suit for the enforcement of any such
payment of principal or interest on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date subject,
however, to Section 3.4 hereof) or such payment of premium, if any, on or
after the date such premium becomes due and payable;
(ii) permit the creation of any lien prior to or pari passu with the
lien of this Bond Indenture with respect to any part of the Trust Estate, or
terminate the lien of this Bond Indenture on any part of the Trust Estate or
deprive any Bondholder of the security afforded by the lien of this Bond
Indenture;
(iii) reduce the amounts payable under the Notes assigned to the Bond
Trustee or change the time for the payment thereof so that such payments are
less than the amounts necessary to pay when due the principal of, premium, if
any, and interest on the outstanding Bonds;
(iv) reduce the percentage in principal amount of the outstanding Bonds
of all Series, the consent of whose holders is required for any such
Supplemental Indenture, or the consent of whose holders is required for any
waiver (of compliance with certain provisions of this Bond Indenture or of
certain defaults hereunder and their consequences) provided for in this Bond
Indenture; or
(v) modify any of the provisions of this Section, except to provide that
certain other provisions of this Bond Indenture cannot be modified or waived
without the consent of each Bondholder affected thereby.
Upon receipt by the Bond Trustee of an Officer's Certificate of the Issuer
and such other documentation as the Bond Trustee may reasonably require and
upon the provision to the Bond Trustee of evidence of the act of such
Bondholders, the Bond Trustee shall join in the execution of such Supplemental
Indenture or other instrument, as the case may be, subject to the provisions of
Section 16.3 hereof.
It shall not be necessary for any act of Bondholders under this Section to
approve the particular form of any proposed Supplemental Indenture, but it
shall be sufficient if such act shall approve the substance thereof. Promptly
after the execution by the Issuer and the Bond Trustee of any Supplemental
Indenture pursuant to the provisions of this Section, the Bond Trustee shall
transmit a written notice, setting forth in general terms the substance of such
Supplemental Indenture, to all Bondholders, as the names and addresses of such
Bondholders
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appear on the Bond Register. Any failure of the Bond Trustee to mail such
notice, or any defect therein, shall not, however, in any way impair or affect
the validity of any such Supplemental Indenture.
16.3. Execution of Supplemental Indentures. In executing, or accepting the
additional trusts created by, any Supplemental Indenture permitted by this
Article or the modifications thereby of the trusts created by this Bond
Indenture, the Bond Trustee shall be entitled to receive, and shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
such Supplemental Indenture is authorized or permitted by this Bond Indenture.
16.4. Effect of Supplemental Indentures. Upon the execution of any
Supplemental Indenture permitted under this Article, this Bond Indenture shall
be modified in accordance therewith, and such Supplemental Indenture shall form
a part of this Bond Indenture for all purposes; and every Holder of Bonds
theretofore or thereafter authenticated and delivered hereunder shall be bound
to this Bond Indenture as so supplemented.
ARTICLE XVII
17. Remedies Cumulative. Each legal, equitable or contractual right, power
or remedy of the Bond Trustee and Holders now or hereafter provided herein or
by statute or otherwise shall be cumulative and concurrent and shall be in
addition to every other right, power and remedy, and the exercise or beginning
of the exercise by the Bond Trustee or any Holder of any one or more of such
rights, powers and remedies shall not preclude the simultaneous or later
exercise of any or all such other rights, powers and remedies.
ARTICLE XVIII
18. No Waiver. No failure by the Bond Trustee or any of the Holders to
insist upon the strict performance of any term hereof or to exercise any right,
power or remedy consequent upon a breach hereof shall constitute a waiver of
any such term or of any such breach. No acceptance of the payment of any sums
due on the Bonds during the continuance of any Default shall constitute a
waiver thereof. No waiver of any breach shall affect or alter this Bond
Indenture which shall continue in full force and effect with respect to any
other then-existing or subsequent breach.
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ARTICLE XIX
19. Direction of Action by Holders.
(a) A Majority in Interest shall have the right by an instrument or
instruments in writing delivered to the Bond Trustee to direct the time, method
and place of conducting any proceeding for any remedy available to the Bond
Trustee hereunder; provided that:
(i) such direction shall not be in conflict with any rule of law or
with the rights of the Issuer or the Bond Trustee under this Bond Indenture;
and
(ii) the Bond Trustee may take any other action deemed proper by the
Bond Trustee that is not inconsistent with such direction.
provided, further, that, subject to the provisions of Section 20.1.4 hereof,
the Bond Trustee shall have the right to decline to follow any such direction
if, being advised by counsel, the Bond Trustee shall determine that the action
so directed may not lawfully be taken or if the Bond Trustee in good faith
shall determine that the action so directed would involve it in personal
liability.
Where a Majority in Interest is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Bond Indenture, they may, but need not, be
consolidated and form one instrument.
(b) Every request, demand, authorization, direction, notice, consent,
waiver or application by the Issuer for action by the Bond Trustee shall be
accompanied by a certificate or certificates stating that the conditions
precedent, if any, to such action provided for in this Bond Indenture have been
complied with. In any case where several matters are required to be certified
or covered by any such certificate, it is not necessary that all such matters
be certified or covered by only one certificate, but one agent authorized to
act on behalf of the Issuer may certify with respect to some matters and
another such agent authorized to act on behalf of THE ISSUER as to other
matters, and any such representative may certify as to such matters in one or
several documents.
(c) Any such certificate may be based, insofar as it relates to legal
matters, upon an opinion of counsel, unless the signatory actually knows that
the certificate or opinion or representations with respect to the matters upon
which his or her
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certificate or opinion is based are erroneous. Any such opinion may be based,
insofar as it relates to factual matters, upon a certificate of, or
representations by, an officer or officers of Kmart, an Owner Trustee, the
Issuer or the Note Trustee stating that the information with respect to such
factual matters is in possession of Kmart, an Owner Trustee, the Issuer or the
Note Trustee, unless such counsel actually knows that the certificate or
opinion or representations with respect to such matters are erroneous.
(d) Any such request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Bond Indenture to be given or taken by
Bondholders, except as otherwise expressly provided herein, shall become
effective when such instrument or instruments are delivered to the Bond Trustee
and, where it is hereby expressly required, to the Issuer and Kmart. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Bondholders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for
any purpose of this Bond Indenture and conclusive in favor of the Bond Trustee
and the Issuer, if made in the manner provided in this Section 19.
The fact and date of the execution of any such instrument or writing may be
proved (i) by the certificate of any notary public or other officer of any
jurisdiction authorized to take acknowledgments of deeds or administer oaths
that the Person executing such instrument acknowledged to him the execution
thereof, (ii) by a notarized affidavit of a witness to such execution or (iii)
by having the signature guaranteed by an Eligible Guarantor Institution as that
term is defined in Rule 17Ad-15 under the Exchange Act, and where such
execution is by an officer of a corporation, limited liability company or
association or a member of a partnership on behalf of such corporation,
limited-liability company, association or partnership, such certificate or
affidavit shall also constitute sufficient proof of his or her authority. The
fact and date of the execution of any such instrument or writing, or the
authority of the Person executing the same, may also be proved in any such
manner which the Bond Trustee deems sufficient.
(e) The Bond Trustee may fix any date as the record date for purposes of
determining the Bondholders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote
on any action, authorized or permitted to be given or taken by Bondholders,
which date shall be no more than 60 days before the first solicitation of a
Bondholder made by any Person with respect to
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any such action. If not set by the Bond Trustee prior to the first
solicitation of a Bondholder made by any Person with respect to any such
action, or, in the case of any such vote, prior to such vote, the record date
for any such action or vote shall be the 30th day (or, if later, the date of
the most recent list of Bondholders required to be provided pursuant to Section
10.1 hereof) prior to the first solicitation or vote, as the case may be. With
regard to any record date, only the Bondholders on such date (or their duly
designated proxies) shall be entitled to give or take or vote on the relevant
action.
(f) Any request, demand, authorization, direction, notice, consent, waiver
or other action by any Bondholder shall bind every other holder of a Bond
issued upon the transfer thereof or in exchange therefor or in lieu thereof,
whether or not notation of such action is made upon such Bond.
(g) Without limiting the foregoing, a Bondholder entitled hereunder to
give or to take any such action with regard to any particular Bond may do so
with regard to all or any part of the principal amount of such Bond or by one
or more duly appointed agents each of whom may do so pursuant to such
appointment with regard to all or any different part of such principal amount.
(h) The Bond Trustee may rely and shall be protected in acting or
refraining from acting in reliance upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties.
(i) Whenever in the administration of this Bond Indenture the Bond Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Bond Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith on
its part, rely upon an Officer's Certificate of the Issuer.
(j) The Bond Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Bond Indenture at the request or
direction of any of the Bondholders pursuant to this Bond Indenture unless such
Bondholders shall have offered to the Bond Trustee reasonable security or
indemnity (including, without limitation, the advancement of monies for
out-of-pocket costs) against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction.
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(k) For all purposes of this Bond Indenture, in the absence of actual
knowledge of a Responsible Officer of the Bond Trustee, the Bond Trustee shall
not be deemed to have knowledge of a Default (except the failure of Kmart to
pay any installment of Basic Rent, as defined in the Note Indentures, when the
same shall become due) unless notified in writing by any Bondholder, the Owner
Participant, the Owner Trustee, the Issuer, the Note Trustee or Kmart.
(l) Whether or not therein expressly so provided, every provision of this
Bond Indenture relating to the conduct or affecting the liability of or
affording protection to the Bond Trustee shall be subject to the provisions of
this Section 19.
The Bond Trustee shall exclude and withhold from each distribution to
any Bondholder (except as otherwise required by law) of principal, premium, if
any, and interest and other amounts due hereunder or under the Bonds any and
all withholding taxes applicable thereto as required by law. The Bond Trustee
agrees (i) to act as such withholding agent and, in connection therewith,
whenever any present or future taxes or similar charges are required to be
withheld with respect to any amounts payable in respect of the Bonds, to
withhold such amounts and timely to pay the same to the appropriate authority
in the name of and on behalf of the Bondholders, and (ii) that it will file any
necessary withholding tax returns or statements when due. The Bond Trustee
agrees to file any other information reports as it may be required to file
under United States law. To the extent that the Bond Trustee fails, with
respect to any Bondholder, to withhold and pay over any such taxes to the
appropriate taxing authority, the Bond Trustee shall, upon a claim being made
for such taxes by such authority, and before making any claim to Kmart or the
Note Trustee for indemnification under the Master Indemnification Agreement (if
such indemnification would otherwise be permissible thereunder), take all
reasonable steps to recover such taxes from such Bondholder, including, without
limitation, withholding the amount of such taxes from subsequent distributions,
if any, to such Bondholder. To the extent that the Bond Trustee receives any
amount from Kmart or the Note Trustee, as appropriate, for indemnification of
such taxes which the Bond Trustee thereafter recovers from the appropriate
Bondholder (including by withholding from subsequent distributions to such
Bondholder) the Bond Trustee shall reimburse Kmart or the Note Trustee, as
appropriate, therefor.
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(m) No Bondholder shall have the right to institute any suit, action or
proceeding at law or in equity or otherwise for the foreclosure of this Bond
Indenture or for the enforcement of any other remedy under or upon this Bond
Indenture, unless:
(i) the Bond Trustee shall have received a direction from a Majority in
Interest in accordance with this Section 19 requesting that it institute such
action, suit or proceeding and, if requested, shall have been offered
indemnity as provided in Section 19(j) hereof;
(ii) the Bond Trustee shall have refused or neglected to institute any
such action, suit or proceeding for 30 days after receipt of such notice,
request and offer of indemnity; and
(iii) no subsequent direction from a Majority in Interest inconsistent with
the first such direction has been given to the Bond Trustee during such
30-day period.
It is understood and intended that no one or more of the Bondholders shall
have any right in any manner whatsoever hereunder or under the Bonds (1) to
surrender, impair, waive, affect, disturb or prejudice the lien of this Bond
Indenture on any property subject hereto or to the rights of the Bondholders of
any other Bonds, (2) to obtain or seek to obtain priority over or preference to
any other such Bondholder or (3) to enforce any right under this Bond
Indenture, except in the manner herein provided and for the equal, ratable and
common benefit of all of the Bondholders of all series, subject to the
provisions of this Bond Indenture. If no instructions are received from a
Majority in Interest within 10 days after notifying all of the Holders of the
occurrence of a Default hereunder, the Bond Trustee shall take such action as
it shall deem necessary or desirable for the protection of the Trust Estate and
the interest of the Holders therein.
In case the Bond Trustee shall have instituted any proceeding to enforce any
right, power or remedy under this Bond Indenture by foreclosure, entry or
otherwise, and such proceedings shall have been discontinued or abandoned for
any reason or shall have been determined adversely to the Bond Trustee, then
and in every such case, the Bond Trustee and the Bondholders shall be restored
to their former positions and rights hereunder with respect to the Trust
Estate, and all rights, powers and remedies of the Bond Trustee shall continue
as if no such proceedings had been taken.
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ARTICLE XX
20. The Bond Trustee.
20.1. Scope of Activities.
20.1.1. Actions under this Bond Indenture. Prior to its receipt of notice
of the occurrence of an Event of Default, the Bond Trustee shall, IN SUCH
CAPACITY, undertake to perform such duties and only such duties as are
specifically set forth WITH RESPECT TO THE BOND TRUSTEE in this Bond
Indenture. In case an Event of Default has occurred, the Bond Trustee shall
exercise such of the rights and powers vested in it by this Bond Indenture, and
use the same degree of care and skill in its exercise as a prudent person would
exercise or use under the circumstances in the conduct of his or her own
affairs. The Bond Trustee shall not be liable or accountable hereunder except
for its own negligent action or omission or willful misconduct.
20.1.2. Actions upon Request of Majority in Interest. Subject to the
provisions of Article XVI hereof, the Bond Trustee shall execute such waivers,
releases and disclaimers and exercise such rights, powers and remedies as may
be directed by a Majority in Interest; provided, however, that without the
prior written approval of all of the Holders, the Bond Trustee shall not
consent to or permit any modification of, or amendment to, this Bond Indenture.
In addition, without prior written approval of a Majority in Interest, the Bond
Trustee shall not waive the provisions concerning, or consent to waive such
provisions concerning, any proposed action by the Issuer under this Bond
Indenture.
20.1.3. Examination. The Bond Trustee, upon receipt of all resolutions,
certificates, statements, opinions, reports, documents, orders or other
instruments, furnished to it pursuant to provisions of this Bond Indenture,
shall examine them to determine whether they appear on their face to conform to
the requirements of this Bond Indenture.
20.1.4. Liability. No provision of this Bond Indenture shall be construed
to relieve the Bond Trustee from liability for its own negligent action or
omission, or willful misconduct; provided, however, that:
(a) prior to the occurrence of an Event of Default:
(i) the duties and obligations of the Bond Trustee hereunder shall be
determined solely by the express provisions of this Bond Indenture, and the
Bond Trustee shall not be liable except for the performance
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of such duties and obligations as are specifically set forth in this
Bond Indenture, and no implied covenants or obligations shall be read into
this Bond Indenture against the Bond Trustee; and
(ii) in the absence of bad faith on the part of the Bond Trustee, the
Bond Trustee may conclusively rely upon any certificates or opinions
furnished to it and conforming to the requirements of this Bond Indenture,
as to the truth of the statements and the correctness of the opinions
expressed therein;
(b) the Bond Trustee shall not be liable for any error of judgment made in
good faith by a responsible officer or responsible officers of the Bond
Trustee, unless it shall be proved that the Bond Trustee was negligent in
ascertaining the pertinent facts; and
(c) the Bond Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction of
a Majority in Interest relating to the time, method and place of conducting any
proceeding for any remedy available to it or exercising any trust or power
conferred upon it under this Bond Indenture.
20.1.5. Risk of Bond Trustee's Funds. None of the provisions of this Bond
Indenture shall require the Bond Trustee to expend or risk its own funds or
otherwise incur any personal financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if the
Bond Trustee shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it as provided in Section 19(j) hereof.
20.1.6. Execution of Continuation Statements. The Bond Trustee shall
execute continuation statements which shall be prepared and filed by the Issuer
as required by the local law of each State in which a Property is located to
continue the effectiveness of the financing statements filed pursuant to this
Bond Indenture.
20.1.7. Actions under the Note Indenture. In exercising its rights under
the Assignment, the Bond Trustee shall exercise such rights in accordance with
the terms of this Bond Indenture and the Assignment.
20.2. Reliances, Permitted Actions and Limitations on Accountability.
Except as otherwise provided in Section 20.1:
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(a) the Bond Trustee may rely, and shall be protected in acting or
refraining from acting, upon any resolution, Officer's Certificate, certificate
of auditors, or any other certificate, statement, instrument, opinion, report,
notice, request, direction, consent or other paper or document believed by the
Bond Trustee to be genuine and to have been signed or presented by the proper
party or parties;
(b) the Bond Trustee may consult with counsel (which may be counsel for
the Issuer) and the written advice or opinion of such counsel shall be full and
complete authorization and protection in respect of any action taken or
suffered or omitted to be taken by the Bond Trustee hereunder in good faith and
in accordance therewith;
(c) prior to the occurrence of an Event of Default hereunder, the Bond
Trustee shall not be bound to make any investigation into the facts or matters
stated in any resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent or other paper or document, unless
requested in writing so to do by not less than a Majority in Interest;
(d) the Bond Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Bond Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it;
(e) except as otherwise provided herein, the Bond Trustee shall not be
required to ascertain or inquire as to the performance or observance of any of
the covenants or agreements contained herein or in any other instruments
delivered to the Bond Trustee hereunder, to be performed or observed by the
Issuer or any party to any such other instruments, or to take notice or be
deemed to have notice or knowledge of a Default, except default in the payment
of monies to the Bond Trustee which the Issuer is required to pay, or cause to
be paid, to the Bond Trustee on or before a specified date or within a
specified time after receipt by the Bond Trustee of a notice or certificate,
unless the Bond Trustee shall have received from the Issuer, the Owner Trustee,
the Note Trustee or any Holder notice that a Default has occurred and
specifying the same. In the absence of such notice from the Issuer, the Owner
Trustee, the Note Trustee or any Holder, the Bond Trustee may assume that no
Default exists under this Bond Indenture. The Bond Trustee shall be required
to take notice of Defaults, of which it has knowledge, in the delivery of any
certificate or other document required to be delivered to the Bond Trustee
pursuant to Article V of this Bond Indenture, or default in the payment of
monies referred to in the
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preceding sentence, and upon obtaining knowledge of any such default the Bond
Trustee shall promptly notify the Issuer and the Holders.
20.3. Limited Accountability. The recitals contained herein, in the Bonds
(except the Certificate of Authentication on each Bond) and in the other Issuer
Documents shall be taken as the statements of the Issuer, and the Bond Trustee
assumes no responsibility for the correctness of the same. The Bond Trustee
makes no representations as to the value or condition of the Trust Estate or
any part thereof, or as to the title of the Issuer thereto, or as to the
validity or genuineness of the Notes or any securities at any time pledged and
deposited with the Bond Trustee hereunder, or as to the validity or sufficiency
of this Bond Indenture or the Bonds. The Bond Trustee shall not be accountable
for the use or application by the Issuer of the proceeds of the Bonds, or for
the use or application of any monies paid over to or upon the order of the
Issuer by the Bond Trustee in accordance with any provision of this Bond
Indenture.
20.4. Holding Stipulations. Any monies received by the Bond Trustee shall,
until used or applied as herein provided, be held in trust for the purposes for
which they were received, but need not be segregated from other funds except to
the extent required by law and need not be held in an interest-bearing account.
20.5. Requirements of Organization and Condition. The Bond Trustee
hereunder shall at all times be a banking corporation or association organized
and doing business under the laws of the United States or of any State,
authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, and be subject to
supervision or examination by a federal or state banking authority. If such
banking corporation or association publishes reports of condition at least
annually, pursuant to law or to the requirements of the aforesaid supervising
or examining authority, then for the purposes of this Section 20.5, the
combined capital and surplus of such banking corporation or association shall
be deemed to be its combined capital and surplus as set forth in its most
recent report of condition so published. If at any time the Bond Trustee shall
cease to be eligible in accordance with the provisions of this Section 20.5, it
shall resign immediately in the manner and with the effect specified in Section
20.6.
20.6. Resignation and Removal.
20.6.1. Notice of Resignation. The Bond Trustee, or any successor hereafter
appointed, may resign at any time by giving written notice thereof to the
Issuer. Upon receiving notice of
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the resignation of the Bond Trustee, the Issuer shall promptly appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors of the Issuer, one counterpart of which shall be delivered
to the resigning Bond Trustee and another counterpart to the successor trustee.
If no successor trustee shall have been so appointed and have accepted
appointment within 30 days after the mailing of such notice of resignation or
removal, a Majority in Interest may appoint a successor trustee.
20.6.2. Removal upon Cessation of Eligibility. If at any time:
(a) the Bond Trustee shall cease to be eligible in accordance with the
provisions of Section 20.5 hereof and shall fail to resign after written
request therefor by the Issuer, or shall resign for any reason whatsoever; or
(b) the Bond Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or any public officer shall take charge or
control of the Bond Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation;
then, in either such case, (1) the Issuer may remove the affected trustee and
appoint a successor trustee by written instrument, in duplicate, executed by
order of the Board of Directors of the Issuer, a counterpart of which shall be
delivered to the Bond Trustee so removed, another counterpart to the successor
trustee, or (2) a Majority in Interest may appoint a successor trustee, which
appointment shall supersede any prior appointment by the Issuer or (3) any of
the Holders may petition any court of competent jurisdiction for the removal of
the Bond Trustee and the appointment of a successor trustee.
20.6.3. Removal by a Majority in Interest. A Majority in Interest may at
any time remove the Bond Trustee and appoint a successor trustee by delivery to
the Bond Trustee so removed, the successor trustee, the Issuer and to the other
Holders of an instrument in writing signed by such Holders.
20.6.4. Effectiveness. Any resignation or removal of the Bond Trustee and
appointment of a successor trustee pursuant to any of the provisions of this
Section shall become effective upon acceptance of appointment by the successor
Bond Trustee as provided in Section 20.7.
20.7. Successor Bond Trustee.
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20.7.1. Acceptance of Appointment. Any successor Bond Trustee appointed as
provided in Section 20.6 shall execute, acknowledge and deliver to the Issuer,
to its predecessor Bond Trustee and to the Holders, an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor Bond Trustee shall become effective and such successor trustee,
without any further act, deed or conveyance, shall become fully vested with all
the rights, powers, duties and obligations of its predecessor hereunder, with
like effect as if originally named as Bond Trustee herein. The predecessor
Bond Trustee shall, at the written request of the successor Bond Trustee, pay
over to the successor Bond Trustee all monies at the time held by it hereunder;
and the Issuer and the predecessor Bond Trustee shall execute and deliver such
instruments and do such other things as may reasonably be required for more
fully and certainly vesting and confirming in the successor Bond Trustee all
such rights, powers, duties and obligations.
20.7.2. Eligibility upon Acceptance. No successor Bond Trustee shall accept
appointment as provided in this Section unless at the time of such acceptance
such successor Bond Trustee shall be eligible under the provisions of Section
20.6.
20.7.3. Notice of Succession. Upon acceptance of appointment by a successor
Bond Trustee as provided in this Section, the Issuer shall mail a notice of the
succession of such trustee hereunder to all of the Holders, with a copy to the
successor trustee. If the Issuer fails to mail such notice within 10 days
after acceptance of appointment by the successor trustee, the successor trustee
shall cause such notice to be mailed at the expense of the Issuer.
20.8. Merger or Consolidation. Any corporation into which the Bond Trustee
may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Bond Trustee shall be a
party, or any corporation succeeding to the business of the Bond Trustee, shall
be the successor of the Bond Trustee hereunder AND SHALL BE DESIGNATED BY
SUCH CONSOLIDATED OR SUCCESSOR CORPORATION AS THE SUCCESSOR TAX
ADMINISTRATOR; provided that such corporation shall be eligible under the
provisions of Section 20.6, WITH RESPECT TO QUALIFICATIONS AS SUCCESSOR
BOND TRUSTEE AND UNDER THE REMIC PROVISIONS AS SUCCESSOR TAX ADMINISTRATOR, ALL
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding.
20.9. Limitation on Note Modification. The Bond Trustee shall not modify or
permit any modification of any material term of a Note (including, but not
limited to, the interest rate, the
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principal balance, the amortization schedule, the remaining term to maturity,
or any other term affecting the amount or timing of payments on the Note)
unless the Bond Trustee and the Tax Administrator have received an Opinion of
Counsel (at the expense of the party seeking to modify the Note) to the effect
that such modification would not be treated as giving rise, for federal income
tax purposes, to the acquisition of a new debt instrument by any of the REMICs.
20.10. Title, Management and Disposition of REO.
20.10.1. Actions Prior to Sale of REO. In the event that any Property
becomes an REO that is acquired by the Trust Estate, the Bond Trustee shall
manage, conserve, protect and operate each REO for the related Holders solely
for the purpose of its prompt disposition and sale. The Bond Trustee shall use
its best efforts to dispose of any REO for its fair market value within 22
months of its acquisition, unless the Tax Administrator shall have
requested and the REMIC shall have been granted an extension of time to dispose
of such REO by the IRS pursuant to section 856(e)(3) of the Code (an
"Extension"). If the REMIC shall have been granted an Extension, the
Bond Trustee shall continue to attempt to sell the REO for its fair market
value for the period ending two months prior to the time such Extension expires
(the "Extended Period"). In the event the Bond Trustee is unable to dispose of
any REO within such 22-month or Extended Period, as the case may be, the Bond
Trustee shall ensure that such REO is auctioned to the highest bidder within
one month after the end of such 22-month period or Extended Period, as the case
may be. Neither the Bond Trustee nor any Person acting on behalf of the Trust
Estate shall provide financing from the Trust Estate to any purchaser of such
REO. The Bond Trustee may contract with any independent contractor for the
operation and management of any REO as set forth in Section 20.10.2 hereof.
The Bond Trustee (or its independent contractor) shall advance such funds as
are necessary to accomplish such sale to the extent that the Bond Trustee deems
such advances to be recoverable out of sale proceeds, and the Bond Trustee
(or its independent contractor, as appropriate) shall be entitled to
reimburse itself therefor from such proceeds as provided in Section 20.10.4.
20.10.2. Protection of Interests in REO. Pursuant to its efforts to sell
any REO acquired by the Trust Estate, the Bond Trustee shall either itself or
through an agent or independent contractor selected by the Bond Trustee
protect and conserve such REO inthe same manner and to such extent as is
customarily done in connection with owning real estate acquired through
foreclosure or by deed-in-lieu of foreclosure, incident to its conservation
and protection of the interests of the related Holders, and may rent the same,
or any part thereof, as the Bond Trustee deems likely to increase the
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net proceeds distributable to the related Holders subject to the terms and
conditions described in this Section 20.10.
For the purpose of protecting the interests of the Trust Estate and
conserving the REO prior to sale, the Bond Trustee may contract with any
Independent Contractor for the OPERATION, MANAGEMENT, conservation,
protection and rental of any REO; provided that:
(a) the terms and conditions of any such contract may not be inconsistent
herewith;
(b) any such contract shall require, or shall be administered to require,
that the Independent Contractor (i) pay all costs and expenses incurred in
connection with the operation and management of such REO, (ii) hold all related
revenues in a segregated account insured by the FDIC , (III) MAKE ADVANCES
WITH RESPECT TO SUCH REO AS SET FORTH IN SECTION 20.10.1 HEREOF AND (IV) remit
all related revenues collected (net of such costs and expenses OR ADVANCES
retained by such Independent Contractor) to the Bond Trustee on a monthly or
more frequent basis; and
(c) none of the provisions of this Section 20.10 relating to any such
contract or to actions taken through any such Independent Contractor shall be
deemed to relieve the Bond Trustee of any of its duties and obligations to the
Trust Estate and the Holders with respect to the conservation, protection and
rental of any such REO.
The Bond Trustee shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Bond Trustee by such
Independent Contractor and nothing in this Agreement shall be deemed to limit
or modify such indemnification. The Bond Trustee or any Independent Contractor
shall be entitled to a fee, based on the prevailing market rate (and set in
good faith at a reasonable level in the case of a fee payable to the Bond
Trustee), for the operation and management of any REO, which fee shall be an
expense of the Trust Estate with respect to the related Asset Group and shall
be payable out of the gross income on such REO.
20.10.3. Deposits to Bond Account. The Bond Trustee shall deposit all funds
collected and received in connection with the operation of any REO in the
related Bond Account no later than the Business Day following receipt of such
funds.
20.10.4. Reimbursement of Bond Trustee Advances. The Bond Trustee, (or its
Independent Contractor, as appropriate), upon the final disposition of any REO,
shall be entitled to reimbursement of any related unreimbursed advances it has
made
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with respect thereto as well as any unpaid REO fees, with interest thereon at a
floating rate per annum equal to one percent plus the prime or base rate of
interest published from time to time by the Bank of New York, from liquidation
proceeds received in connection with the final disposition of such REO;
provided that any such unreimbursed advances and unpaid REO fees (with interest
thereon) may be reimbursed or paid, as the case may be, out of any net rental
income or other net amounts derived from such REO.
20.10.5. Disposition Practices. The final disposition of any REO shall be
carried out by the Bond Trustee at the REO's fair market value under the
circumstances existing at the time of disposition and upon such terms and
conditions as the Bond Trustee shall deem necessary or advisable, and as are in
accordance with accepted mortgage servicing practices and in accordance with
Section 20.10.
20.10.6. Reports Pursuant to the Code. The Bond Trustee shall prepare and
file reports of foreclosure and abandonment in accordance with section 6050J of
the Code.
20.10.7. Prohibited Actions. Notwithstanding any other provision of this
Bond Indenture, no Person, acting on behalf of the Bond Trustee hereunder,
shall rent, lease, or otherwise earn income or take any action on behalf of the
Trust Estate with respect to any REO that might (a) cause such REO to fail to
qualify as "foreclosure property" within the meaning of section 860G(a)(8) of
the Code or (b) result in the receipt by any of the REMICs of any "income from
non-permitted assets" within the meaning of section 860F(a)(2) of the Code or
any "net income from foreclosure property" within the meaning of section
860G(c)(2) of the Code, both of which types of income are subject to tax under
the REMIC Provisions, unless the Bond Trustee has received an Opinion of
Counsel at the expense of the Trust Estate (and chargeable against the related
Asset Group), to the effect that, under the REMIC Provisions and any relevant
proposed legislation, any income generated for the related REMIC by the REO
would not result in the imposition of a tax upon such REMIC.
Without limiting the generality of the foregoing, the Bond Trustee shall not:
(a) enter into, renew or extend any New Lease with respect to any REO, if
the New Lease by its terms will give rise to any income that does not
constitute Rents from Real Property;
(b) permit any amount to be received or accrued under any New Lease other
than amounts that will constitute Rents from Real Property;
(c) authorize or permit any construction on any REO, other than the
completion of a building or other improvement
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thereon, and then only if more than ten percent of the construction of such
building or other improvement was completed before default on the related Notes
became imminent, all within the meaning of section 856(e)(4)(B) of the Code; or
(d) Directly Operate, or allow any other Person (other than an Independent
Contractor) to Directly Operate, any REO Property on any date more than 90 days
after its acquisition date;
unless, in any such case, the Bond Trustee has requested and received the
Opinion of Counsel described in the preceding sentence, in which case the Bond
Trustee may take such actions as are specified in such Opinion of Counsel.
20.10.8. Acquisition of Personal Property. The Bond Trustee shall not
acquire any personal property relating to any of the Properties pursuant to
this Section 20.10 unless either:
(a) such personal property is incident to real property (within the meaning
of section 856(e)(1) of the Code) so acquired by the Bond Trustee; or
(b) the Bond Trustee shall have requested and received an Opinion of
Counsel, at the expense of the Trust Estate (and chargeable against the related
Asset Group), to the effect that the holding of such personal property by any
REMIC will not cause the imposition of a tax under the REMIC Provisions on any
REMIC related to the Trust Estate or cause any such REMIC to fail to qualify as
a REMIC at any time that any related Bond is outstanding.
Any actions required or permitted to be taken by the Bond Trustee under this
Section 20.10 may be taken by another Person on behalf of the Bond Trustee.
20.11. Bond Trustee's Fees; Tax Administrator's Fees. In consideration for
their services hereunder, the Bond Trustee and the Tax Administrator shall be
entitled to a fee and reimbursement of certain expenses with respect to each
REMIC. In addition, as provided in Sections 20.10.1 and 20.10.4 hereof, the
Bond Trustee shall be entitled to reimbursement for amounts advanced by it with
respect to REO properties not recovered from income therefrom or the
disposition thereof. All such fees, expenses and reimbursement amounts shall
be paid by the Holders of the
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Residual Bonds of such REMIC and deposited by them into the related Reserve
Fund. The Bond Trustee shall be entitled to withdraw the funds for payment
of its fee and the reimbursement amounts with respect to a particular REMIC
or for payment to the Tax Administrator of its fee with respect to a particular
REMIC solely from the related Reserve Fund.
ARTICLE XXI
21. Performance by the Note Trustee. Compliance by the Owner Trustee or
Note Trustee with any provisions of the Notes, the Mortgages or the Note
Indentures that, if done by the Issuer, would constitute compliance with
provisions of this Bond Indenture, shall be deemed compliance by the Issuer
with such provisions hereof. Performance by the Owner Trustee or Note Trustee
of any of the Issuer's obligations hereunder, whether or not pursuant to the
Notes, the Mortgages or the Note Indentures, shall be the equivalent of the
Issuer's performance thereof.
ARTICLE XXII
22. Prohibited Activities. Neither the Issuer, the Tax Administrator, the
Holders of Residual Bonds nor the Bond Trustee shall engage in, nor shall the
Bond Trustee permit, any of the following transactions or activities unless it
has received (a) a Special Tax Opinion and (b) a Special Tax Consent from each
of the Holders of the related Bonds (unless the Special Tax Opinion specially
provides that no REMIC-level tax will result from the transaction or activity
in question):
(i) the sale or other disposition of, or substitution for, any of the Notes
except pursuant to (A) a default with respect to such Note, (B) the
bankruptcy or insolvency of any REMIC or (C) the termination of any REMIC
pursuant to Article III hereof;
(ii) the acquisition of any Note for the Trust Estate after the Startup Day
except (A) during the three-month period beginning on the Startup Day
pursuant to a fixed-price contract in effect on the Startup Day that has been
reviewed and approved by tax counsel acceptable to the Tax Administrator;
(iii) the sale or other disposition of any investment in a Bond Account at a
gain;
(iv)) the acceptance of any contribution to any Asset Group except the
following cash contributions: (A) a
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contribution received during the three-month period beginning on the
Startup Day, (B) a contribution to facilitate a complete redemption of the
Bonds that is made within the 90-day period beginning on the date on which
a plan of complete liquidation is adopted pursuant to Code section
860F(a)(4) and Section 3.12 hereof or (C) a contribution to a Reserve Fund
by the Holders of the related Series of Residual Bonds in order to pay
expenses of the related REMIC; or
(v) any other transaction or activity that is not contemplated by this
Bond Indenture.
Any party causing the Trust Estate to engage in any of the activities
prohibited in this Section shall be liable for the payment of any tax imposed
on the Trust Estate or the REMICs pursuant to Code section 860F(a)(1) or
860G(d) as a result of such activities.
ARTICLE XXIII
23. Certificate as to No Default; Information. Annually, within 120
days after the end of each fiscal year of the trust, commencing with the fiscal
year ending in 1994, the Issuer will deliver to the Bond Trustee an Officer's
Certificate, stating that to the best of the signer's knowledge after making
due inquiry, there is no Default hereunder, or if any such Default exists to
such officer's knowledge, specifying the nature and period of existence
thereof and what action the Issuer is taking or proposes to take with respect
thereto. The Issuer will also furnish, and will use its best efforts to cause
the Owner Trust or Kmart to furnish, promptly to any Holder, such information
with respect to any Property and any Lease as may be reasonably requested.
ARTICLE XXIV
24. Additional Instruments. The Issuer, at its expense, will execute,
acknowledge, secure and deliver all such instruments and take all such action
as the Bond Trustee from time to time may reasonably request for the better
assuring of the properties and rights now or hereafter subjected to the lien of
this Bond Indenture or intended so to be.
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ARTICLE XXV
25. Termination and Liquidation.
25.1. Satisfaction. The terms and conditions of this Bond Indenture and the
lien created hereby shall terminate upon the earlier of (a) the delivery by the
Issuer to the Bond Trustee of all of the Bonds of each Series for cancellation
or (b) the payment in full of the principal of, and interest due and premium,
if any, on, the Bonds and all other sums secured hereby and upon delivery to
the Bond Trustee of an Officer's Certificate of the Issuer and an Opinion of
Counsel for the Issuer, each stating that all conditions precedent to the
satisfaction and discharge of this Bond Indenture, with respect to the Bonds,
have been complied with. Thereupon, the Bond Trustee, at the Issuer's expense
shall execute, record and file, as appropriate, proper instruments
acknowledging that the liens and security interests created by this Bond
Indenture shall cease to secure the obligations under the Bonds and the terms
and conditions set forth in this Bond Indenture shall no longer apply to the
Bonds. Upon written request, the Bond Trustee shall give or cause to be given
to the Note Trustee notice of such termination, release and satisfaction. In
no event shall the trusts created hereby continue beyond the expiration of 21
years from the death of the survivor of the descendants of Joseph P. Kennedy,
the late Ambassador of the United States to the Court of St. James, living on
the date hereof.
25.2. Authorization. By their acceptance of Residual Bonds, the Bond Owners
thereof hereby agree to authorize the Bond Trustee to adopt and sign a plan of
complete liquidation of the Trust Estate, which authorization shall be binding
upon all successor Bond Owners of Residual Bonds.
ARTICLE XXVI
26. Terms Subject to Applicable Law; Separability. All rights, powers and
remedies provided herein may be exercised only to the extent that the exercise
thereof does not violate any applicable law, and are intended to be limited to
the extent necessary so that they will not render this Bond Indenture invalid,
unenforceable or not entitled to be recorded, registered or filed under any
applicable law. If any term or provision of this Bond Indenture shall be held
to be invalid, illegal or unenforceable, the validity of the other terms and
provisions hereof shall in no way be affected thereby.
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ARTICLE XXVII
27. Notices. All notices and other communications hereunder shall be in
writing, and delivered, telegraphed or mailed (by registered or certified mail,
postage prepaid), addressed:
(a) if to the Issuer:
FGHK, Inc.
c/o Pine Street Capital Corporation
750 Old Hickory Boulevard
Two Brentwood Commons, Suite 150
Brentwood, Tennessee 37027
Attention: James R. Greene
(b) if to the Bond Trustee OR TAX ADMINISTRATOR:
The Bank of New York
101 Barclay Street, 12W
New York, New York 10286
Attention: Corporate Trust Administration, MBS (KMART)
or to such other address as the Issuer, the Bond Trustee OR TAX
ADMINISTRATOR may hereafter designate, and shall be effective upon receipt as
evidenced by a receipt signed by a person at such address. A copy of each
notice of an Event of Default and all other notices or communications,
including the text of any proposed or final amendment or supplement to this
Bond Indenture, hereunder given by or to the Bond Trustee or the Issuer shall
be contemporaneously transmitted to Kmart, 3100 West Big Beaver Road, Troy,
Michigan 48084, Attention: Vice President--Real Estate, or to such other
address as Kmart may have designated by written notice to the Bond Trustee.
The provisions of the foregoing sentence are for the express benefit of Kmart,
shall be enforceable by it, and may not be modified or eliminated without its
consent.
Where this Bond Indenture provides for notice to Bondholders of any event,
such notice shall be sufficiently given (unless otherwise herein expressly
provided) if in writing and mailed first-class postage prepaid, to each
Bondholder, at its address as it appears in the Bond Register, not later than
the latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. Where this Bond Indenture provides for notice in any
manner, such notice may be waived in writing by the Person entitled to receive
such notice, either before or after the event, and such waiver shall be the
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equivalent of such notice. Waivers of notice by Bondholders shall be filed
with the Bond Trustee, but such filing shall not be a condition precedent to
the validity of any action taken in reliance upon such waiver. In any case
where notice to Bondholders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Bondholder
shall affect the sufficiency of such notice with respect to other Bondholders,
and any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given.
ARTICLE XXVIII
28. No Recourse to the Issuer. Anything herein to the contrary
notwithstanding, neither the Bond Trustee nor the Issuer, nor any Affiliates,
officers, directors, employees, shareholders, incorporators or trustees thereof
shall be personally liable for the payment or performance of any of the
covenants, obligations or indemnifications contained in this Bond Indenture,
said covenants, obligations and indemnifications having been made by the Issuer
for the sole purpose of binding its interest as owner of the Trust Estate, and
the Bond Trustee agrees that in the event of the occurrence of a foreclosure
hereunder, it shall have no recourse against the Issuer, the Note Trustee or
their respective Affiliates, officers, directors, employees, shareholders or
incorporators for any deficiency, loss or claim resulting therefrom.
ARTICLE XXIX
29. Miscellaneous.
29.1. Amendment. This Bond Indenture (a) may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought and (b) shall be binding upon the Issuer, its successors and assigns,
and all persons claiming under or through the Issuer, and shall inure to the
benefit of and be enforceable by the Bond Trustee and its respective successors
and assigns. The headings in this Bond Indenture are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof. If
any of the provisions of this Bond Indenture or the Bonds shall require, or be
deemed or adjudicated to require, the payment, or permit the collection, of
interest in excess of the maximum permitted by law, the Issuer shall not be
obligated to pay, nor the Holders be permitted to collect, interest in excess
of the amount permitted by law, and the provisions of this sentence shall
supersede any
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conflicting provisions contained herein or in any of the Bonds. This Bond
Indenture shall be governed by and construed in accordance with the laws of the
State of New York without reference to the choice of law doctrine of the State
of New York. This Bond Indenture may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
29.2. Legal Holidays. In any case where any Payment Date, Redemption Date
or Stated Maturity of any Bond shall not be a Business Day, then,
notwithstanding any other provision of this Bond Indenture, payment of
interest, principal, and premium, if any, need not be made on such date, and if
not made on such date shall instead be made on the next succeeding Business Day
with the same force and effect as if made on the Payment Date, Redemption Date
or at Stated Maturity, and, provided that such payment is so made on such next
succeeding Business Day, no interest shall accrue for the period from and after
such Payment Date, Redemption Date or Stated Maturity Date to and including
such next succeeding Business Day.
29.3. Benefits of Bond Indenture. Except to the extent of the rights of the
Owner Trustees as third-party beneficiary as provided in the Assignments,
nothing in this Bond Indenture or in the Bonds, express or implied, shall give
to any Person, other than the parties hereto, their successors and assigns
hereunder and the Bondholders, any benefit or any legal or equitable right,
remedy or claim under this Bond Indenture.
29.4. Governing Law. This Bond Indenture and the Bonds shall be construed in
accordance with the laws of the State of New York, without reference to its
conflict of laws provisions (other than Section 5-1401 of the General
Obligations Law of New York), and the obligations, rights and remedies of the
parties hereunder and thereunder shall be determined in accordance with such
laws.
ARTICLE XXX
30. Bond Trustee's Acceptance. The Bond Trustee accepts the trust hereby
declared and provided, and covenants and agrees to perform the same as the same
are herein expressed.
ARTICLE XXXI
31. TAX ADMINISTRATOR'S ACCEPTANCE. THE TAX ADMINISTRATOR ACCEPTS
DESIGNATION AS SUCH AND AS EACH REMIC'S TAX MATTERS
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PERSON AND COVENANTS AND AGREES TO PERFORM THE DUTIES OF THE
TAX ADMINISTRATOR AS THE SAME AS HEREIN EXPRESSED.
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IN WITNESS WHEREOF, the Issuer and the BANK OF NEW YORK IN ITS
RESPECTIVE CAPACITIES OF Bond Trustee AND TAX ADMINISTRATOR have caused this
Bond Indenture to be executed and their respective corporate seals to be
hereunto affixed and attached by their proper officers thereunto duly
authorized, and each has hereunto set his or her hand, all as of the day and
year first above written.
FGHK, INC.,
as Issuer
[Corporate Seal]
Attest: By
-------------------------
Name:
-------------------------- Title:
Name:
Title:
Signed, Sealed and Acknowledged in
the Presence of:
--------------------------
Name:
Title:
THE BANK OF NEW YORK,
as Bond Trustee
[Corporate Seal]
By
-------------------------
Name:
Attest: Title:
--------------------------
Name:
Title:
Signed, Sealed and Acknowledged in
the Presence of:
--------------------------
Name:
Title:
THE BANK OF NEW YORK
AS TAX ADMINISTRATOR
[CORPORATE SEAL]
BY
ATTEST: NAME:
TITLE
NAME:
TITLE:
SIGNED, SEALED AND ACKNOWLEDGED IN
THE PRESENCE OF.
NAME:
TITLE:
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<PAGE> 76
STATE OF )
: ss.:
COUNTY OF )
On the ____ day of ________, 1994, before me the undersigned authority
personally came _______________ whose name as ______________ of
__________________________, a ________ corporation, is signed to the foregoing
instrument and to me known, who, being by me duly sworn, did depose, say and
acknowledge before me that he is a ______________ of _________
________________, the corporation described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed
to said instrument is such corporate seal; that it was so affixed by order of
the board of directors of said corporation, that he signed his name thereto by
like order, and that being informed of the contents of said instrument, he, as
such officer and with full authority, executed the same voluntarily for and as
the act of said corporation.
---------------------
Notary Public
[Notary Seal]
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STATE OF )
: ss.:
COUNTY OF )
On the ____ day of ________, 1994, before me the undersigned authority
personally came _________________ whose name as a Trust Officer of
____________________________, a _____________ corporation, is signed to the
foregoing instrument and to me known, who, being by me duly sworn, did depose,
say and acknowledge before me that he is a Trust Officer of
____________________________, the corporation described in and which executed
the foregoing instrument; that he knows the seal of said corporation; that the
seal affixed to said instrument is such corporate seal; that it was so affixed
by order of the board of directors of said corporation, that he signed his name
thereto by like order, and that being informed of the contents of said
instrument, he, as such officer and with full authority, executed the same
voluntarily for and as the act of said corporation.
-------------------------
Notary Public
[Notary Seal]
<PAGE> 78
EXHIBIT A
FORM OF OFFERED BOND
UNLESS THIS BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY BOND ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR
TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC)
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT", AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED (THE "CODE").
THE PRINCIPAL OF THIS BOND IS PAYABLE IN INSTALLMENTS AS SET FORTH HEREIN.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS BOND AT ANY TIME MAY BE
LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF.
SECURED LEASE BOND, SERIES [A][B][C]
NO.: __ Initial Principal
Amount of this Bond: $_____________
CUSIP NO. ______ Initial Aggregate
Principal Amount of
the Series [A][B][C]
Bonds: $_____________
Interest Rate: __% per annum
Issue Date: MAY __, 1994
Maturity Date:
This is one of the Secured Lease Bonds, Series [A][B][C], issued
pursuant to a collateral trust indenture (the "Bond Indenture") dated as of
MAY __, 1994, between FGHK, Inc., a special-purpose corporation organized and
existing under the laws
A-1
<PAGE> 79
of the State of New York (the "Issuer"), and The Bank of New York, as Bond
Trustee. Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Bond Indenture.
This certifies that ______________________ is the registered owner of
the percentage interest (the "Percentage Interest") (obtained by dividing the
Initial Principal Amount of this Bond specified above by the Initial Aggregate
Principal Amount of Series [A][B][C] Bonds above) of the rights and interests
of the Series [A][B][C] Bonds in a trust estate (the "Trust Estate") consisting
primarily of the Series [A][B][C] Notes and the Issuer's rights and interests
under the Note Indentures assigned to the Bond Trustee by the Issuer.
This Bond is issued under and is subject to the terms, provisions and
conditions of the Bond Indenture, to which the Holder of this Bond by virtue of
the acceptance hereof assents and by which such Holder is bound.
The Issuer, for value received, hereby promises to pay on each
Payment Date to the Holder hereof, or registered assigns thereof, in payment of
principal owing hereon, an amount equal to the product of (i) the Percentage
Interest and (ii) the aggregate amount, if any, payable as a Sinking Fund
payment on the Series [A][B][C] Bonds as set forth in the Schedule of Sinking
Fund Payments in the Bond Indenture, as such schedule may be amended from time
to time pursuant to Article III of the Bond Indenture; provided, however, that
the entire unpaid principal amount of this Bond shall be due and payable on the
earlier of [_________, ____][_________, ____][_________, ____]; and provided
further that the entire unpaid principal amount of this Bond, or any portion
hereof, may be payable on any Payment Date that is a Redemption Date, pursuant
to Article III of the Bond Indenture.
Interest will be payable on this Bond on each Payment Date and will
accrue at a rate of ___% from and including the most recent preceding Payment
Date on which interest has been paid to the Holder of this Bond to, but
excluding, such Payment Date or, in the case of the Payment Date on July 1,
1994, the period from the date of issuance of this Bond to such Payment Date.
Interest will be computed on the basis of a 360-day year consisting of 12
months of 30 days each.
If on any Payment Date amounts available for distribution to the
Bondholders are insufficient to pay in full all amounts then due, then such
amounts shall be distributed as payment of principal and interest, pro rata
among the Bonds, without any preference or priority of one Bond over another,
according to the
A-2
<PAGE> 80
aggregate amount due for principal, premium, if any, and interest (including
any Make-Whole Premium) on such Payment Date.
In the event that on any Payment Date the interest accrued on this
Bond or the Sinking Fund payment or premium to be paid hereon is not paid in
full to the Holder of this Bond, interest shall accrue on the unpaid amount of
interest or principal at a rate of 1.0% plus the interest rate otherwise
applicable to this Bond from and including such Payment Date to and including
the date on which such unpaid amount is distributed to the Holder of this Bond.
Under certain limited circumstances set forth in the Bond Indenture,
Holders of Series [A][B][C] Bonds will be entitled to receive a Make-Whole
Premium in connection with the redemption of such Bonds in whole or in part
before the Maturity Date specified on the face hereof.
Reference is made to the further provisions of this Bond set forth on
the reverse hereof and in the Bond Indenture, which shall have the same effect
as though fully set forth on the face of this Bond.
Unless the certificate of authentication hereon has been executed by
the Bond Trustee whose name appears below by manual signature, this Bond shall
not be entitled to any benefit under the indenture referred to on the reverse
hereof, or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
signed, manually or in facsimile, by its Authorized Officer.
FGHK, INC.,
as Issuer
By:________________________
Name:
Title:
A-3
<PAGE> 81
BOND TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Bonds designated above and referred to in
the within-mentioned Bond Indenture.
Date: THE BANK OF NEW YORK,
not in its individual capacity,
but solely as Bond Trustee
under the Bond Indenture
By:
---------------------------
Authorized Signatory
A-4
<PAGE> 82
EXHIBIT B
FORM OF RESIDUAL BOND
THIS CLASS R CERTIFICATE HAS NO PRINCIPAL BALANCE, DOES NOT BEAR INTEREST AND
WILL NOT RECEIVE ANY DISTRIBUTIONS EXCEPT AS PROVIDED HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT", AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED (THE "CODE").
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). ANY RESALE OR TRANSFER OF THIS CERTIFICATE
WITHOUT REGISTRATION THEREOF UNDER THE SECURITIES ACT MAY ONLY BE MADE IN A
TRANSACTION EXEMPTED FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2.4 OF THE BOND INDENTURE
REFERRED TO HEREIN.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
PROPOSED TRANSFEREE DELIVERS TO THE TAX ADMINISTRATOR AND THE BOND TRUSTEE A
TRANSFEREE AGREEMENT AND EITHER A BENEFIT PLAN AFFIDAVIT OR A BENEFIT PLAN
OPINION IN ACCORDANCE WITH THE PROVISIONS OF SECTION 2.4.1 OF THE BOND
INDENTURE REFERRED TO HEREIN. NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY
HEREIN, ANY PURPORTED TRANSFER OF THIS CERTIFICATE TO OR ON BEHALF OF AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA OR TO THE CODE WITHOUT THE BENEFIT PLAN
OPINION TO THE TRUSTEE AS DESCRIBED ABOVE SHALL BE VOID AND OF NO EFFECT.
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
TAX ADMINISTRATOR DELIVERS ITS WRITTEN CONSENT TO SUCH TRANSFER TO THE BOND
TRUSTEE PURSUANT TO SECTION 2.4.1 OF THE BOND INDENTURE REFERRED TO HEREIN,
WHICH CONSENT SHALL NOT BE GIVEN IN CONNECTION WITH ANY PROPOSED TRANSFER TO A
DISQUALIFIED ORGANIZATION OR ANY PROPOSED TRANSFER WHICH WOULD RESULT IN THE
ISSUER OR THE TRUST ESTATE BEING DEEMED TO BE AN "INVESTMENT COMPANY" WITHIN
THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED. A DISQUALIFIED
ORGANIZATION IS ANY OF (a) THE UNITED STATES, (b) ANY STATE OR POLITICAL
SUBDIVISION THEREOF, (c) ANY FOREIGN GOVERNMENT, (d) ANY INTERNATIONAL
ORGANIZATION, (e) ANY AGENCY OR INSTRUMENTALITY OF ANY OF THE FOREGOING, (f)
ANY TAX- EXEMPT ORGANIZATION (OTHER THAN A COOPERATIVE DESCRIBED IN SECTION 521
OF THE CODE) THAT IS EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH ORGANIZATION IS
SUBJECT TO TAX UNDER THE UNRELATED BUSINESS TAXABLE INCOME PROVISIONS OF THE
CODE, (g) ANY ORGANIZATION DESCRIBED IN SECTION 1381(A)(2)(C) OF THE CODE, OR
(h) ANY OTHER ENTITY IDENTIFIED AS A DISQUALIFIED ORGANIZATION BY THE REMIC
PROVISIONS. A CORPORATION WILL NOT BE TREATED AS AN INSTRUMENTALITY OF THE
UNITED STATES OR ANY STATE OR POLITICAL SUBDIVISION THEREOF IF ALL OF ITS
ACTIVITIES ARE SUBJECT TO TAX AND, WITH THE EXCEPTION OF THE FEDERAL HOME LOAN
MORTGAGE CORPORATION, A MAJORITY OF ITS BOARD OF DIRECTORS IS NOT SELECTED BY
SUCH GOVERNMENTAL UNIT.
<PAGE> 83
SECURED LEASE BONDS, SERIES [AR][BR][CR]
No: __ Percentage Interest
Represented by this Bond: ___%
Maturity Date:
This is one of the Secured Lease Bonds, Series [AR][BR][CR], issued
pursuant to a collateral trust indenture (the "Bond Indenture") dated as of
MAY __, 1994, between FGHK, Inc., a special-purpose corporation organized and
existing under the laws of the State of New York (the "Issuer"), and The Bank
of New York, as Bond Trustee. Capitalized terms used but not defined herein
shall have the meanings ascribed to them in the Bond Indenture.
This certifies that ______________________ is the registered owner of
the Percentage Interest specified above of the rights and interests of the
Series [AR][BR][CR] Bonds in a trust estate (the "Trust Estate") consisting
primarily of the Series [A][B][C] Notes and an assignment of the Issuer's
rights and interests under the Note Indentures.
This Bond is issued under and is subject to the terms, provisions and
conditions of the Bond Indenture (INCLUDING PROVISIONS REQUIRING THE GRANTING
OF CERTAIN AFFIRMATIVE CONSENTS AND AUTHORIZATIONS), to which the Holder of
this Bond by virtue of the acceptance hereof assents and by which such Holder
is bound. BY ITS ACCEPTANCE HEREOF, THE HOLDER HEREOF HEREBY FURTHER AGREES
AND UNDERTAKES TO TIMELY GRANT OR PROVIDE ALL CONSENTS AND AUTHORIZATIONS
REQUIRED OF IT PURSUANT TO THE BOND INDENTURE.
No distributions are expected to be made on this Series [AR][BR][CR]
Bond and any distribution of the proceeds of any remaining assets of the Trust
Estate will be made net of any amount by which the Holder is delinquent with
respect to payments required to be made by such Holder (or any predecessor in
interest to such holder) pursuant to Section 2.6.2, 2.6.6(h) or 20.11 of the
Bond Indenture and only upon presentation and surrender of this Bond at the
Corporate Trust Office or the office or agency maintained by the Bond Trustee
in New York City, New York.
No transfer of a Residual Bond shall be made unless such transfer is
made pursuant to an effective registration statement under the Securities Act
and any applicable state securities laws or is exempt from the registration
requirements under the Securities Act and such state securities laws. In the
event that a transfer is to be made in reliance upon an exemption from the
B-2
<PAGE> 84
Securities Act and such laws, in order to assure compliance therewith, the
Holder desiring to effect such transfer and such Holder's prospective
transferee shall each certify to the Bond Trustee in writing the facts
surrounding the transfer as provided in Section 2.4.1(a) of the Bond Indenture.
In the event that such transfer is to be made within THREE years from the
date of the initial issuance of Bonds pursuant hereto (other than a transfer as
to which the proposed transferee has provided a Rule 144A Letter), there shall
also be delivered to the Bond Trustee an opinion of counsel that such transfer
may be made pursuant to an exemption from the Securities Act and such state
securities laws. Each Holder of a Residual Bond desiring to effect such
transfer shall, and does hereby agree to, indemnify the Bond Trustee, the
Issuer, Kmart, the Owner Participant and the Owner Trustee against any
liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.
No transfer of a Residual Bond shall be made unless the transferee
provides the Tax Administrator and the Bond Trustee with (a) a Transferee
Agreement substantially in the form of Exhibit H to the Bond Indenture and (b)
either (i) a Benefit Plan Affidavit or (ii) a Benefit Plan Opinion as provided
in Section 2.4.1(b) of the Bond Indenture.
The Bond Trustee shall not register any transfer of a Residual Bond
(including any beneficial interest therein) unless it shall have received the
written consent of the Tax Administrator. The Tax Administrator shall not give
such consent (a) to any proposed transfer to any investor that is a
Disqualified Organization or (b) if such transfer would result in the Issuer or
the Trust Estate being deemed to be an "investment company" within the meaning
of the Investment Company Act of 1940, as amended. As prerequisites to the Tax
Administrator's consent to any other transfer, the proposed transferee
(including an initial purchaser) of a Residual Bond, or any beneficial interest
therein, must provide the Tax Administrator and the Bond Trustee with (a) the
items specified in the preceding paragraph, (b)(i) if the transferee is a
Non-U.S. Person, an affidavit in substantially the form attached as Exhibit B-1
to Exhibit H to the Bond Indenture and (ii) if the transferee is a U.S. Person,
an affidavit in substantially the form attached as Exhibit B-2 to Exhibit H to
the Bond Indenture and (c) if the proposed transferee is a Non-U.S. Person, a
certificate, signed by the transferor, stating whether the Residual Bond has
"tax avoidance potential" as defined in Treasury Regulations Section
1.860G-3(a)(2) (a "TAPRI Certificate"). Notwithstanding the fulfillment of
the prerequisites described above, the Tax Administrator may withhold its
consent to a transfer, but only to the extent necessary to avoid a risk of (a)
disqualification of the Pool [A][B][C] REMIC as a REMIC or (b) the imposition
of a tax upon the Pool [A][B][C] REMIC. In addition, the Tax Administrator
shall not give its consent to the transfer of less
B-3
<PAGE> 85
than an entire interest in a Residual Bond unless (a) the interest transferred
is an undivided interest or (b) the transferor or the transferee provides the
Tax Administrator with an Opinion of Counsel that the transfer will not
jeopardize the REMIC status of the Pool [A][B][C] REMIC.
Any attempted or purported transfer of any ownership interest in a
Residual Bond in violation of these provisions shall be absolutely null and
void and shall vest no rights in the purported transferee. If any purported
transferee shall become a Holder of a Residual Bond in violation of these
provisions, then the last preceding Permitted Transferee shall be restored to
all rights as Holder thereof retroactive to the date of registration of
Transfer of such Residual Bond.
Each Holder of this Bond shall be deemed to have agreed to be bound by
all of the relevant restrictions of Section 2.4 of the Bond Indenture.
Each Holder of this Bond shall be deemed to have agreed to make the
payments required by (a) SECTIONS 2.6.2 AND 2.6.6(h) of the Bond Indenture
with respect to taxes and (b) Section 20.11 of the Bond Indenture with respect
to certain fees.
Unless the certificate of authentication hereon has been executed by
the Bond Trustee whose name appears below by manual signature, this Bond shall
not be entitled to any benefit under the Bond Indenture referred to on the
reverse hereof, or be valid or obligatory for any purpose.
* * *
B-4
<PAGE> 86
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
signed, manually or in facsimile, by its Authorized Officer.
FGHK, INC.
By:_________________________
Name:
Title:
B-5
<PAGE> 87
BOND TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Bonds designated above and referred to in
the within-mentioned Bond Indenture.
Date: THE BANK OF NEW YORK,
not in its individual capacity,
but solely as Bond Trustee
under the Bond Indenture
By:
---------------------------
Authorized Signatory
B-6
<PAGE> 88
EXHIBIT C
FORM OF REVERSE OF BOND
On each Payment Date, pursuant to Article III of the Bond
Indenture, the Bond Trustee shall withdraw monies from the Pool A Bond Account,
the Pool B Bond Account or the Pool C Bond Account, as appropriate, and apply
such monies first to the payment of interest accrued on the Offered Bonds, as
described below, and second to the payment of principal scheduled to be paid to
the Offered Bonds as Sinking Fund payments on such Payment Date. Monies
received subsequent to any Payment Date with respect to payments on the Notes,
including redemptions thereof, due on such Payment Date will be withdrawn from
the Pool A Bond Account, the Pool B Bond Account or the Pool C Bond Account, as
appropriate, by the Bond Trustee and applied to the redemption of the Offered
Bonds, in whole or in part, pursuant to Article III of the Bond Indenture.
Interest shall accrue on the Offered Bonds at the rate set
forth on the face of each Offered Bond.
On any Payment Date on which payments of interest and
principal on this Bond do not constitute payment in full of this Bond, such
payments shall be made by check mailed to the Holder of this Bond to such
address as such Holder shall specify or if such Holder holds Bonds having an
aggregate initial principal amount of at least $5,000,000 so specifies in
written notice to the Trustee received no fewer than five BUSINESS DAYS prior
to such Payment Date, and provided an account number is included in the
Register, payments will be made by wire transfer in immediately available funds
to such account. Any reduction in the principal amount of this Bond (or any
one or more predecessor Bonds) effected by any payments made on any Payment
Date shall be binding upon all future Holders of this Bond and of any Bond
issued upon the registration of transfer hereof or in exchange hereof or in
lieu hereof, whether or not noted hereon. Final payment in full of any Bond
shall be made only against surrender and delivery of such Bond to the Bond
Trustee at the Corporate Trust Office.
As provided in the Bond Indenture, and subject to certain
limitations set forth therein, the transfer of this Bond may be registered on
the Register upon surrender of this Bond for registration of transfer at the
Corporate Trust Office of the Bond Trustee pursuant to the Bond Indenture, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Bond Trustee duly executed by, the Holder hereof or his or
her attorney duly authorized in writing, with such signature guaranteed by a
commercial bank or trust company located, or having a correspondent located, in
The City of New York or the city in which the Corporate Trust Office is
located,
C-1
<PAGE> 89
or a member firm of a national securities exchange, and such other documents as
the Bond Trustee may require, and thereupon one or more new Bonds of authorized
denominations and in the same aggregate principal amount will be issued to the
designated transferee or transferees. No service charge will be charged for
any registration of transfer or exchange of this Bond, but the transferor may
be required to pay a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any such registration of transfer
or exchange.
Each Bondholder, by acceptance of a Bond, and each Bond Owner,
by acceptance of a beneficial interest in a Bond, covenants and agrees by
accepting the benefits of the Bond Indenture that such Bondholder will not at
any time institute against Kmart, the Issuer, the Owner Participant, or the
Owner Trustee, or join in any institution against Kmart, the Issuer, the Owner
Participant or the Owner Trustee of any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings under any United States
Federal or state bankruptcy or similar law in connection with any obligations
relating to the Bonds or the Bond Indenture.
Prior to the due presentment for registration of transfer of
this Bond, the Issuer, the Bond Trustee and any agent of the Issuer or the Bond
Trustee may treat the Person in whose name this Bond is registered as the owner
hereof for all purposes, whether or not this Bond be overdue, and neither the
Issuer, the Bond Trustee nor any such agent shall be affected by notice to the
contrary.
The Bond Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Bonds under the
Bond Indenture at any time by the Issuer with the consent of a Majority in
Interest. The Bond Indenture also contains provisions permitting a Majority in
Interest, on behalf of the holders of all the Offered Bonds, to waive
compliance by the Issuer with certain provisions of the Bond Indenture and
certain past defaults under the Bond Indenture and their consequences. Any
such consent or waiver by the Holder of this Bond (or any one or more
predecessor Bonds) shall be conclusive and binding upon such Holder and upon
all future Holders of this Bond and of any Bond issued upon the registration of
transfer hereof or in exchange hereof or in lieu hereof whether or not notation
of such consent or waiver is made upon this Bond. The Bond Indenture also
permits the Bond Trustee to amend or waive certain terms and conditions of the
Bond Indenture without the consent of Holders of the Bonds issued thereunder.
This Bond and the Bond Indenture shall be construed in
accordance with the laws of the State of New York, without reference to its
conflict of law provisions (other than Section 5-1401 of the General
Obligations Law of New York), and the
C-2
<PAGE> 90
obligations, rights and remedies of the parties hereunder and thereunder shall
be determined in accordance with such laws.
No reference herein to the Bond Indenture and no provision of
this Bond or of the Bond Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of and
interest on this Bond at the times, place and rate, and in the coin or currency
herein prescribed.
C-3
<PAGE> 91
Assignment
FOR VALUE RECEIVED, the undersigned hereby sells,
assigns and transfers unto _______________________________________
(name and address of assignee)
the within Bond and all rights thereunder, and hereby irrevocably constitutes
and appoints attorney, to transfer said Bond on the books kept for registration
thereof, with full power of substitution in the premises.
Social Security or Taxpayer I.D. or other identifying number of assignee: ______
Dated: _____________ __________________________*
Signature Guaranteed:
__________________________
______________________
______________________
* NOTE: The signature to this assignment must correspond with the name
of the registered owner as it appears on the face of the within Note
in every particular, without alteration, enlargement or any change
whatsoever.
C-4
<PAGE> 92
EXHIBIT D
FORM OF DEPOSITORY AGREEMENT
[Intentionally Omitted]
D-1
<PAGE> 93
EXHIBIT E
FORM OF TRANSFEROR CERTIFICATE
[Intentionally Omitted]
E-1
<PAGE> 94
EXHIBIT F
FORM OF INVESTMENT LETTER
[Intentionally Omitted]
F-1
<PAGE> 95
EXHIBIT G
FORM OF RULE 144A LETTER
[Intentionally Omitted]
G-1
<PAGE> 96
EXHIBIT H
FORM OF TRANSFEREE AGREEMENT
[Intentionally Omitted]
H-1
<PAGE> 97
EXHIBIT I
[RESERVED]
I-1
<PAGE> 98
EXHIBIT J
FORM OF SUPPLEMENTAL ASSIGNMENT AGREEMENT
[INTENTIONALLY OMITTED]
J-1
<PAGE> 99
SCHEDULE I
SINKING FUND PAYMENTS
[Intentionally Omitted]
SI-1
<PAGE> 1
KMART CORPORATION AND SUBSIDIARY COMPANIES
EXHIBIT 12 - INFORMATION ON RATIO OF EARNINGS
TO FIXED CHARGES COMPUTATION
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------
January 26, January 27, January 29,
(Millions) 1994 1993 1992
----------- ------------ -----------
<S> <C> <C> <C>
Net income (loss) from continuing
retail operations before extraordinary
item and the effect of accounting changes $ (328) $ 882 $ 789
Income taxes (222) 445 400
----------- ------------ -----------
Pretax income (loss) from continuing
retail operations (550) 1,327 1,189
Equity income of unconsolidated affiliated
retail companies that exceeds distributions (19) (11) (26)
Fixed charges per below 764 664 582
Less interest capitalized during the period (12) (14) (10)
----------- ------------ -----------
Earnings from continuing retail operations $ 183 $ 1,966 $ 1,735
----------- ------------ -----------
----------- ------------ -----------
Fixed Charges:
Interest expense $ 490 $ 442 $ 399
Rent expense - portion of operating rentals
representative of the interest factor 260 206 172
Other 14 16 11
----------- ------------ -----------
$ 764 $ 664 $ 582
----------- ------------ -----------
----------- ------------ -----------
Ratio of income to fixed charges (1) -- 3.0 3.0
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
(1) The deficiency of earnings from continuing retail operations versus fixed
charges was $581 for the fiscal year ended January 26, 1994.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 2 to the Registration Statement on Form
S-3 of our report dated March 15, 1994, which appears on Annex V page V-21 of
Kmart Corporation's definitive Proxy Statement dated April 28, 1994, which is
incorporated by reference in Kmart Corporation's Annual Report on Form 10-K
for the year ended January 26, 1994. We also consent to the incorporation by
reference of our report on the Financial Statement Schedules, which appears on
page 11 of such Annual Report on Form 10-K. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
Price Waterhouse
Detroit, Michigan 48243
May 31, 1994
<PAGE> 1
EXHIBIT 23.5
MARSHALL AND STEVENS
I N C O R P O R A T E D
-----------------------
Appraisers and Valuation Consultants
One Dock Street
Stamford, CT 06902-5803
(203) 357-1668
FAX (203) 358-9311
May 31, 1994
Securities and Exchange Commission
450 Fifth Street, N.W., Stop 3-11
Washington, D.C. 20549
Re: Kmart Corporation - Amendment No. 2 to
Registration Statement on Form S-3 with respect
to $172,300,000 Secured Lease Bonds
Ladies and Gentlemen:
We have provided to the Registrant for inclusion in the Prospectus
constituting part of the above-referenced Registration Statement the information
contained under the caption "DESCRIPTION OF THE PROPERTIES--APPRAISALS" and
hereby consent to the references made to our firm under such caption and under
the caption "EXPERTS" contained therein.
/s/ Marshall and Stevens Incorporated
MARSHALL AND STEVENS INCORPORATED
