<PAGE> 1
As filed with the Securities and Exchange Commission on August 19, 1994
REGISTRATION NO. 33-54043
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
KMART CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN
(State or other jurisdiction of incorporation or organization)
38-0729500
(I.R.S. Employer Identification No.)
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:
Verne C. Hampton, II
Dickinson, Wright, Moon,
Van Dusen & Freeman
500 Woodward Avenue, Suite 4000
Detroit, Michigan 48226
Norman C. Storey
Squire, Sanders & Dempsey
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
James L. Purcell
Paul, Weiss, Rifkind,
Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
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. /X/
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER UNIT PRICE FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through
Certificates................... $250,000,000 100% $250,000,000 $86,206.90*
</TABLE>
* Previously paid.
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<PAGE> 2
Information contained in this preliminary prospectus supplement is subject
to completion or amendment. This preliminary prospectus supplement and
accompanying 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 jurisdiction in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such jurisdiction.
SUBJECT TO COMPLETION, DATED AUGUST 19, 1994
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST , 1994)
$85,000,000*
$ MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1994A-1
$ MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1994A-2
The Mortgage Pass-Through Certificates Series 1994A-1 and the Mortgage
Pass-Through Certificates Series 1994A-2 (collectively, the "Certificates") will
evidence fractional undivided beneficial ownership interests in the assets of
one of two separate Pass-Through Trusts to be formed pursuant to two separate
Pass-Through Trust Agreements between National Tenant Finance Corporation (the
"Depositor") and United States Trust Company of New York, as Pass-Through
Trustee. The Pass-Through Trust Property of each Pass-Through Trust will consist
of Mortgage Notes evidencing the non-recourse obligations of the Borrowers under
the Loan Agreements, each between a Borrower and the Depositor, pursuant to
which the Depositor will loan each Borrower a portion of the proceeds of the
Certificates offered hereby to (i) finance the acquisition and/or construction
of, or to provide permanent financing for, certain real property and
improvements thereon described in this Prospectus Supplement (the "Facilities")
to be leased by Builders Square, Inc. ("Builders"); Borders, Inc. ("Borders");
OfficeMax, Inc. ("OfficeMax"); or The Sports Authority, Inc. ("TSA")
(individually, a "Subsidiary" and collectively, the "Subsidiaries"),
subsidiaries of
KMART CORPORATION
a Michigan corporation ("Kmart") and (ii) pay a pro rata portion of the costs of
issuance of the Certificates. Each Certificate will evidence a fractional
undivided beneficial ownership interest in the assets of the related Pass-
Through Trust and will have no rights, benefits or interests in respect of any
other Pass-Through Trust or the Trust Property held in any other Pass-Through
Trust.
Scheduled Payments of interest paid on the Mortgage Notes held in each
Pass-Through Trust will be passed through to the Certificateholders of such
Pass-Through Trust on the first Business Day of September and March of each year
commencing March 1, 1995 (each, a "Remittance Date"), until the final scheduled
Remittance Date for such Pass-Through Trust. Scheduled Payments of principal
paid on the Mortgage Notes held in each Pass-Through Trust will be passed
through to the Certificateholders of such Pass-Through Trust in scheduled
amounts on the first Business Day of September of each year, commencing on the
initial scheduled principal distribution date for such Pass-Through Trust set
forth below, until the final scheduled Remittance Date for such Trust.
(continued on following page)
<TABLE>
<CAPTION>
MORTGAGE PRINCIPAL INTEREST PRICE TO INITIAL SCHEDULED PRINCIPAL FINAL SCHEDULED
PASS-THROUGH CERTIFICATES AMOUNT RATE PUBLIC DISTRIBUTION DATE REMITTANCE DATE PROCEEDS(1)
- -------------------------- --------- -------- --------- ---------------------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series 1994A-1............ $ % % / / / / $
Series 1994A-2............ $ % % / / / / $
</TABLE>
- -------------------------
(1) The underwriting discount and certain other expenses relating to the
offering, of $ in the aggregate and % of the principal amount of
the Certificates, will be paid by the Borrowers out of the loan amounts.
The proceeds of the sale of the Certificates will be used by the
Pass-Through Trusts to purchase the Mortgage Notes from the Depositor.
Kmart has agreed to indemnify Sutro & Co. Incorporated against certain
liabilities under the Securities Act of 1933. See "PLAN OF DISTRIBUTION"
herein.
THESE CERTIFICATES 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 SUPPLEMENT OR THE 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.
------------------
The Certificates are offered by the underwriter named below when, as and if
issued, delivered to, and accepted by it and subject to its right to reject
orders in whole or in part. It is expected that the Certificates will be
delivered in book-entry form on or about September , 1994, through the Same
Day Funds Settlement System of The Depository Trust Company.
------------------
SUTRO & CO. INCORPORATED
------------------
The date of this Prospectus Supplement is August , 1994.
- -------------------------
* Preliminary; subject to change.
<PAGE> 3
The related Collateral Trust Property described in the Prospectus,
including Mortgages on the Facilities and assignments of the Lease Payments
payable by the Subsidiaries, will be held for the benefit, pari passu, of the
Pass-Through Trusts in a Collateral Trust pursuant to a Collateral Trust
Agreement between the Depositor and United States Trust Company of New York as
Collateral Trustee. The obligations of the Subsidiaries under the Leases are
guaranteed by Kmart pursuant to a Lease Guaranty with respect to each Lease.
Pursuant to the terms of Note Put Agreements, each between Kmart, a Subsidiary
and the Depositor, such Subsidiary, or in the event of such Subsidiary's failure
to do so, Kmart will be obligated to purchase the related Mortgage Notes upon
the occurrence of a Triggering Event.
Kmart has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (File No. 33-54043) (the
"Registration Statement"), which was declared effective by the Commission on
August , 1994, relating to the offering of $250,000,000 aggregate principal
amount of Mortgage Pass-Through Certificates. The Prospectus, dated August ,
1994, included in the Registration Statement is referred to herein as the
"Prospectus." Capitalized terms not otherwise defined herein are defined in the
Glossary in the Prospectus.
ALTHOUGH LEASE PAYMENTS IN AMOUNTS SUFFICIENT TO PERMIT THE TIMELY PAYMENT
OF THE REGULARLY SCHEDULED INSTALLMENTS OF PRINCIPAL OF AND INTEREST ON THE
MORTGAGE NOTES WILL BE A DIRECT OBLIGATION OF A SUBSIDIARY, WHICH LEASE PAYMENTS
WILL BE GUARANTEED BY KMART, NEITHER THE CERTIFICATES NOR THE MORTGAGE NOTES
WILL REPRESENT AN INTEREST IN OR DIRECT OBLIGATION OF, OR WILL BE GUARANTEED BY,
KMART, ANY SUBSIDIARY, ANY PASS-THROUGH TRUSTEE, THE COLLATERAL TRUSTEE, ANY
BORROWER OR THE DEPOSITOR. UNDER CERTAIN CIRCUMSTANCES MORE FULLY DESCRIBED IN
THE PROSPECTUS, A SUBSIDIARY WILL HAVE THE RIGHT TO TERMINATE THE LEASE AND
CEASE MAKING LEASE PAYMENTS THEREUNDER.
SEE "SPECIAL CONSIDERATIONS" IN THE PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING THE CERTIFICATES, INCLUDING,
WITHOUT LIMITATION, THE ANNOUNCEMENT BY KMART OF ITS INTENTION TO SELL MAJORITY
INTERESTS IN BORDERS, OFFICEMAX AND TSA THROUGH INITIAL PUBLIC OFFERINGS OF
STOCK OF THOSE SUBSIDIARIES. SEE "SPECIAL CONSIDERATIONS -- OPTION OF SUBSIDIARY
OR KMART TO TERMINATE LEASE GUARANTY UNDER CERTAIN CIRCUMSTANCES" IN THE
PROSPECTUS.
The Certificates offered by this Prospectus Supplement will constitute
separate Series of Certificates being offered pursuant to the Prospectus of
which this Prospectus Supplement is a part and which accompanies this Prospectus
Supplement. The Prospectus contains material information about this offering
that is not contained herein, and prospective investors are urged to read both
this Prospectus Supplement and the Prospectus in full. Sales of the Certificates
may not be consummated unless the purchaser has received both the Prospectus and
this Prospectus Supplement.
There is currently no secondary market for the Certificates and there can
be no assurance that such a market will develop. See "SPECIAL CONSIDERATIONS" in
the Prospectus.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<PAGE> 4
SUMMARY INFORMATION
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the Prospectus. Capitalized terms used herein and not defined herein or in the
Prospectus shall have the respective meanings assigned to them in the "Glossary"
contained in the Prospectus.
CERTIFICATES OFFERED.......... $85,000,000* Mortgage Pass-Through Certificates
Series 1994A-1 will be scheduled to bear
interest at % per annum and $
Mortgage Pass-Through Certificates Series
1994A-2 will be scheduled to bear interest at
% per annum. Each Certificate represents a
fractional undivided beneficial ownership
interest in the related Pass-Through Trust
Property. See "THE CERTIFICATES" in the
Prospectus and herein.
DEPOSITOR..................... National Tenant Finance Corporation, a limited
purpose financing corporation.
COMPANY....................... Kmart Corporation. See "KMART" in the
Prospectus.
SUBSIDIARIES.................. Builders Square, Inc. ("Builders"); Borders,
Inc. ("Borders"); OfficeMax, Inc.
("OfficeMax"); and The Sports Authority, Inc.
("TSA").
BOOK-ENTRY FORM;
DENOMINATIONS............... The Certificates will be issued in fully
registered form in minimum denominations of
$1,000 and integral multiples thereof, and will
be registered in the name of Cede & Co. as the
nominee of The Depository Trust Company. No
person acquiring an interest in the
Certificates will be entitled to receive a
Definitive Certificate representing such
person's interest in the related Pass-Through
Trust unless Definitive Certificates are
issued, which will only occur under limited
circumstances. See "THE CERTIFICATES -- Book
Entry Registration" in the Prospectus.
CLOSING DATE.................. On or about September , 1994.
REMITTANCE DATES.............. (A) The first Business Day of each October and
April commencing April 1, 1995 and continuing
until the earlier of (i) October 1, with
respect to Series 1994A-1 and October 1,
with respect to Series 1994A-2 or (ii) the
payment in full of such Series, or (B) such
other date when a distribution is made to the
related Certificateholders as a result of a
prepayment, purchase or liquidation of a
related Mortgage Note.
SCHEDULED PAYMENTS OF
INTEREST...................... Scheduled Payments of interest paid on the
Mortgage Notes held in each Pass-Through Trust
will be passed through to the
Certificateholders of such Pass-Through Trust
on each Remittance Date, until the final
scheduled Remittance Date for such Pass-Through
Trust. Distributions on any regularly scheduled
Remittance Date will include interest paid on
the outstanding Mortgage Notes from and
including the first day of the sixth month
immediately preceding such Remittance Date (or
from and including the Closing Date with
respect to the first Remittance Date) through
the end of the calendar month immediately
preceding such Remittance Date. See
- ---------------
* Preliminary, subject to change.
S-3
<PAGE> 5
"THE CERTIFICATES -- Distributions of Scheduled
Payments" herein.
SCHEDULED PAYMENTS OF
PRINCIPAL..................... Scheduled Payments of principal paid on the
Mortgage Notes held in each Pass-Through Trust
will be passed through to the
Certificateholders of each such Pass-Through
Trust in scheduled amounts on the first
Business Day of each October commencing October
1, 1995 and continuing until October 1,
with respect to Series 1994A-1 and commencing
October 1, and continuing until October 1,
with respect to Series 1994A-2. See "THE
CERTIFICATES -- Distributions of Scheduled
Payments" herein.
PASS-THROUGH TRUST
AGREEMENTS.................... The Pass-Through Trust Agreements, each dated
as of September , 1994, between the Depositor
and the Pass-Through Trustee pursuant to each
of which the related Pass-Through Trusts will
be formed, the related Mortgage Notes will be
held and the related Certificates will be
issued. See "THE TRUSTS, PASS-THROUGH TRUSTS
AND COLLATERAL TRUSTS -- The Trust Agreements
and Pass-Through Trust Agreements" in the
Prospectus and "THE PASS-THROUGH TRUSTS AND THE
COLLATERAL TRUST" herein.
PASS-THROUGH TRUSTEE.......... United States Trust Company of New York, a New
York banking corporation. See "THE PASS-THROUGH
TRUSTS AND THE COLLATERAL TRUST -- The
Pass-Through Trustee and Collateral Trustee"
herein.
COLLATERAL TRUST AGREEMENT.... The Collateral Trust Agreement dated as of
September , 1994, between the Depositor and
the Collateral Trustee pursuant to which the
Collateral Trustee will hold the Collateral for
the benefit, pari passu, of the Pass-Through
Trusts. See "THE TRUSTS, PASS-THROUGH TRUSTS
AND COLLATERAL TRUSTS -- The Collateral Trust
Agreements" in the Prospectus and "THE
PASS-THROUGH TRUSTS AND THE COLLATERAL TRUST"
herein.
COLLATERAL TRUSTEE............ United States Trust Company of New York, a New
York banking corporation. See "THE PASS-THROUGH
TRUSTS AND THE COLLATERAL TRUST -- The Pass
Through Trustee and Collateral Trustee" herein.
THE MORTGAGE NOTES............ The aggregate principal amount of the Mortgage
Notes held in the Pass-Through Trust Series
1994A-1 is $ and such Mortgage Notes bear
interest at % per annum. The aggregate
principal amount of the Mortgage Notes held in
the Pass-Through Trust Series 1994A-2 is
$ and such Mortgage Notes bear interest
at % per annum. The overdue interest rate
applicable to any late payments is % per
annum for the Mortgage Notes held in the
Pass-Through Trust Series 1994A-1 and % per
annum for the Mortgage Notes held in the
Pass-Through Trust Series 1994A-2. The interest
rate on the Mortgage Notes held in each Pass-
Through Trust will correspond to the interest
rate on the Certificates evidencing interests
in such Pass-Through Trust. The aggregate
principal amount of such Certificates will
equal the aggregate principal amount of such
Mortgage Notes. See "THE MORTGAGE NOTES, THE
LOAN AGREEMENTS AND
S-4
<PAGE> 6
RELATED DOCUMENTS" in the Prospectus and "THE
MORTGAGE NOTES" herein.
LEASES........................ Each Borrower will own one of the commercial
properties identified herein and will lease
such property to a Subsidiary for use as a
retail outlet except as otherwise specified
herein. The primary term of each Lease will
expire on or after maturity of the related
Mortgage Loan unless earlier terminated due to
certain bankruptcy, casualty loss or
condemnation events. The Lease Payments under a
Lease will be scheduled to be in amounts
sufficient to pay Scheduled Payments on the
related Mortgage Notes. Payment of the Lease
Payments will be guaranteed by Kmart pursuant
to a related Lease Guaranty. See "THE LEASES,
THE LEASE GUARANTIES AND RELATED DOCUMENTS" in
the Prospectus and "THE FACILITIES AND THE
LEASES" herein.
RATINGS....................... It is a condition to their issuance that the
Certificates be rated BBB-or better by Standard
& Poor's Ratings Group ("S&P"). See "RATINGS"
herein and "SPECIAL CONSIDERATIONS -- Limited
Nature of Credit Ratings" in the Prospectus.
S-5
<PAGE> 7
USE OF PROCEEDS
The proceeds from the sale of the Certificates will be used to make
Mortgage Loans to the Borrowers (i) for permanent financing of, or for the
acquisition or the acquisition and construction of, the related Facility and
(ii) for the payment of a pro rata portion of the costs of issuance of the
Certificates. All or a portion of the amount of each Mortgage Loan, less the
respective pro rata share of the issuance costs, will be used to refinance a
short-term loan to the related Borrower, the proceeds of which funded the
construction (in whole or in part) and/or acquisition of the related Facility.
The related Subsidiary and Kmart executed note put agreements in connection with
each short-term loan which entitle the holder of the related promissory note to
require the Subsidiary or Kmart, as the case may be, to purchase the note if it
is not paid at maturity.
THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the terms of two separate
Pass-Through Trust Agreements, each providing for the issuance of a single class
of Certificates designated either Mortgage Pass-Through Certificates Series
1994A-1 or Mortgage Pass-Through Certificates Series 1994A-2. The original
principal amount of and interest rate applicable to each Series of Certificates
are shown on the front cover page of this Prospectus Supplement. The summary of
the terms of the Certificates contained herein does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the provisions
of the Pass-Through Trust Agreements. Reference is made to the Prospectus for
additional information regarding the terms and conditions of the Certificates.
The Certificates will be issued in fully registered form. All payments of
principal and interest will be made by or on behalf of the Pass-Through Trustee
to DTC for distribution to Beneficial Owners of the Certificates through DTC
Participants or Indirect Participants. See "THE CERTIFICATES -- Book-Entry
Registration" in the Prospectus.
DISTRIBUTIONS OF SCHEDULED PAYMENTS
Scheduled Payments of interest paid on the Mortgage Notes held by each
Pass-Through Trust will be passed through to the Certificateholders of such
Pass-Through Trust semiannually on each Remittance Date commencing April 1,
1995, and on the first Business Day of each October and April thereafter until
October 1, with respect to Series 1994A-1 and until October 1, with
respect to Series 1994A-2.
Scheduled Payments of principal paid on such Mortgage Notes will be passed
through to such Certificateholders on the first Business Day of each October,
commencing October 1, 1995, and continuing until October 1, , with respect
to Series 1994A-1, and commencing October 1, , and continuing until October
1, , with respect to Series 1994A-2.
S-6
<PAGE> 8
The schedule of interest and principal payments on the Certificates is as
follows:
<TABLE>
<CAPTION>
SERIES 1994A-1 SERIES 1994A-1 SERIES 1994A-2 SERIES 1994A-2
SCHEDULED SCHEDULED SCHEDULED SCHEDULED SCHEDULED
PAYMENT DATE PRINCIPAL PAYMENT INTEREST PAYMENT PRINCIPAL PAYMENT INTEREST PAYMENT
- --------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
April 1, 1995....................
October 1, 1995..................
April 1, 1996....................
October 1, 1996..................
April 1, 1997....................
October 1, 1997..................
April 1, 1998....................
October 1, 1998..................
April 1, 1999....................
October 1, 1999..................
April 1, 2000....................
October 1, 2000..................
April 1, 2001....................
October 1, 2001..................
April 1, 2002....................
October 1, 2002..................
April 1, 2003....................
October 1, 2003..................
April 1, 2004....................
October 1, 2004..................
April 1, 2005....................
October 1, 2005..................
April 1, 2006....................
October 1, 2006..................
April 1, 2007....................
October 1, 2007..................
April 1, 2008....................
October 1, 2008..................
April 1, 2009....................
October 1, 2009..................
April 1, 2010....................
October 1, 2010..................
April 1, 2011....................
October 1, 2011..................
April 1, 2012....................
October 1, 2012..................
April 1, 2013....................
October 1, 2013..................
April 1, 2014....................
October 1, 2014.................. *
April 1, 2015....................
October 1, 2015..................
April 1, 2016....................
October 1, 2016..................
April 1, 2017....................
October 1, 2017..................
April 1, 2018....................
October 1, 2018..................
April 1, 2019....................
October 1, 2019.................. *
------- ------- ------- -------
Total.......................
============= ============ ============= ============
</TABLE>
- -------------------------
* Final Scheduled Remittance Date
S-7
<PAGE> 9
OTHER DISTRIBUTIONS
The Certificateholders may receive other distributions in the event that a
Mortgage Note is prepaid or purchased. See "THE CERTIFICATES -- Other
Distributions" in the Prospectus.
THE PASS-THROUGH TRUSTS AND THE COLLATERAL TRUST
GENERAL
The Certificates Series 1994A-1 will be issued pursuant to the Pass-Through
Trust Agreement Series 1994A-1, and the Certificates Series 1994A-2 will be
issued pursuant to the Pass-Through Trust Agreement Series 1994A-2
(collectively, the "Pass-Through Trust Agreements"). Each Pass-Through Trustee
will hold the related Mortgage Notes for the benefit of the Certificateholders
of the related Pass-Through Trust. Pursuant to the Collateral Trust Agreement,
the Collateral Trustee will hold the Collateral for the benefit, pari passu, of
the Pass-Through Trusts. See "THE TRUSTS, PASS-THROUGH TRUSTS AND COLLATERAL
TRUSTS" in the Prospectus. The Depositor will provide to any prospective or
actual Certificateholder, upon written request, a copy (without exhibits) of the
related Pass-Through Trust Agreement and the Collateral Trust Agreement.
Requests should be addressed to National Tenant Finance Corporation, 40 North
Central Avenue, Suite 2700, Phoenix, Arizona 85004, Attention: Secretary.
THE PASS-THROUGH TRUSTEE AND COLLATERAL TRUSTEE
United States Trust Company of New York will act as Pass-Through Trustee of
each Pass-Through Trust and will act as Collateral Trustee of the Collateral
Trust. The mailing address of the corporate trust office of the Pass-Through
Trustee and Collateral Trustee is United States Trust Company of New York, c/o
U.S. Trust Company of California, N.A., Suite 2700, 555 South Flower Street, Los
Angeles, California 90071 Attention: Corporate Trust Division.
THE MORTGAGE NOTES
GENERAL
Each Mortgage Note will be issued pursuant to a Loan Agreement between the
Depositor and a Borrower and will be a non-recourse obligation of such Borrower.
Each Borrower will be a special purpose corporation, limited partnership,
limited liability company or other entity that will not be permitted to have any
significant assets or sources of funds other than the related Mortgage Loan and
the related Facility which will be leased to a Subsidiary. No Borrower will
receive the proceeds of more than one Mortgage Loan or own or lease more than
one Facility. A default under one Mortgage Loan will not constitute a default
under any other Mortgage Loan.
The Mortgage Notes Series 1994A-1 will be held by the Pass-Through Trust
Series 1994A-1 and the Mortgage Notes Series 1994A-2 will be held by the
Pass-Through Trust Series 1994A-2. The maturity date of the Mortgage Notes
Series 1994A-1 is September 30, , which is one day prior to the final
scheduled Remittance Date for the Certificates Series 1994A-1, and the maturity
date of the Mortgage Notes Series 1994A-2 is September 30, , which is one
day prior to the final scheduled Remittance Date for the Certificates Series
1994A-2.
Interest on the Mortgage Notes will be calculated on the basis of a 360-day
year consisting of twelve 30-day months. The Mortgage Notes Series 1994A-1 will
bear interest at % per annum and will have an overdue interest rate
applicable to any late payments of % per annum. The Mortgage Notes Series
1992A-2 will bear interest at % per annum and will have an overdue interest
rate applicable to any late payments of % per annum.
S-8
<PAGE> 10
SCHEDULED PAYMENTS
Interest on the Mortgage Notes is payable semiannually on each Due Date
commencing March 31, 1995, and on the last Business Day of each September and
March thereafter until September 30, with respect to Series 1994A-1 and
until September 30, with respect to Series 1994A-2.
Payments of principal on the Mortgage Notes will be made on the last
Business Day of each September, commencing September 30, 1995, and continuing
until September 30, with respect to Series 1994A-1 and commencing September
30, and continuing until September 30, with respect to Series 1992A-2.
PREPAYMENTS AND PURCHASES
The Mortgage Notes are subject to being prepaid or purchased under the
circumstances described in the Prospectus. The Purchase Price for any Mortgage
Note in the event of a prepayment or purchase is the sum of (i) the principal
amount of such Mortgage Note that is to be paid or prepaid ("Called Principal"),
(ii) accrued interest thereon, and (iii) the Make-Whole Premium related thereto,
or, in the case of a purchase pursuant to a Note Put Agreement as a result of a
Lease Guaranty Termination, the lesser of the Make-Whole Premium or the
Termination Premium. See "THE MORTGAGE NOTES, THE LOAN AGREEMENTS AND RELATED
DOCUMENTS -- Prepayments" and "THE NOTE PUT AGREEMENTS" in the Prospectus.
The "Make-Whole Premium" means with respect to any amount of Called
Principal of a Mortgage Note, an amount equal to the positive excess, if any, as
of the Purchase Date of the Discounted Prepayment Value of the Called Principal
of such Mortgage Note over such Called Principal.
The "Termination Premium" means (a) the product of the unpaid principal
balance of the Mortgage Note being purchased multiplied by the applicable
factor: (i) prior to the first anniversary of the date of such Mortgage Note --
, (ii) on or after the first anniversary of such Mortgage Note but before
the second anniversary thereof -- , (iii) on or after the second
anniversary of the date of such Mortgage Note but before the third anniversary
thereof -- , (iv) on or after the third anniversary of the date of
Mortgage Note but before the fourth anniversary thereof -- , or (v) on or
after the fourth anniversary of the date of such Mortgage Note but before the
maturity date -- ; less (b) the unpaid principal balance of such Mortgage
Note.
S-9
<PAGE> 11
THE FACILITIES RELATED TO THE MORTGAGE NOTES
The following table sets forth the Facility location, the Subsidiary that
will be leasing such Facility and the principal amount of the related Mortgage
Notes.
<TABLE>
<CAPTION>
LOCATION SUBSIDIARY PRINCIPAL AMOUNT OF MORTGAGE NOTE
OF RELATED LEASING RELATED -------------------------------------
FACILITY FACILITY SERIES 1994A-1 SERIES 1994A-2
- ------------------------------------------------ --------------- -------------- --------------
<S> <C> <C> <C>
1. Aurora, CO.................................. Builders $ $
2. Upper Merion Township, PA................... Builders
3. Mission Viejo, CA........................... Borders
4. Torrance, CA................................ Borders
5. Westwood, CA................................ Borders
6. Dauphin County, PA.......................... Borders
7. Mesa, AZ.................................... OfficeMax
8. Orlando, FL................................. OfficeMax
9. Miami, FL................................... TSA
10. North Miami Beach, FL....................... TSA
11. Gaithersburg, MD............................ TSA
12. Virginia Beach, VA.......................... TSA
------- -------
Total...................................... $ $
=========== ===========
</TABLE>
THE FACILITIES AND THE LEASES
Each Borrower will own one of the commercial properties listed below and
will lease such property to a Subsidiary for use as a retail outlet except as
otherwise specified. The Lease Payments under a Lease will be scheduled to be in
amounts sufficient to pay Scheduled Payments under the related Mortgage Notes
and will be paid by the Subsidiary directly to the Collateral Trustee. The
primary term of the Leases will commence on the Closing Date and expire on or
after September 30, 2019, except that the primary term of the Lease of the
Facility located in Dauphin County, Pennsylvania will commence on the Closing
Date and expire on or after September 30, 2014 but prior to September 30, 2019,
in each case unless earlier terminated as provided in the Lease. See "THE
LEASES, THE LEASE GUARANTIES AND RELATED DOCUMENTS" in the Prospectus.
The Facilities consist of two Builders Square store locations operated by
Builders Square Group, three Borders Books and Music store locations operated by
the Borders-Walden Group, one Borders Books and Music regional distribution
warehouse location operated by the Borders-Walden Group, two OfficeMax store
locations operated by the OfficeMax Group, and four The Sports Authority store
locations operated by the Sports Authority Group.
S-10
<PAGE> 12
Certain information regarding each of the Facilities is set forth below:
<TABLE>
<CAPTION>
APPROXIMATE DATE PURPOSE
FACILITY LEASE OF CAPITALIZED
SIZE LOT SIZE PAYMENTS MORTGAGE DEBT SERVICE
LOCATION SUBSIDIARY (SQ. FT.) (ACRES) COMMENCE LOAN(1) RESERVE(2)
------------------------ ----------- ----------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. Aurora, CO.............. Builders 107,500 11.4 Closing Date P N/A
2. Upper Merion Township,
PA...................... Builders 109,800 19.6 4/15/95 C,P $
3. Mission Viejo, CA....... Borders 30,000 2.5 Closing Date C,P $ 50,000
4. Torrance, CA............ Borders 35,800 3.3 Closing Date C,P N/A
5. Westwood, CA............ Borders 43,800 0.7 Closing Date C,P N/A
6. Dauphin County, PA...... Borders 108,000 11.8 Closing Date P N/A
7. Mesa, AZ................ OfficeMax 23,500 2.2 9/8/94 C,P $
8. Orlando, FL............. OfficeMax 23,500 2.9 Closing Date A,P N/A
9. Miami, FL............... TSA 42,500 3.9 Closing Date P N/A
10. North Miami Beach, FL... TSA 42,500 3.1 Closing Date P N/A
11. Gaithersburg, MD........ TSA 43,200 4.4 Closing Date P N/A
12. Virginia Beach, VA...... TSA 41,300 3.2 Closing Date P N/A
</TABLE>
- -------------------------
(1) The related Mortgage Loan will be used to acquire the Facility ("A"),
construct the Facility ("C") and/or provide permanent financing for the
Facility ("P").
(2) If Lease Payments do not commence on the date of the related Mortgage Notes,
the amount indicated will be deducted from the proceeds of the related
Mortgage Loan and will be deposited in the related Capitalized Debt Service
Reserve Account. Such amount will be equal to Scheduled Payments due or
accrued on the related Mortgage Notes prior to the commencement of Lease
Payments. In the case of the Facility located in Mission Viejo, California,
the Capitalized Debt Service Reserve consists of a real property tax impound
as discussed below under "Separate Tax Parcels." See "THE TRUSTS, THE
PASS-THROUGH TRUSTS AND THE COLLATERAL TRUSTS -- Accounts -- Capitalized
Debt Service Account" in the Prospectus.
FACILITIES AS TO WHICH CONSTRUCTION IS COMPLETE
The Note Put Agreements related to Facilities with respect to which the
Mortgage Loan is being used solely to provide permanent financing include only
two Triggering Events. Construction of these Facilities is complete and,
consequently, the third Triggering Event, failure to complete construction by
the Completion Date, is inapplicable.
MISSION VIEJO, CALIFORNIA DEED RESTRICTIONS AND COVENANTS
Title to the land in Mission Viejo, California is subject to certain deed
restrictions and covenants, including the following: (i) on or before June 29,
1995, the improvements on the land must be completed, the Facility fully stocked
and fixtured and opened for business as a Borders Books retail store, and (ii)
for a period of six months from the date of the initial opening Borders must
continuously operate the Facility as a Borders Books retail store. Borders is
not obligated pursuant to the related Lease to open, occupy or operate the
store. The deed provides that a breach of the covenants shall not defeat or
render the lien of the related Mortgage invalid, however, the covenants will
bind any new owner, whether by foreclosure or otherwise, and, therefore, may
adversely affect marketability of the property.
S-11
<PAGE> 13
SEPARATE TAX PARCELS
The Mission Viejo, California and Mesa, Arizona properties are each
presently taxed along with other property not owned by the respective Borrower
and not subject to the lien of the related Mortgage. In each case, failure of
the other property owner to pay its share of taxes for the larger tax parcel
will result in a lien on the related Borrower's property which is superior to
the lien of the related Mortgage. Each Borrower has applied to the appropriate
taxing authority for designation of the related Facility as a separate tax
parcel. The Capitalized Debt Service Reserve for the Mission Viejo, California
property consists of an impound sufficient to pay real property taxes on the
larger tax parcel through the May 1, 1995 tax installment. The Mesa, Arizona
property is subject to a reciprocal tax agreement pursuant to which each party
thereto agrees to pay its respective share of the entire tax bill.
FACILITIES UNDER CONSTRUCTION
With respect to the three Facilities under construction that are being
leased to Borders, there will be no Construction Fund Disbursement Agreements.
In each case the related Borrower caused a portion of the proceeds of its
short-term loan discussed in "USE OF PROCEEDS" of this Prospectus Supplement to
be disbursed to Borders to satisfy such Borrower's obligation under the related
Lease to provide a leasehold improvement allowance to Borders. Borders will use
such funds to complete construction of the related Facility. Construction Fund
Disbursement Agreements were entered into in connection with the related short-
term loans discussed in "USE OF PROCEEDS" of this Prospectus Supplement with
respect to the other two Facilities under construction. The remaining balances
of the existing Construction Fund Disbursement Agreements will be pledged to the
Depositor as security for the related Mortgage Loan. The latest date for
completion of construction under the Loan Agreement related to each Facility is
July , 1996. The Escrow Agents under such Construction Fund Disbursement
Agreements are as follows:
<TABLE>
<CAPTION>
LOCATION SUBSIDIARY ESCROW AGENT
- -------------------------------------------- --------------- -------------------------------
<S> <C> <C>
1. Upper Merion Township, PA................ Builders Square Congress Abstract Corporation
2. Mesa, AZ................................. OfficeMax Chicago Title Insurance Company
</TABLE>
PLAN OF DISTRIBUTION
Sutro & Co. Incorporated (the "Underwriter") has agreed, on the terms and
conditions of the Underwriting Agreement, dated the date hereof, between the
Underwriter, the Depositor and Kmart (the "Underwriting Agreement") to purchase
the entire principal amount of the Certificates offered hereby if any
Certificates are purchased. In the event of default by the Underwriter, the
Underwriting Agreement provides that, in certain circumstances, the Underwriting
Agreement may be terminated.
The Depositor will provide in each Loan Agreement with a Borrower that such
Borrower will bear its proportionate share of the costs of issuance of the
Certificates, including (i) the underwriter's discount (i.e., % of the
proceeds of sale of the Certificates, or an aggregate of $ ), (ii) a
shelf expense recovery fee (i.e., one-fourth of 1% of the proceeds of sale of
the Certificates or an aggregate of $ ) to reimburse the Underwriter
for a portion of expenses incurred by it in connection with preparing and filing
the Registration Statement, the exhibits thereto and the Prospectus and (iii)
certain expenses of the offering being made by this Prospectus Supplement (not
to exceed $ in the aggregate); and each Borrower as a condition to
receiving a Mortgage Loan shall authorize the Depositor to apply a portion of
the related Mortgage Loan amount to payment of the Borrower's proportionate
share of such costs of issuance by agreeing that the Underwriter may withhold
from the proceeds of sale of the Certificates, such Borrower's proportionate
share of the costs of issuance of the Certificates.
Kmart and the Depositor have been advised by the Underwriter that it
proposes initially to offer the Certificates to the public at the offering price
set forth on the cover page of this Prospectus Supplement, and to certain
dealers at such price less concessions not in excess of % of the principal
amount evidenced thereby. The Underwriter may allow and such dealers may reallow
discounts not in excess of % of the principal amount evidenced thereby, on
sales to certain other dealers. After the initial public offering, the public
offering price and concessions and discounts to dealers may be changed.
S-12
<PAGE> 14
The distribution of the Certificates by the Underwriter may be effected
from time to time in one or more negotiated transactions, or otherwise, at
varying prices to be determined, in each case, at the time of sale. The
Underwriter may effect such transactions by selling the Certificates to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter. In
connection with the sale of the Certificates, the Underwriter may be deemed to
have received compensation in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Certificates may be deemed to be underwriters and any
commissions received by them and any profit on the resale of the Certificates by
them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933.
The Underwriting Agreement provides that Kmart will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the Underwriter may be
required to make in respect thereof.
LEGAL MATTERS
The legality of the Certificates and certain other legal matters will be
passed upon for the Depositor by Squire, Sanders & Dempsey. Certain legal
matters will be passed upon for Kmart by its general counsel and Dickinson,
Wright, Moon, Van Dusen & Freeman, Detroit, Michigan, and for the Underwriter by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. The material
federal income tax consequences of the Certificates will be passed upon by
Squire, Sanders & Dempsey.
RATINGS
It is a condition to the issuance of the Certificates that the Certificates
be rated BBB- or better by S&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. The security rating assigned to the
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities. See "SPECIAL CONSIDERATIONS" in the
Prospectus.
S-13
<PAGE> 15
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 by 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 AUGUST 19, 1994
PROSPECTUS
$250,000,000
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
-------------------------
The Mortgage Pass-Through Certificates (the "Certificates") offered hereby
and by the related Prospectus Supplements will be offered from time to time in
one or more Series in amounts, at prices and on terms to be determined at the
time of the offering. Capitalized terms used herein and not defined herein shall
have the respective meanings assigned to them in the glossary set forth on pages
53 through 59 of this Prospectus (the "Glossary").
Each Certificate of each Series offered hereby will evidence a fractional
undivided beneficial ownership interest in the assets of a single separate Trust
to be created pursuant to the related Trust Agreement between National Tenant
Finance Corporation, a Delaware corporation (the "Depositor"), and the Trustee
identified in the related Prospectus Supplement. If more than one Series of
Certificates is offered by a related Prospectus Supplement, each such Series
will be issued pursuant to a single separate Trust.
The Trust Property of each Trust will include, but not be limited to, one or
more Mortgage Notes (each, a "Mortgage Note," and collectively, the "Mortgage
Notes"). Generally, each such Mortgage Note will evidence the non-recourse
obligation of a Borrower under a Loan Agreement between such Borrower and the
Depositor pursuant to which the Depositor will loan a portion of the proceeds of
the offering of the related Series of Certificates to such Borrower (i) to
finance the acquisition or the acquisition and construction of, or to provide
permanent financing for, a facility described in the Prospectus Supplement (a
"Facility") which will be leased for use as a retail store to a tenant
("Tenant") which will be
KMART CORPORATION
("Kmart") or a subsidiary (a "Subsidiary") of Kmart identified in the Prospectus
Supplement and (ii) to pay a pro rata portion of the costs of issuance of the
Certificates.
The Trust Property will generally also include, with respect to each
Facility, the following Collateral for the related Mortgage Note(s): (i) a
Mortgage on such Facility securing each such Mortgage Note; (ii) all of the
Depositor's rights under the Loan Agreement pursuant to which the related
Mortgage Note(s) were issued; (iii) an assignment of the related Lease, Lease
Payments and (if the Tenant is a Subsidiary) Lease Guaranty; (iv) a pledge of
certain moneys held in certain funds established pursuant to the Trust
Agreement, or Collateral Trust Agreement, if applicable; (v) a Note Put
Agreement requiring the Tenant and Kmart (if the Tenant is a Subsidiary) to
purchase the related Mortgage Note(s) upon the occurrence of a Triggering Event;
(vi) an assignment of the Borrower's right, title and interest in and to any
Construction Fund Disbursement Agreement and Construction Fund Disbursement
Agreement-Common Area related to such Facility; (vii) a pledge of certain
investments of fund balances held in the Trust, or the Collateral Trust if
applicable, and income earned thereon; and (viii) any other Loan Documents.
In some cases a Loan Agreement may provide that a Mortgage Loan will be
evidenced by two or more Mortgage Notes having different maturities. In such
event, (i) each such Mortgage Note (and, if Mortgage Notes of different
maturities are issued pursuant to two or more Loan Agreements, all of such
Mortgage Notes having the same maturity) will be held by a separate Pass-Through
Trust, and, in the case of Mortgage Notes issued under two or more Loan
Agreements, all Mortgage Notes held by each separate Pass-Through Trust will
have the same maturity, (ii) each Certificate will evidence a fractional
undivided beneficial ownership interest in the assets of the related
Pass-Through Trust and will have no rights, benefits or interests in respect of
any other Pass-Through Trust or the Pass-Through Trust Property held in any
other Pass-Through Trust, and (iii) the Collateral securing such Mortgage Notes
will be held by a Collateral Trustee for the benefit, pari passu, of all
Pass-Through Trusts holding any of the Mortgage Notes secured by such
Collateral.
Scheduled Payments on the Mortgage Notes will be passed through to the
Certificateholders of each Trust on the dates and in the amounts set forth in
the related Prospectus Supplement until the final scheduled Remittance Date for
such Trust. The maturity date of the Mortgage Notes acquired by each Trust will
correspond to the final scheduled Remittance Date applicable to the Certificates
evidencing interests in such Trust. Each Trust will acquire Mortgage Notes
having an interest rate corresponding to the interest rate on the Certificates
evidencing interests in such Trust. The aggregate principal amount of the
Certificates evidencing interests in each Trust will be equal to the aggregate
principal amount of the Mortgage Notes held in such Trust.
The Prospectus Supplement relating to a Series of Certificates will set
forth, among other things, the following information if applicable to such
Series: (i) the aggregate principal amount, interest rate and authorized
denominations of such Certificates, (ii) certain information concerning the
Mortgage Notes and the nature of the related Facilities, (iii) the Remittance
Dates on which periodic distributions will be made to Certificateholders, and
(iv) additional information with respect to the plan of distribution of such
Certificates. The Prospectus Supplement will also set forth whether the Mortgage
Note(s) have the same maturity, in which case the Collateral will be held by the
related Trust, or whether the Mortgage Notes have different maturities, in which
case the Collateral will be held by the related Collateral Trust.
ALTHOUGH LEASE PAYMENTS IN AMOUNTS NECESSARY TO PERMIT THE TIMELY PAYMENT OF
THE REGULARLY SCHEDULED INSTALLMENTS OF PRINCIPAL OF AND INTEREST ON THE
MORTGAGE NOTE(S) WILL BE A DIRECT OBLIGATION OF A TENANT, WHICH LEASE PAYMENTS
WILL BE GUARANTEED BY KMART IF IT IS NOT THE TENANT, NEITHER THE CERTIFICATES
NOR THE MORTGAGE NOTES WILL REPRESENT AN INTEREST IN OR A DIRECT OBLIGATION OF,
OR BE GUARANTEED BY, KMART, ANY SUBSIDIARY, ANY TRUSTEE, ANY PASS-THROUGH
TRUSTEE, ANY COLLATERAL TRUSTEE, ANY BORROWER OR THE DEPOSITOR.
THE CERTIFICATES WILL REPRESENT AN INTEREST IN THE RELATED TRUST ONLY, AND
WILL NOT BE GUARANTEED BY ANY GOVERNMENTAL AGENCY OR DEPARTMENT, OR BY THE
DEPOSITOR, KMART, ANY SUBSIDIARY, THE TRUSTEE, THE COLLATERAL TRUSTEE, THE
PASS-THROUGH TRUSTEE, OR BY ANY OF THEIR RESPECTIVE AFFILIATES, OR BY ANY OTHER
PERSON OR ENTITY.
SEE "SPECIAL CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BEFORE PURCHASING THE CERTIFICATES OF ANY SERIES.
-------------------------
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.
-------------------------
The Certificates are offered when, as and if delivered to and accepted by
Sutro & Co. Incorporated and the other underwriters, if any, subject to prior
sale, withdrawal or modification of the offer without notice, the approval of
counsel and other conditions. Retain this Prospectus for future reference. This
Prospectus may not be used to consummate sales of the Certificates offered
hereby unless accompanied by a Prospectus Supplement.
SUTRO & CO. INCORPORATED
THE DATE OF THIS PROSPECTUS IS AUGUST , 1994
<PAGE> 16
AVAILABLE INFORMATION
Kmart Corporation ("Kmart" or the "Company") is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at 7 World Trade Center, 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 upon
payment of prescribed rates. Kmart's common stock is listed on the New York
Stock Exchange, the Chicago Stock Exchange and the Pacific Stock Exchange. Such
reports, proxy statements and other information can also be inspected and copied
at the New York Stock Exchange, 20 Broad Street, 7th Floor, New York, New York
10005.
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 Certificates. 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. 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, D.C. 20549, and copies thereof may be obtained from
the Commission upon payment of prescribed rates.
-------------------------
REPORTS TO CERTIFICATEHOLDERS
The Trustee will furnish to Certificateholders of each Series periodic
statements containing information with respect to principal and interest
distributions on the Certificates of that Series. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. See "THE TRUSTS, PASS-THROUGH TRUSTS AND
COLLATERAL TRUSTS -- The Trust Agreements and Pass-Through Trust Agreements --
Reports to Certificateholders." Unless and until Definitive Certificates are
issued, such statements will be sent to Cede & Co., the nominee of The
Depository Trust Company, as registered holder of the Certificates. See "THE
CERTIFICATES -- Book-Entry Registration."
-------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-327) pursuant
to the Exchange Act are incorporated or deemed to be incorporated herein by
reference.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
January 26, 1994, its Quarterly Report on Form 10-Q for the quarter ended
April 27, 1994, its Form 8-K filed on June 8, 1994, and its Form 8-K filed
on August 19, 1994; and
2. All other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering of the
Certificates.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for all purposes to the extent that a statement contained in any other
subsequently filed document which is also, or is deemed to be, incorporated by
reference, modifies or replaces such statement. Any such statement so modified
or superseded shall not be deemed to constitute a part of this Prospectus,
except as so modified or superseded.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, on written or oral request of such person, a copy
(without exhibits, unless such exhibits are specifically incorporated by
reference into such document(s)) of any or all documents incorporated by
reference in this Prospectus. Requests for such copies should be addressed to
Kmart Corporation, Corporate Reporting Department, 3100 West Big Beaver Road,
Troy, Michigan 48084, telephone number (810) 643-1093.
2
<PAGE> 17
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to detailed
information appearing elsewhere in, or incorporated by reference in, this
Prospectus and by reference to the information with respect to each Series of
Certificates contained in the related Prospectus Supplement and in the Trust
Agreement, the Pass-Through Trust Agreement, the Collateral Trust Agreement, if
applicable, the Mortgage Note(s) and the Loan Documents with respect to such
Series. The forms of the Trust Agreement, the Pass-Through Trust Agreement, the
Collateral Trust Agreement and certain of the Loan Documents, each in
substantially the form in which it will be used, have been filed as exhibits to
the Registration Statement of which this Prospectus is a part.
Capitalized terms used herein and not defined herein shall have the
respective meanings assigned to them in the Glossary.
CERTIFICATES OFFERED. . . . . . Mortgage Pass-Through Certificates (the
"Certificates"), issuable in Series, all as
more fully described in the related Prospectus
Supplement. The Certificates of each Series
will represent fractional undivided beneficial
ownership interests in a single separate Trust
established for the benefit of the
Certificateholders of such Series. If more than
one Series is offered by a related Prospectus
Supplement, such Series will be issued pursuant
to separate Trusts and each Certificate will
represent a fractional undivided beneficial
ownership interest in one of such separate
Trusts. Each Certificate will evidence a
fractional undivided beneficial ownership
interest in the assets of one Trust and will
have no rights, benefits or interests in
respect of any other Trust or the Trust
Property held in any other Trust. The
Certificates will mature on the date specified,
and will be subject to prepayment
distributions, as described herein, as a
consequence of the prepayment, sale or other
liquidation of the Mortgage Note(s) held by the
related Trust. See "THE CERTIFICATES."
BOOK-ENTRY REGISTRATION . . . . The Certificates will be issued in
fully-registered form only and in denominations
of $1,000 or integral multiples thereof unless
otherwise specified in the related Prospectus
Supplement. Each Series will be represented by
one or more global Certificates registered in
the name of Cede & Co. as the nominee of The
Depository Trust Company. No person acquiring
an interest in the Certificates of such Series
will be entitled to receive a Definitive
Certificate representing such person's interest
in the related Trust, except in the event that
Definitive Certificates are issued under the
limited circumstances described herein. See
"THE CERTIFICATES -- Book-Entry Registration."
DISTRIBUTIONS . . . . . . . . . Distributions from funds held in the
Certificate Account established pursuant to
each Trust Agreement will be made by the
Trustee to the Certificateholders to pay Debt
Service on the Remittance Dates specified in
the related Prospectus Supplement. Interest
will be paid on each Certificate at the rate of
interest specified in the related Prospectus
Supplement and will be calculated on the basis
of a 360-day year consisting of twelve 30-day
months. See "THE CERTIFICATES -- Distribution
of Scheduled Payments."
THE COMPANY . . . . . . . . . . Kmart is one of the world's largest
mass-merchandise retailers. The Subsidiaries
consist of five companies which are
subsidiaries of
3
<PAGE> 18
Kmart: Borders, Inc., which operates large
format book superstores; Walden Book Company
Inc., which operates mall-based bookstores;
Builders Square, Inc., which operates home
improvement superstores; OfficeMax Inc., which
operates office supply superstores; and The
Sports Authority, Inc., which operates large
format sporting goods megastores. See "KMART."
DEPOSITOR The Depositor is a limited purpose finance
corporation formed solely for the purpose of
facilitating the financing and sale of mortgage
loans. See "THE DEPOSITOR."
THE TRUSTS, PASS-THROUGH
TRUSTS AND COLLATERAL TRUSTS Each Series of Certificates will be issued
pursuant to a Trust Agreement between the
Depositor and the Trustee identified in the
related Prospectus Supplement. Each Trust will
hold one or more Mortgage Notes, evidencing one
or more Mortgage Loans.
Each Mortgage Loan will be made to a separate
Borrower, pursuant to a separate Loan
Agreement, and with respect to a separate
Facility. If the Loan Agreement(s) provide for
Mortgage Loan(s) evidenced by Mortgage Note(s)
of one maturity, then, pursuant to a single
Trust Agreement, the Depositor will convey to
the Trustee, without recourse, all of its
right, title and interest in and to such
Mortgage Loan(s) and the related Mortgage
Note(s) and Loan Documents. If the Loan
Agreement(s) provide for Mortgage Notes having
different maturities, then (i) all of such
Mortgage Notes having the same maturity will be
conveyed to a separate Trust ("Pass-Through
Trust") which will be established pursuant to a
form of Trust Agreement sometimes referred to
herein as a "Pass-Through Trust Agreement" and
(ii) the Collateral for all of the Mortgage
Notes issued pursuant to such Loan Agreement(s)
will be conveyed by the Depositor to a single
Collateral Trust pursuant to a Collateral Trust
Agreement for the benefit, pari passu, of all
Pass-Through Trusts holding any of the Mortgage
Notes secured by such Collateral. If the
Mortgage Notes are issued pursuant to more than
one Loan Agreement, the Mortgage Notes relating
to separate Loan Agreements will not be
cross-collateralized or subject to
cross-default provisions. See "THE TRUSTS,
PASS-THROUGH TRUSTS AND COLLATERAL TRUSTS."
The maturity date of the Mortgage Notes
acquired by each Trust will correspond to the
final scheduled Remittance Date applicable to
the Certificates evidencing interests in such
Trust. Each Trust will acquire Mortgage Notes
having an interest rate corresponding to the
interest rate on the Certificates evidencing
interests in such Trust. The aggregate
principal amount of the Certificates evidencing
interests in each Trust will be equal to the
aggregate principal amount of the Mortgage
Notes held in such Trust.
The Trust Property held by either the Trust or
the Collateral Trust will generally also
include, with respect to each Facility, the
following Collateral for the related Mortgage
Note(s): (i) a Mortgage on such Facility; (ii)
all of the Depositor's rights under the Loan
Agreement pursuant to which the related
Mortgage Note(s) were issued; (iii) an
assignment of the related Lease,
4
<PAGE> 19
Lease Payments and, if the related Tenant is a
Subsidiary, Lease Guaranty; (iv) a pledge of
certain moneys held in certain funds
established pursuant to the Trust Agreement, or
Collateral Trust Agreement if applicable, (v) a
Note Put Agreement requiring the Tenant and
Kmart (if the Tenant is a Subsidiary) to
purchase the related Mortgage Note(s) upon the
occurrence of a Triggering Event; (vi) an
assignment of the Borrower's right, title and
interest in and to any Construction Fund
Disbursement Agreement and any Construction
Fund Disbursement Agreement-Common Area related
to such Facility; (vii) a pledge of certain
investments of fund balances held in the Trust
or the Collateral Trust, if applicable, and
income earned thereon; and (viii) any other
Loan Documents. See "STRUCTURE OF THE
FINANCINGS" and "THE TRUSTS, PASS-THROUGH
TRUSTS AND COLLATERAL TRUSTS."
MORTGAGE NOTES Each Mortgage Note will evidence the
non-recourse obligation of a Borrower under a
Loan Agreement between such Borrower and the
Depositor pursuant to which the Depositor will
loan a portion of the proceeds of the offering
of the related Series of Certificates to such
Borrower to (i) finance the acquisition or the
acquisition and construction of, or to provide
permanent financing for, a Facility which will
be leased to a Tenant and (ii) pay a pro rata
portion of the costs of issuance of the
Certificates. Scheduled Payments on the
Mortgage Notes will be passed through to the
Certificateholders of each Trust on the dates
set forth in the related Prospectus Supplement
until the final scheduled Remittance Date for
such Trust. The Mortgage Notes will be subject
to prepayment prior to maturity as described
herein. Although the Mortgage Note(s) will not
be a direct obligation of, or guaranteed by,
Kmart or a Subsidiary, Lease Payments payable
by the Tenant of the related Facility (the
payment of which will be guaranteed by Kmart if
a Subsidiary is the Tenant), together with any
payments to be made from funds on deposit in
any related Capitalized Debt Service Account,
will be scheduled to be sufficient to pay the
Scheduled Payments on the Mortgage Notes which,
in turn, will be scheduled to be sufficient to
pay Debt Service on the Certificates. See "THE
MORTGAGE NOTES, THE LOAN AGREEMENTS AND RELATED
DOCUMENTS."
NOTE PUT AGREEMENT Kmart, a Subsidiary (if it is the Tenant) and
the Depositor will enter into a Note Put
Agreement with respect to each Mortgage Loan.
Each Note Put Agreement will provide that, in
the event (a)(i) a Tenant fails to pay when due
any Lease Payment within 10 days (or 30 days if
the Tenant is Kmart) after notice to the Tenant
of such default and (ii) if the Tenant is a
Subsidiary, Kmart fails to pay any such Lease
Payment within 30 days after notice to Kmart of
such Subsidiary's failure to do so (which
notice may be given concurrently with the
corresponding notice to such Subsidiary), (b)
completion of construction of the Facility to
be leased to the Tenant does not occur prior to
the Completion Date, or (c) if the Tenant is a
Subsidiary, a Lease Guaranty Termination occurs
(each, a Triggering Event), the Trustee, or the
Collateral Trustee if applicable, will have the
right to require the Tenant, and in the event
of the Tenant's failure to do so when the
Tenant is
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<PAGE> 20
a Subsidiary, to require Kmart to purchase the
related Mortgage Note(s) in whole (but not in
part) at the Purchase Price (which Purchase
Price will include the Make-Whole Premium or,
under certain circumstances, the Termination
Premium). In the event the Trustee, or the
Collateral Trustee if applicable, exercises
such right, the Purchase Price will be
deposited with the Trustee, or initially with
the Collateral Trustee if applicable, and on
the next Business Day with the Pass-Through
Trustee, and such amount, less any costs and
expenses incurred by the Trustee, the Pass-
Through Trustee or the Collateral Trustee in
connection with the exercise of their rights
under the Note Put Agreement, will be
distributed to the related Certificateholders.
If the Trust holds no other Mortgage Notes,
such distribution will be the final
distribution with respect to that Series of
Certificates. If the Trust holds other Mortgage
Notes, subsequent Debt Service on the
Certificates will be adjusted as provided in
the Trust Agreement. All of the Depositor's
right, title and interest in and to the Note
Put Agreement will be assigned to the Trustee,
or to the Collateral Trustee if applicable. See
"THE NOTE PUT AGREEMENTS."
LEASE Each Facility will be leased to a Tenant by the
related Borrower. The term of each Lease,
excluding renewal or extension terms, will
expire on or after maturity of the related
Mortgage Loan unless earlier terminated due to
certain bankruptcy, casualty loss or
condemnation events. Lease Payments will be
scheduled to be in amounts sufficient to pay
the Scheduled Payments on the related Mortgage
Notes, and such Scheduled Payments will be
scheduled to be in amounts sufficient to pay
Debt Service on the related Certificates. The
Lease Payments will be made by the related
Tenant directly to the Trustee or, if Mortgage
Notes of different maturities are issued by the
related Borrower, to the Collateral Trustee.
The obligation of the Tenant to make Lease
Payments will commence on the date the related
Mortgage Loan is made, if no construction of
the Facility is required, or, if construction
of the Facility is required, on the date
specified in the Lease regardless of whether
construction has been completed. All of the
Borrower's right, title and interest in and to
the Lease will be assigned to the Trustee, or
the Collateral Trustee if applicable. See "THE
LEASES, LEASE GUARANTIES AND RELATED DOCUMENTS"
and "THE MORTGAGE NOTES, THE LOAN AGREEMENTS
AND RELATED DOCUMENTS -- The Assignments of
Leases and Rents."
LEASE GUARANTY Kmart will enter into a Lease Guaranty with
respect to each Facility leased by a Borrower
to a Subsidiary. Pursuant to such Lease
Guaranty, Kmart will guarantee to the Borrower
the full and punctual payment, performance and
observance by the related Subsidiary of all of
the terms, conditions, covenants and
obligations to be performed and observed by the
Subsidiary under the related Lease. Except for
Kmart's or the Subsidiary's right to terminate
the Lease Guaranty in certain specific
circumstances stated in the Lease Guaranty, the
liability of Kmart under the Lease Guaranty
will be irrevocable so long as the Lease is not
terminated as permitted in the Lease. All of
the Borrower's right, title and
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<PAGE> 21
interest in and to the Lease Guaranty will be
assigned to the Trustee, or the Collateral
Trustee if applicable. See "THE LEASES, THE
LEASE GUARANTIES AND RELATED DOCUMENTS -- The
Lease Guaranty Agreements" and "THE MORTGAGE
NOTES, THE LOAN AGREEMENTS AND RELATED
DOCUMENTS -- The Assignments of Leases and
Rents."
FEDERAL INCOME TAX
CONSEQUENCES A Trust should be classified as a grantor trust
and not as an association taxable as a
corporation for federal income tax purposes.
Each Beneficial Owner will be treated as the
owner of a fractional undivided interest in the
Trust Property and, as such, will be required
to report a pro rata share of the income of
such Trust on its federal income tax return in
accordance with such Beneficial Owner's method
of accounting. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
ERISA CONSIDERATIONS A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Internal Revenue Code of 1986, as amended
(the "Code"), should review carefully with its
legal counsel whether the purchase or holding
of the Certificates could give rise to a
transaction prohibited or otherwise not
permissible under ERISA or the Code. See "ERISA
CONSIDERATIONS."
LEGAL INVESTMENT Institutions whose investment authority is
subject to review by federal or state
regulatory authorities should consult with
their counsel or the applicable authorities to
determine whether and to what extent the
Certificates constitute legal investments for
them. The Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984, as amended. See "LEGAL INVESTMENT
CONSIDERATIONS."
USE OF PROCEEDS The proceeds from the sale of each Series of
Certificates will be used by the Depositor to
make Mortgage Loans to Borrowers to (i) finance
the acquisition or acquisition and construction
of, or to provide permanent financing for,
Facilities and (ii) pay a pro rata portion of
the costs of issuance of the Certificates. In
the case of Mortgage Loans made to finance the
construction of Facilities, a portion of the
Mortgage Loan proceeds will be deposited in a
Capitalized Debt Service Account maintained in
a Trust or Collateral Trust, if applicable. See
"USE OF PROCEEDS."
RATING Unless otherwise specified in the related
Prospectus Supplement, each Series of
Certificates offered by means of this
Prospectus and the related Prospectus
Supplement will have an Investment Grade Rating
from the rating agency or rating agencies
identified in such Prospectus Supplement. See
"SPECIAL CONSIDERATIONS -- Limited Nature of
Credit Ratings."
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<PAGE> 22
SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with the purchase of Certificates.
NON-RECOURSE OBLIGATIONS OF SPECIAL PURPOSE BORROWER; RELIANCE ON LEASE PAYMENTS
Each Borrower will be a special purpose entity without assets other than
the related Facility and its interest as landlord under the related Lease, and
the related Mortgage Note(s) will be non-recourse obligation(s) of such
Borrower. Accordingly, the only source of payments under, or with respect to,
any Mortgage Note will be the related Lease Payments (which will be guaranteed
by Kmart if the Tenant is a Subsidiary), the proceeds of any foreclosure of the
related Facility, the right, under certain circumstances, to sell such Mortgage
Note to the related Tenant or to Kmart (if the Tenant is a Subsidiary) pursuant
to the related Note Put Agreement, and, under certain other circumstances,
Insurance Proceeds or Condemnation Proceeds payable in respect of such Facility.
Although the Lease Payments under each Lease, together with amounts in the
related Capitalized Debt Service Account, if any, will be scheduled to be in
amounts sufficient to pay the Scheduled Payments under the related Mortgage
Note(s), there can be no assurance, in the event of a default under such Lease
and the related Lease Guaranty and Note Put Agreement, or a termination of such
Lease in connection with a casualty, condemnation or Borrower bankruptcy, that
the value of the related Facility, and, if applicable, the amount of Insurance
Proceeds or Condemnation Proceeds, will be sufficient to permit the payment in
full of all amounts due under the Mortgage Note(s), or that Insurance Proceeds
or Condemnation Proceeds will be received in time to make Scheduled Payments on
the dates when due.
OPTION OF TENANT TO TERMINATE LEASE UNDER CERTAIN CIRCUMSTANCES
Each Lease will provide that in the event that all of the related Facility
is permanently expropriated, the Lease will automatically terminate. If (i) the
points of ingress and egress to the public roadways are materially impaired by a
permanent expropriation by a public or quasi-public authority (with no
reasonable replacement points of ingress and egress provided) so as to render
such Facility unsuitable for its intended use, (ii) less than the whole, but
more than 10% or such other higher percentage specified in the Prospectus
Supplement, of the square footage of the building or land constituting the
Facility is permanently expropriated by public or quasi-public authority, or
(iii) damage or destruction to the Facility takes place within two years prior
to the expiration date of the initial term of the Lease and the cost of
restoration exceeds 50% of the fair market value of the Facility immediately
prior to the time such damage or destruction took place, the Tenant will have
the right to terminate the Lease. If the Lease automatically terminates or the
Tenant exercises its right to terminate the Lease, the Tenant will have no
further obligation to make Lease Payments, the related Lease Guaranty (if the
Tenant is a Subsidiary) will be terminated, and the related Mortgage Note(s)
will automatically become due and payable, together with accrued but unpaid
interest and the Make-Whole Premium. Such termination of the Lease and Lease
Guaranty (if the Tenant is a Subsidiary) and the acceleration of the maturity of
the related Mortgage Note(s) will not give the Trustee or Collateral Trustee, if
applicable, the right to sell such Mortgage Note(s) under the related Note Put
Agreement. Accordingly, the only source from which to pay the amounts due under
such Mortgage Note(s) will be any Condemnation Proceeds or Insurance Proceeds
and the proceeds of foreclosure or other sale. There can be no assurance that
such proceeds will be sufficient to pay all amounts then due under the Mortgage
Note(s), although, in the case of a termination resulting from damage or
destruction during the last two years of the term of the Lease, the resulting
Insurance Proceeds may, in light of the fact that each Mortgage Note fully
amortizes during its term, be sufficient to pay all amounts due under such
Mortgage Note, except in the case of extraordinary devaluation of the Facility
during the term of such Mortgage Note.
OPTION OF SUBSIDIARY OR KMART TO TERMINATE LEASE GUARANTY UNDER CERTAIN
CIRCUMSTANCES
Each Lease Guaranty will provide that at the option of the related
Subsidiary or Kmart, the obligations of Kmart under the Lease Guaranty may be
terminated upon the occurrence of any of the following events: (a) the related
Subsidiary achieves Investment Grade Status without regard to Kmart's credit
rating, (b) the related Lease is assigned to a third party and such third party,
or an affiliate of such third party which has
8
<PAGE> 23
guaranteed such third party's obligations under the related Lease, has achieved
or subsequently achieves Investment Grade Status, or (c) more than 50% of the
issued and outstanding capital stock of the related Subsidiary is acquired by a
third party and such third party, or affiliate thereof, which has guaranteed the
Subsidiary's obligations under the related Lease, has achieved or subsequently
achieves Investment Grade Status. Termination of the Lease Guaranty as a result
of either (a), (b) or (c) above constitutes a Triggering Event pursuant to the
related Note Put Agreement and unless the holders of Certificates evidencing not
less than a 66 2/3% Percentage Interest in the related Mortgage Note(s) direct
the Trustee not to exercise its rights under the Note Put Agreement, the related
Subsidiary, or upon the failure of the Subsidiary to do so, Kmart must purchase
the related Mortgage Note(s). A Termination Premium or, if less, a Make-Whole
Premium is payable in connection with any such purchase. In the event the
Trustee is directed by 66 2/3% Percentage Interest of holders of Certificates
not to exercise its rights under the Note Put Agreement, and the long-term
unsecured debt rating of the (i) Subsidiary or (ii) third party assignee and the
new guarantor is lower than the long-term unsecured debt rating of Kmart, the
Investment Grade Rating of the Certificates will be downgraded to the greater of
the Investment Grade Rating of such Subsidiary or third party assignee or of the
new guarantor.
Although Kmart has announced plans to sell majority interests in
Borders/Walden, OfficeMax and The Sports Authority through initial public
offerings of stock, it is not likely that the proposed offerings, if completed,
will have an adverse effect on the Certificateholders. The related Lease
Guaranties may be terminated as a result of any such sale only if a single
investor, or affiliate thereof, which is investment grade rated purchases 51% of
the stock of the Subsidiary and either Kmart or the Subsidiary elects to
terminate the related Lease Guaranties. See "THE LEASES, THE LEASE GUARANTIES
AND RELATED DOCUMENTS -- The Lease Guaranty Agreements" and "THE NOTE PUT
AGREEMENTS."
BANKRUPTCY
In the event that a bankruptcy petition should be filed by or against a
Borrower under the Bankruptcy Code, the rights of Certificateholders may be
adversely affected as a result of the Borrower's exercise of certain rights and
remedies available to a debtor-in-possession under the Bankruptcy Code. If a
Borrower is in bankruptcy and rejects the related Lease, the related Consent and
Agreement will require the related Tenant to elect under Section 365(h) of the
Bankruptcy Code to remain in possession of the Facility, and to continue making
Lease Payments, for the remaining term of the Lease. However, if notwithstanding
such election, the Tenant is deprived of possession of the Facility as a result
of the Lease having been rejected by such Borrower in the bankruptcy proceeding,
such Tenant and Kmart (if the Tenant is a Subsidiary) will have no further
obligation to make Lease Payments or any further obligations under such Lease,
the related Lease Guaranty or the related Note Put Agreement.
In the event that a Tenant should become the subject of a bankruptcy
proceeding, such Tenant as a debtor-in-possession, or its bankruptcy trustee,
may reject the related Lease, thereby leaving the Borrower with an unsecured
claim for damages limited to an 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 such Lease (plus rent already due
but unpaid). Alternatively, such Lease may be recharacterized by the bankruptcy
court as a secured loan to such Tenant, thereby subjecting the Borrower (and,
indirectly, the Trustee or Collateral Trustee) to certain risks associated with
being a secured creditor of such Tenant. In the event of bankruptcy proceedings
instituted by or against a Subsidiary which is a Tenant, Kmart would continue to
be obligated under the related Lease Guaranty for the payment of the
Subsidiary's obligations under the Lease, and Kmart would remain obligated under
the Note Put Agreement to purchase the related Mortgage Note(s) upon the
occurrence of a Triggering Event. See "CONSEQUENCES OF BANKRUPTCY OF A TENANT OR
A BORROWER."
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of their investment or will continue for the
life of the Certificates. In addition, the market value of Certificates of each
Series will fluctuate with changes
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<PAGE> 24
in prevailing interest rates. Consequently, sale of the Certificates in any
secondary market which may develop may be at a discount from par value or from
their purchase price. Certificateholders have no optional redemption rights.
LIMITED NATURE OF CREDIT RATINGS
Any rating assigned to the Certificates by a rating agency will reflect
only such rating agency's assessment of the likelihood that timely distributions
will be made with respect to such Certificates. Such rating will not constitute
an assessment of the risk that the Leases will be terminated, or of the
likelihood that principal prepayments on the Mortgage Notes comprising part of
the Trust Property will be made by Borrowers, or address the effect of any
Make-Whole Premium or Termination Premium on the anticipated yield for any
Series. As a result, such rating will not address the possibility that a
prepayment of a Mortgage Loan may cause such investor to experience a lower than
anticipated yield.
Kmart will be either the Tenant under, or (unless the guaranty is
terminated as described above) the guarantor of, all of the Leases, and, as
such, may become the ultimate source of payment on the Mortgage Loans and,
therefore, the ultimate source of payments on the Certificates. Because of this
dependence upon Kmart for the ultimate payment of the Certificates, the ratings
on the Certificates are directly related to the credit of Kmart. It should,
therefore, be expected that a reduction or withdrawal of the debt ratings of
Kmart will adversely affect the ratings on the Certificates. The long-term
unsecured debt obligations of Kmart are currently rated "BBB+" by S&P, "A3" by
Moody's and "A-" by Duff & Phelps Credit Rating Co.
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 interest 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 has been presented as a discontinued operation 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
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<PAGE> 25
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.
RECENT DEVELOPMENTS
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.
The Store Restructuring and Other Charges related to the U.S. General
Merchandise Operations were principally for specifically-identified relocations
which will result in replacing smaller, less productive stores with larger
stores in better locations. These new stores are expected to generate improved
sales and gross margin which will be partially offset by increased store
occupancy and depreciation expense. The Kmart Group also expects that there will
be continued sales and profitability improvement at the stores modernized to
date. In 1993, modernized stores (including new stores, relocations, expansions
and refurbishments) outperformed non-modernized stores by 17% in sales, 12% in
customer count, 16% in units sold and 6% in transaction amounts, and the Super
Kmart Center stores open the full year averaged in excess of $55 million in
sales. These larger-format stores are a key part of the Kmart Group's strategy
to compete effectively in the marketplace. The Kmart Group will integrate these
larger-format stores and the Super Kmart Center program into the remaining U.S.
Kmart store modernization program. The Kmart Group anticipates that the store
modernization program will be substantially complete by the end of fiscal 1996.
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 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
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<PAGE> 26
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.
On July 21, 1994, Kmart announced that it accepted an offer from Coles Myer
which provides for the purchase of Kmart's 21.5 percent equity interest in the
Australian retailer. The transaction is conditional upon the approval of Coles
Myer shareholders and is subject to Coles Myer obtaining any necessary approval
by the Australian regulatory authorities. Under the terms of the agreement,
Kmart will receive the equivalent of A$4.55 per share for its Coles Myer shares,
which represented a premium over the then-current market price for the shares.
The closing price per share on July 20, 1994 was A$4.31. The total proceeds will
amount to approximately A$1,259 million (equivalent to U.S. $924 million.)
Following its meeting on August 16, 1994, the Company's Board of Directors
announced plans for public offerings of shares in three of the Company's
specialty retail businesses. A sale of a majority interest in Borders/Walden,
OfficeMax and The Sports Authority will be made through Initial Public Offerings
(IPO's). An IPO of shares in OfficeMax is expected to be filed within a few
weeks of the date of the meeting. Others will follow in an orderly manner
dependent upon market conditions. The Board of Directors and management continue
to review alternatives with respect to Builders Square and initiatives related
to the Company's core business. See "SPECIAL CONSIDERATIONS -- Option of
Subsidiary or Kmart to Terminate Lease Guaranty under Certain Circumstances."
FINANCIAL INFORMATION
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.
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 of
1993.
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KMART CORPORATION
SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
APRIL 27, APRIL 28,
1989(1) 1990 1991 1992 1993(2) 1994 1993
------- ------- ------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Sales........................ $27,670 $28,133 $29,042 $31,031 $34,156 $ 7,810 $ 7,352
Cost of merchandise sold..... 20,310 20,614 21,243 22,800 25,646 5,840 5,466
Selling, general and
administrative expenses... 6,277 6,435 6,603 6,875 7,636 1,886 1,744
Interest expense -- net...... 353 384 384 414 477 124 122
Income (loss) from continuing
retail operations before
income taxes.............. 444 1,070 1,189 1,327 (550) 28 83
Net income (loss) from
continuing retail
operations before an
extraordinary item and the
effect of accounting
changes................... 282 712 789 882 (328) 18 58
Ratio of earnings from
continuing retail
operations to fixed
charges................... 1.8 2.9 3.0 3.0 (3) (4) (4)
Balance Sheet (at end of
period):
Working capital.............. $ 3,685 $ 3,519 $ 4,682 $ 5,014 $ 4,123 $ 4,042 $ 4,593
Merchandise inventories...... 6,933 6,891 7,546 8,752 7,252 7,815 9,747
Total assets................. 13,145 13,899 15,999 18,931 17,504 17,963 20,090
Long-term debt............... 1,480 1,701 2,287 3,237 2,227 2,224 3,041
Capital leases............... 1,549 1,598 1,638 1,698 1,720 1,764 1,762
Shareholders' equity......... 4,972 5,384 6,891 7,536 6,093 6,010 7,464
</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.
(4) Due to the seasonality of Kmart's business, the ratio of earnings from
continuing retail operations to fixed charges for the interim period
computed as described in (3) above using 52 weeks ended April 28, 1993 was
2.8. The deficiency of income from continuing retail operations versus
fixed charges was $663 million for the 52 weeks ended April 27, 1994.
SECOND QUARTER 1994 FINANCIAL RESULTS
Net income from continuing retail operations for the 13 weeks ended July
27, 1994 declined to $94 million from $125 million for the 13 weeks ended July
28, 1993 as restated to exclude the discontinued PACE and divested PayLess
businesses. Second-quarter sales reached $8.83 billion, an increase of 4.6% from
$8.44 billion for the same period in 1993.
Net income for the 26 weeks of 1994 declined to $112 million from $183
million for the same period of 1993 as restated to exclude the discontinued and
divested businesses and before an extraordinary item and accounting changes.
Sales rose 5.4% to $16.64 billion from $15.79 billion for the same 26-week
period of 1993.
13
<PAGE> 28
KMART CORPORATION
SALES AND OPERATING INCOME
26 WEEKS ENDED JULY 27, 1994 AND JULY 28, 1993
(MILLIONS)
<TABLE>
<CAPTION>
26 WEEKS ENDED
--------------------
JULY 27, JULY 28,
1994 1993
-------- --------
<S> <C> <C>
Sales..................................................................... 16,638 15,791
Cost of merchandise sold.................................................. 12,477 11,775
Selling, general and administrative expenses.............................. 3,916 3,669
Interest expense -- net................................................... 240 247
Income from continuing retail operations before income taxes.............. 171 263
Net income from continuing retail operations.............................. 112 183
</TABLE>
THE DEPOSITOR
National Tenant Finance Corporation will be a Delaware corporation to be
formed prior to the initial issuance of Certificates. The Depositor will be a
limited purpose financing corporation formed solely for the purpose of
facilitating the origination and sale of Mortgage Loans. The Depositor's
certificate of incorporation will limit its business to the foregoing and will
place certain other restrictions on its activities.
The Depositor's principal executive office will be located in Phoenix,
Arizona.
USE OF PROCEEDS
The proceeds from the sale of each Series of Certificates will be used by
the Depositor to make Mortgage Loans to Borrowers (i) for permanent financing
of, or for the acquisition or acquisition and construction of, Facilities and
(ii) for the payment of a pro rata share of the costs of issuance of the
Certificates.
14
<PAGE> 29
DIAGRAM OF TRANSACTION STRUCTURE
INVOLVING A MORTGAGE NOTE WITH ONE MATURITY
CERTIFICATE HOLDERS
/\ /\
| |
| |
(13)| (1) |
| |
| |
| |
\/ \/
TRUST
/\ | \
| | \
| | \
(9) | | (2) \
| | \
| \/ (7) \
DEPOSITOR <------------- <---------
/\ | /\ \ TENNANT ----- |
|(4)| | (4) \ |(10) | |
| | | \ | | |
| | ESCROW \ \/ | |
(3)| | AGENT / KMART | |
| | | (11) / | |
| | | / | |
| \/ \/ / (5) | |
BORROWER <----------------------------| |
-----------------------------------|
(10)
15
<PAGE> 30
FOOTNOTES TO DIAGRAM WITH SINGLE MATURITY:
(1) On the Closing Date, the Certificates will be issued to the
Certificateholders by the Trust in exchange for the proceeds thereof.
(2) On the Closing Date, the Trust will provide funds to the Depositor to make
a Mortgage Loan to a Borrower.
(3) On the Closing Date, the Depositor will enter into a Loan Agreement with a
Borrower pursuant to which such Borrower will deliver to the Depositor a
Mortgage Note equal to the amount of the Mortgage Loan, a Mortgage on the
Facility to be leased to the Tenant, and an assignment of the Lease and
Lease Guaranty, if applicable.
(4) Unless otherwise specified in the related Prospectus Supplement, on the
Closing Date, if construction of the Facility is complete, the net proceeds
of the Mortgage Loan after payment of a pro rata share of the costs of
issuance of the Certificates will be disbursed to the Borrower. If the
Facility will be constructed with such proceeds, then such proceeds (net of
land costs and the amount placed in the Capitalized Debt Service Account)
will be disbursed to the Escrow Agent pursuant to a Construction Fund
Disbursement Agreement among the Borrower, the Depositor, the Tenant, Kmart
(if the Tenant is a Subsidiary), the Escrow Agent, and, if applicable, the
Construction Monitor.
(5) On the Closing Date, the Borrower will enter into a Lease with the Tenant
pursuant to which the Tenant will lease the Facility for use as a retail
store.
(6) On the Closing Date, if the Tenant is a Subsidiary, the Borrower will enter
into a Lease Guaranty with Kmart pursuant to which Kmart will guaranty the
payment and performance of the Subsidiary's obligations under the Lease.
(7) On the Closing Date, the Depositor, the Tenant and Kmart (if the Tenant is
a Subsidiary) will enter into a Note Put Agreement pursuant to which the
Depositor, upon the occurrence of a Triggering Event, will be entitled to
require the Tenant and, if the Tenant is a Subsidiary and fails to perform,
to require Kmart to purchase the related Mortgage Note(s) at the Purchase
Price.
(8) On the Closing Date, if the Tenant is a Subsidiary, the Depositor and Kmart
will enter into an Indemnity Agreement pursuant to which Kmart will
indemnify the Depositor in the event any Lease Payments under the Lease or
Lease Guaranty are asserted to be voidable in any bankruptcy proceeding
filed by or against the Subsidiary.
(9) On the Closing Date, the Depositor will assign to the Trust for the benefit
of the Certificateholders the Depositor's interest in the Mortgage Note and
the related Loan Documents including the Loan Agreement, the Mortgage, the
Lease, the Lease Guaranty, if applicable, the Note Put Agreement, the
Construction Fund Disbursement Agreement, if applicable, and the Indemnity
Agreement, if applicable.
(10) On the Closing Date, if the Facility will be constructed with the proceeds
of a Mortgage Loan, the Borrower will grant the Tenant a second mortgage on
the Facility to secure the Borrower's obligation to construct the Facility
and also will grant the Tenant an option to purchase the Facility in the
event Borrower does not complete such construction on or before the
Completion Date. If the Tenant is a Subsidiary, it will assign its rights
under the second mortgage and the option to purchase to Kmart to secure the
performance by the Subsidiary of its reimbursement obligations to Kmart
with respect to payments made by Kmart under the Lease Guaranty and the
Note Put Agreement.
(11) Unless otherwise stated in the related Prospectus Supplement, as
construction of the Facility continues, the Borrower will receive drawdowns
from the Escrow Agent pursuant to the Construction Fund Disbursement
Agreement. Each drawdown will require the approval of the Tenant.
(12) The Tenant will make Lease Payments directly to the Trust.
(13) On each Due Date, the Trustee will use such Lease Payments to pay Scheduled
Payments on the Mortgage Note and, on each Remittance Date, will use such
Scheduled Payments on the Mortgage Note to pay Debt Service on the
Certificates. As long as no Event of Default exists under any of the
related Loan Documents (other than a non-monetary default by the Tenant
under the Lease), on the second scheduled Remittance Date after the Closing
Date and on each anniversary thereafter of such Remittance Date, Lease
Payments received by the Trustee in excess of amounts needed to pay
Scheduled Payments on the Mortgage Note and certain other expenses will be
remitted to the Borrower.
NOTE: If the proceeds of the sale of Certificates are used to finance more than
one Facility, then each Facility will be owned and, if applicable, constructed
by a different Borrower, each Loan Agreement, the Mortgage Note issued
thereunder, and related Loan Documents will relate to only one Facility, the
Facilities may be leased by the same Tenant or by different Tenants, and the
foregoing structure will apply to each Mortgage Loan except that only a portion
of the proceeds of the sale of Certificates will be used to finance such
Mortgage Loan.
See "STRUCTURE OF THE FINANCINGS" herein for a more detailed description of
the transaction set forth in the foregoing diagram.
16
<PAGE> 31
INVOLVING MORTGAGE NOTES WITH TWO MATURITIES
|--------------------------------------------------|
| (14) |
| |------------------------------ |
(15) \/ \/ (15) | |
CERTIFICATE<-------- PASS THROUGH PASS THROUGH -----> CERTIFICATE | |
HOLDERS (1) TRUST TRUST (1) HOLDERS | |
Series B ----------> Series B Series A <--------- Series A | |
/\| /\ | | |
| | | | | |
(9)| | (9) | | | |
| | | | COLLATERAL---------| |
| |(2) | | (2) / TRUST ----------------
| | | | (10)/ /\
| | | | / | (13)
| \/ | \/ (7) | <-------------
DEPOSITOR <------------ TENNANT ----------- |
/\| | \ | (11) | |
| |(4) \/ (4) \ | | |
| | ESCROW (7) \/ | |
(3) | | AGENT (8) \ KMART | |
| | | / | |
| | | / | |
| \/ \/ / (6) (5) | |
BORROWER <-------------------------------- |
-------------------------------------|
(11)
17
<PAGE> 32
FOOTNOTES TO DIAGRAM WITH TWO MATURITIES:
(1) On the Closing Date, the Certificates Series A will be issued to the
Certificateholders Series A by the Pass-Through Trust Series A in exchange
for the proceeds thereof, and the Certificates Series B will be issued to
the Certificateholders Series B by the Pass-Through Trust Series B in
exchange for the proceeds thereof. The Certificates Series A and the
Certificates Series B will have different maturities.
(2) On the Closing Date, the Pass-Through Trust Series A and the Pass-Through
Trust Series B will provide funds to the Depositor to make a Mortgage Loan
to a Borrower.
(3) On the Closing Date, the Depositor will enter into a Loan Agreement with
the Borrower pursuant to which the Borrower will deliver to the Depositor
the Mortgage Note Series A and the Mortgage Note Series B, the aggregate
principal amount of which will equal the principal amount of the Mortgage
Loan, a Mortgage on the Facility to be leased to the Tenant, and an
assignment of the Lease and Lease Guaranty, if applicable.
(4) Unless otherwise specified in the related Prospectus Supplement, on the
Closing Date, if construction of the Facility is complete, the net proceeds
of the Mortgage Loan after payment of a pro rata share of the costs of
issuance of the Certificates will be disbursed to the Borrower. If the
Facility will be constructed with such proceeds, then such proceeds (net of
land costs and the amount placed in the Capitalized Debt Service Account)
will be disbursed to the Escrow Agent pursuant to a Construction Fund
Disbursement Agreement among the Borrower, the Depositor, the Tenant, Kmart
(if the Tenant is a Subsidiary), the Escrow Agent, and, if applicable, the
Construction Monitor.
(5) On the Closing Date, the Borrower will enter into a Lease with the Tenant
pursuant to which the Tenant will lease the Facility for use as a retail
store.
(6) On the Closing Date, if the Tenant is a Subsidiary, the Borrower will enter
into a Lease Guaranty with Kmart pursuant to which Kmart will guaranty the
payment and performance of the Subsidiary's obligations under the Lease.
(7) On the Closing Date, the Depositor, the Tenant and Kmart (if the Tenant is
a Subsidiary) will enter into a Note Put Agreement pursuant to which the
Depositor, upon the occurrence of a Triggering Event, will be entitled to
require the Tenant and, if the Tenant is a Subsidiary and fails to perform,
to require Kmart to purchase the Mortgage Note Series A and the Mortgage
Note Series B at the Purchase Price for each Mortgage Note.
(8) On the Closing Date, if the Tenant is a Subsidiary, the Depositor and Kmart
will enter into an Indemnity Agreement pursuant to which Kmart will
indemnify the Depositor in the event any Lease Payments under the Lease or
Lease Guaranty are asserted to be voidable in any bankruptcy proceeding
filed by or against the Subsidiary.
(9) On the Closing Date, the Depositor will assign to the Pass-Through Trust
Series A for the benefit of Certificateholders Series A the Mortgage Note
Series A and will assign to the Pass-Through Trust Series B for the benefit
of Certificateholders Series B the Mortgage Note Series B. The Mortgage
Note Series A and the Mortgage Note Series B will have different maturities
that correspond, respectively, to the maturities of the Certificates Series
A and of the Certificates Series B.
(10) On the Closing Date, the Depositor will assign to the Collateral Trustee
for the benefit of the Pass-Through Trust Series A and the Pass-Through
Trust Series B the Depositor's interest in the Loan Documents including the
Loan Agreement, the Mortgage, the Lease, the Lease Guaranty, if applicable,
the Note Put Agreement, the Construction Fund Disbursement Agreement, if
applicable, and the Indemnity Agreement, if applicable.
(11) On the Closing Date, if the Facility will be constructed with the proceeds
of a Mortgage Loan, the Borrower will grant the Tenant a second mortgage on
the Facility to secure the Borrower's obligation to construct the Facility
and also will grant the Tenant an option to purchase the Facility in the
event Borrower does not complete such construction on or before the
Completion Date. If the Tenant is a Subsidiary, it will assign its rights
under the second mortgage and the option to purchase to Kmart to secure the
performance by the Subsidiary of its reimbursement obligations to Kmart
with respect to payments made by Kmart pursuant to the Lease Guaranty and
the Note Put Agreement.
(12) Unless otherwise stated in the related Prospectus Supplement, as
construction of the Facility continues, the Borrower will receive drawdowns
from the Escrow Agent pursuant to the Construction Fund Disbursement
Agreement. Each drawdown will require the approval of the Tenant.
(13) The Tenant will make Lease Payments directly to the Collateral Trust.
(14) On each Due Date, the Collateral Trustee will use such Lease Payments to
pay to the Pass-Through Trust Series A Scheduled Payments due on the
Mortgage Note Series A and to the Pass-Through Trust Series B Scheduled
Payments due on the Mortgage Note Series B. As long as no Event of Default
exists under any of the related Loan Documents (other than a non-monetary
default by the Tenant under the Lease), on the second scheduled Remittance
Date after the Closing Date and on each anniversary thereafter of such
Remittance Date, Lease Payments received by the Collateral Trustee in
excess of amounts needed to pay Scheduled Payments on the Mortgage Note
Series A and on the Mortgage Note Series B and certain other expenses will
be remitted to the Borrower.
(15) On each Remittance Date, the Pass-Through Trustee Series A will use such
Scheduled Payments on the Mortgage Note Series A to pay Debt Service on the
Certificates Series A, and the Pass-Through Trustee Series B will use such
Scheduled Payments on the Mortgage Note Series B to pay Debt Service on the
Certificates Series B.
NOTE: If the proceeds of the sale of Certificates are used to finance more than
one Facility, then each Facility will be owned and, if applicable, constructed
by a different Borrower, each Loan Agreement, the Mortgage Notes issued
thereunder and related Loan Documents will relate to only one Facility, the
Facilities may be leased by the same Tenant or by different Tenants and the
foregoing structure will apply to each Mortgage Loan except that only a portion
of the proceeds of the sale of Certificates will be used to finance such
Mortgage Loan. If a Mortgage Loan is evidenced by Mortgage Notes of more than
two maturities, there will be a different Pass-Through Trust and a different
series of Certificates for each maturity. In all other respects, the foregoing
structure will apply.
See "STRUCTURE OF THE FINANCINGS" herein for a more detailed description of
the transaction set forth in the foregoing diagram.
18
<PAGE> 33
STRUCTURE OF THE FINANCINGS
Concurrently with the issuance of each Series of Certificates, the
Depositor will make a Mortgage Loan to a Borrower or multiple Mortgage Loans,
each to a different Borrower, with the proceeds from the sale of the
Certificates to be used as permanent financing for, or for the financing of the
acquisition or the acquisition and construction of, one or more Facilities and
to pay a pro rata share of the costs of issuance of the Certificates. Each
Facility will be owned or owned and constructed by a different Borrower
(provided that in certain cases the Borrower may have a ground leasehold
interest in, and not fee simple title to, the Demised Premises) and will be a
retail or warehouse facility to be leased to a Tenant pursuant to a Lease
between such Borrower and such Tenant. Lease Payments will be guaranteed by
Kmart pursuant to a Lease Guaranty (if the Tenant is a Subsidiary). Lease
Payments will be made by the Tenant directly to the Trustee or to the Collateral
Trustee, if applicable, and will be scheduled to be sufficient to pay Scheduled
Payments on the related Mortgage Note(s) for the period from and after the
commencement of such Lease Payments. If the Facility is constructed when the
Mortgage Loan is made, Lease Payments will commence immediately. If the Facility
is to be constructed with the proceeds of the Mortgage Loan, Lease Payments will
commence on a date specified in the Lease even if construction of the Facility
is not complete. With respect to each Mortgage Loan when Lease Payments do not
commence immediately, a portion of such Mortgage Loan will be deposited in a
related Capitalized Debt Service Account, and such amount will be sufficient to
pay Scheduled Payments that become due or accrue prior to the commencement of
Lease Payments. In connection with each Mortgage Loan, the related Borrower will
execute and deliver, or cause to be executed and delivered, to the Depositor (i)
a Mortgage Note or Mortgage Notes and Mortgage (ii) an assignment of the Lease,
Lease Payments and, if the Tenant is a Subsidiary, the Lease Guaranty and (iii)
other Loan Documents.
With respect to each Mortgage Loan, the related Tenant and Kmart (if the
Tenant is a Subsidiary) will enter into a Note Put Agreement with the Depositor
giving the Depositor the right to require such Tenant and Kmart, if applicable,
to purchase the related Mortgage Note(s) at the Purchase Price upon the
occurrence of (i) a default in the payment of Lease Payments by such Tenant
after 10 days notice (or 30 days notice if the Tenant is Kmart) of such default
and, if the Tenant is a Subsidiary, by Kmart after 30 days notice of such
default (which notice may be given concurrently with the corresponding notice to
such Subsidiary), (ii) a failure to complete construction of the related
Facility by the Completion Date or (iii) if the Tenant is a Subsidiary, the
occurrence of a Lease Guaranty Termination of the related Lease Guaranty (each,
a Triggering Event).
In consideration for the proceeds of the sale of the Certificates, and if
the related Loan Agreements provide for Mortgage Notes of a single maturity, the
Depositor will convey to the Trustee, without recourse, such Mortgage Notes and
all of the Depositor's right, title and interest in and to the related Loan
Documents, including the related Lease, Lease Guaranty, if applicable, Indemnity
Agreement, if applicable, Loan Agreement, Mortgage and Note Put Agreement. When
the Loan Agreements provide for Mortgage Notes of different maturities, the
Depositor will convey the Mortgage Notes to different Pass-Through Trustees such
that each Pass-Through Trustee will hold only Mortgage Notes having the same
maturity. All of the Depositor's right, title and interest in and to the related
Loan Documents, including the related Lease, Lease Guaranty, if applicable,
Indemnity Agreement, if applicable, Loan Agreement, Mortgage and Note Put
Agreement, will be conveyed by the Depositor to the Collateral Trustee which
will hold such property in trust for the benefit, pari passu, of the
Pass-Through Trustees as holders of the related Mortgage Notes. In no case will
Mortgage Notes issued under different Loan Agreements be cross-collateralized or
subject to cross-default provisions.
If the proceeds of a Mortgage Loan will be used to construct a Facility,
unless otherwise stated in the related Prospectus Supplement, the Depositor, the
related Borrower, the related Tenant, Kmart (if the Tenant is a Subsidiary), an
Escrow Agent and, in some cases, a Construction Monitor engaged at the request
of such Tenant will enter into a Construction Fund Disbursement Agreement, which
will provide that the Borrower will deposit the net proceeds of the Mortgage
Loan (less amounts used to pay a pro rata share of the costs of issuance of the
Certificates, amounts used to acquire land or ground leasehold interest, amounts
used to fund the related Capitalized Debt Service Account and amounts deposited
in the related Escrow Account-Common Area, if any) into the Escrow Account
created pursuant to such Construction Fund
19
<PAGE> 34
Disbursement Agreement. Amounts deposited in each Escrow Account will be
disbursed to a Borrower in connection with the acquisition and construction of a
Facility upon approval by the related Tenant and the Construction Monitor, if
one is appointed, of draw requests submitted by such Borrower. In certain
instances, Borrowers may own or acquire, or may lease, contiguous but separate
parcels of land for the purpose of constructing a shopping center to be occupied
by more than one Tenant. If the Common Area of such a shopping center is to be
built using a portion of the proceeds of the Mortgage Loans related to such
Facilities, then, in addition to the Construction Fund Disbursement Agreement,
there will be a Construction Fund Disbursement Agreement -- Common Area among
the same parties together with each additional Borrower and each additional
Tenant that is leasing a Facility that will be utilizing such Common Area. The
portion of the related Mortgage Loans that will be used to construct such Common
Area will be deposited in an Escrow Account -- Common Area established pursuant
to such Construction Fund Disbursement Agreement -- Common Area, and will be
disbursed upon approval of such Tenants and the Construction Monitor, if one is
appointed, of draw requests submitted by the Borrowers constructing such Common
Area. All of each Borrower's right, title and interest in and to any
Construction Fund Disbursement Agreement and any Construction Fund Disbursement
Agreement -- Common Area will be pledged, subject to the rights of the Tenants
and Kmart under such Agreements, to the Trustee, or to the Collateral Trustee,
if applicable.
Each Trust Agreement will provide for the establishment of a Certificate
Account and, if there is no Collateral Trust, a Rental Payment Account. Each
Collateral Trust Agreement will provide for the establishment of a Rental
Payment Account and a Mortgage Note Account. The Lease Payments related to the
Mortgage Notes held by the Trustee, or Pass-Through Trustees, if applicable,
will be paid directly by the related Tenants to such Trustee, or the Collateral
Trustee if applicable, and, unless an Event of Default has occurred under any of
the Loan Documents (other than a non-monetary default by the related Tenant
under the related Lease), deposited in the related Rental Payment Account. Such
Lease Payments will be scheduled to be in amounts sufficient to pay Scheduled
Payments on such Mortgage Notes. On the Business Day immediately preceding each
Remittance Date, amounts on deposit in the Rental Payment Account(s) equal to
Scheduled Payments due under the related Mortgage Note or Mortgage Notes will be
deposited in the Certificate Account(s) in the related Trust or Pass-Through
Trust, as applicable, and will be applied to pay Debt Service on the
Certificates as set forth in the related Prospectus Supplement. The Scheduled
Payments on the Mortgage Note(s) will be scheduled to be sufficient to pay the
interest applicable to the related Series of the Certificates and over the term
of such Mortgage Notes to pay the principal of such Series of Certificates. The
maturity date of each Mortgage Note acquired by a Trust or Pass-Through Trust
will correspond to the final Remittance Date applicable to the related Series of
the Certificates.
THE CERTIFICATES
The Certificates described herein and in the related Prospectus Supplements
will be issued from time to time in Series pursuant to one or more Trust
Agreements or Pass-Through Trust Agreements. Each Pass-Through Trust Agreement
(used when there are Mortgage Notes of different maturities) will contain
substantially the same terms as each other such Pass-Through Trust Agreement,
except that interest rates, scheduled payments of principal, aggregate principal
amount and final distribution dates applicable to each Series of Certificates
may differ. When there are Mortgage Notes of different maturities, the
Collateral for all such Mortgage Notes will be held in a Collateral Trust for
the benefit, pari passu, of all Pass-Through Trusts holding any of the Mortgage
Notes secured by such Collateral. The following summaries describe certain
provisions common to each Series of Certificates. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the Prospectus Supplement and the provisions of the Trust
Agreement or Pass-Through Trust Agreement relating to each such Series of
Certificates, the forms of which have been filed as exhibits to the Registration
Statement of which (in substantially the form in which they will be used) this
Prospectus is a part.
GENERAL
The Certificates will be issued in fully registered form only. Each
Certificate will represent a fractional undivided beneficial ownership interest
in the assets conveyed to the Trust or Pass-Through Trust pursuant to
20
<PAGE> 35
which such Series of Certificates was issued. Each Certificate will correspond
to a pro rata share of the outstanding principal amount of the Mortgage Notes
held in the related Trust or Pass-Through Trust and will be issued in minimum
denominations of $1,000 initial principal amount and integral multiples of
$1,000 in excess thereof unless otherwise specified in the related Prospectus
Supplement. The Certificates will be registered in the name of Cede & Co.
("Cede") as the nominee of The Depository Trust Company ("DTC"). No person
acquiring an interest in the Certificates (a "Beneficial Owner") will be
entitled to receive a Certificate representing such person's interest in the
Certificates, except as set forth below under "Book-Entry Registration --
Definitive Certificates." Unless and until Definitive Certificates are issued
under the limited circumstances described herein, all references to actions by
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants (as defined below) and all references herein to distributions,
notices, reports and statements to Certificateholders shall refer, as the case
may be, to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the Certificates, or to DTC Participants for distribution
to Beneficial Owners in accordance with DTC procedures. See "Book-Entry
Registration."
Scheduled Payments made on the Mortgage Notes held in a Trust or a
Pass-Through Trust will be passed through to Certificateholders of such Trust or
Pass-Through Trust on the dates and in the amounts set forth in the related
Prospectus Supplement until the final scheduled Remittance Date for such Trust.
Each Certificate will represent a fractional undivided beneficial ownership
interest in the related Trust or Pass-Through Trust and will not have any
rights, benefits or interest in respect of any other Trust or Pass-Through Trust
or in the property held by any other Trust or Pass-Through Trust. All payments
and distributions on each Series of Certificates will be made only from the
Trust Property in which such Series of Certificates evidences an interest.
Although Lease Payments in amounts necessary to permit the timely payment of
Scheduled Payments on the Mortgage Notes, and consequently Debt Service on the
Certificates, will be direct obligations of one or more Tenants, which Lease
Payments will be guaranteed by Kmart if the related Tenant is a Subsidiary, the
Certificates themselves will not represent an interest in or obligation of
Kmart, any Subsidiary, any Trustee, any Pass-Through Trustee, any Collateral
Trustee, any Borrower or the Depositor. Each purchaser of a Certificate will
look solely to the income and proceeds from the Trust Property to the extent
available for distribution as provided in the Trust Agreement or Pass-Through
Trust Agreement.
No Trust Agreement, Pass-Through Trust Agreement, Collateral Trust
Agreement, Lease, Lease Guaranty, if applicable, Note Put Agreement or other
Loan Document will include financial covenants or other provisions that would
afford Certificateholders protection in the event of highly leveraged or other
transactions involving Kmart. The Certificateholders will have the benefit
solely of the Collateral securing the Mortgage Loan held in the related Trust
Agreement or Collateral Trust, as applicable. See "THE MORTGAGE NOTES, THE LOAN
AGREEMENTS AND RELATED DOCUMENTS."
BOOK-ENTRY REGISTRATION
General
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 participants ("DTC Participants") and to
facilitate the clearance and settlement of securities transactions between DTC
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations. Indirect access
to the DTC system also is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a DTC Participant either directly or indirectly ("Indirect Participants").
Beneficial Owners that are not DTC Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Certificates may do so only through DTC Participants and Indirect
Participants. In addition, Beneficial Owners will receive all distributions of
principal and interest from the Trustee through DTC Participants or Indirect
Participants, as the case may be. Under a book-entry format, Beneficial Owners
may experience some delay in their receipt of payments, since such payments will
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be forwarded by the Trustee to Cede, as nominee for DTC. DTC will forward such
payments to DTC Participants, which thereafter will forward them to Indirect
Participants or Beneficial Owners, as the case may be, in accordance with
customary industry practices. The forwarding of such distributions to the
Beneficial Owners will be the responsibility of such DTC Participants and
Indirect Participants. When book-entry registration is used, the only
"Certificateholder" of a Trust will be Cede, as nominee of DTC. Beneficial
Owners will not be recognized by the Trustee as Certificateholders, as such term
is used in the Trust Agreement or Pass-Through Trust Agreement, and Beneficial
Owners will be permitted to exercise the rights of Certificateholders only
indirectly through DTC and DTC Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Certificates among DTC Participants on whose behalf it acts with respect to the
Certificates and to receive and transmit distributions of principal of, premium,
if any, and interest on, the Certificates to DTC Participants. DTC Participants
and Indirect Participants with which Beneficial Owners have accounts with
respect to the Certificates similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess Certificates,
the Rules provide a mechanism by which Beneficial Owners will receive payments
and will be able to transfer their interests.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect Participants, the ability of a Beneficial Owner to pledge
Certificates to persons or entities that do not participate in the DTC system,
or to otherwise act with respect to such Certificates, may be limited due to the
absence of a physical certificate for such Certificates.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under the Trust Agreement only at the direction of
one or more DTC Participants to whose accounts with DTC the Certificates are
credited. Additionally, DTC has advised the Depositor that it will take such
actions with respect to any percentage of Certificateholders of each Trust only
at the direction of and on behalf of DTC Participants whose holdings include
fractional undivided interests that satisfy any such percentage. DTC may take
conflicting actions with respect to other fractional undivided interests to the
extent that such actions are taken on behalf of DTC Participants whose holdings
include such fractional undivided interests. All notices to Certificateholders
under a Trust Agreement or Pass-Through Trust Agreement will be sent to Cede so
long as the Series of Certificates issued pursuant to such Trust Agreement or
Pass-Through Trust Agreement is represented by a single Certificate registered
in the name of Cede.
None of the Company, the Depositor, the Trustee or the Pass-Through Trustee
will have any liability for any aspect of the records relating to or payments
made on account of beneficial ownership interests in the Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company and the Depositor believe to be
reliable, but neither the Company nor the Depositor takes any responsibility for
the accuracy thereof.
Definitive Certificates
The Certificates will be issued in fully registered, certificated form
("Definitive Certificates") to Beneficial Owners or their nominees, rather than
to DTC or its nominee, only if (i) the Depositor advises the Trustee or
Pass-Through Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to the
Certificates and the Depositor is unable to appoint a qualified successor or
(ii) the Depositor, at its option and only with the prior written consent of
Kmart, elects to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee or Pass-Through Trustee will be required to notify all
Beneficial Owners through DTC Participants of the availability of Definitive
Certificates. Upon surrender by DTC of the global certificates representing the
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Certificates and receipt of instructions for re-registration, the Trustee or
Pass-Through Trustee will reissue the Certificates as Definitive Certificates to
Beneficial Owners.
Definitive Certificates will be freely transferable and exchangeable at the
office of the Trustee or Pass-Through Trustee upon compliance with the
requirements set forth in the Trust Agreement or Pass-Through Trust Agreement.
No service charge will be imposed for any registration of transfer or exchange,
but payment of a sum sufficient to cover any tax or other governmental charge
will be required.
Settlement and Payment
So long as the Certificates are registered in the name of Cede, as nominee
of DTC, all payments of distributions pursuant to the Trust Agreement or
Pass-Through Trust Agreement will be paid to DTC in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the
Certificates will trade in DTC's Same-Day Funds Settlement System until
maturity, and secondary market trading activity in the Certificates will
therefore be required by DTC to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Certificates.
DISTRIBUTIONS OF SCHEDULED PAYMENTS
The Prospectus Supplement for a Series will specify the Due Dates on which
payments of interest and principal on each Mortgage Note ("Scheduled Payments")
held by a related Trust or Pass-Through Trust are due and the Remittance Dates
on which the Trustee or Pass-Through Trustee will distribute to each
Certificateholder its pro rata share of the Available Distribution Amount for
the payment of Debt Service. Each such distribution will be made by the Trustee
to holders of record of the Certificates on the close of business of the
fifteenth day preceding the related Remittance Date, except with respect to
Scheduled Payments received after the Due Date (the "Record Date"). Lease
Payments related to any Mortgage Note will be paid directly to the Trustee, or
the Collateral Trustee if applicable. On each Due Date, the Trustee will use
such Lease Payments to pay the Scheduled Payments on the related Mortgage Note
or the Collateral Trustee will transfer to the Pass-Through Trustee amounts
sufficient to pay the Scheduled Payments on the related Mortgage Notes. Such
Scheduled Payments will then be used by the Trustee, or Pass-Through Trustee, if
applicable, to pay Debt Service to the Certificateholders on the related
Remittance Date. See "THE TRUSTS, PASS-THROUGH TRUSTS AND COLLATERAL TRUSTS."
Each Mortgage Note will provide for interest at an overdue rate as
specified in the related Prospectus Supplement on any Scheduled Payments, or
portions thereof, that are not paid when due. The related Lease will provide for
a late payment rate applicable to any Lease Payments, or portions thereof, that
are not paid when due (including any grace period). The late payment rate in the
Lease is scheduled to be sufficient to pay the overdue rate on the related
Mortgage Note(s). Any portion of Scheduled Payments and overdue interest thereon
received by the Trustee or Pass-Through Trustee after the related Due Date will
be distributed to the Certificateholders, based upon their Percentage Interests,
within 10 Business Days of receipt of the corresponding late Lease Payments by
the Trustee or Collateral Trustee. The Record Date with respect to such
distributions will be the close of business on the fifteenth day prior to the
Remittance Date on which the related Scheduled Payment would have been
distributable to Certificateholders had such Scheduled Payment been timely paid
in full. See "THE MORTGAGE NOTES AND THE LOAN AGREEMENTS -- Scheduled Payments."
OTHER DISTRIBUTIONS
Certificateholders may receive other distributions on the Certificates due
to the optional prepayment of a Mortgage Note by the related Borrower, the sale
of a Mortgage Note as a result of the occurrence of a Triggering Event under the
related Note Put Agreement, the termination of a Lease due to certain casualty
or condemnation events, a condemnation that does not result in a termination of
the related Lease, or the liquidation of a Mortgage Note. The Trustee or
Pass-Through Trustee will send notice of any such distribution
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to the Certificateholders at the address shown on the Certificate Register not
less than 10 days prior to the date fixed for such distribution. The reasonable
costs of such notices incurred by the Trustee or Pass-Through Trustee will be
deducted from the amount of any such distribution.
Optional Prepayment Distribution
Unless otherwise specified in the related Prospectus Supplement, any
Mortgage Note may be prepaid at any time, in whole or in part (but if in part,
then in units of $1,000,000 or an integral multiple of $100,000 in excess
thereof), at the option of the related Borrower at a price equal to the Purchase
Price. See "THE MORTGAGE NOTES, THE LOAN AGREEMENTS AND RELATED DOCUMENTS --
Prepayments -- Optional Prepayments." Any such prepayment will be deposited with
the Trustee, or, if applicable, the Collateral Trustee, which will transfer it
to the related Pass-Through Trustees on the next Business Day. Any such
prepayment will be distributed to the Certificateholders, based on their
Percentage Interests, within 30 days of receipt by the Trustee or Collateral
Trustee. Subsequent distributions to Certificateholders of Debt Service will be
proportionately reduced as a consequence of the reduction of the aggregate
outstanding principal balance of the Mortgage Note(s) and the corresponding
reduction of Scheduled Payments.
Distribution from Proceeds of Purchase of Mortgage Note
A distribution will be made with respect to the Certificates of any Series
in the event that a Tenant or Kmart (if the Tenant is a Subsidiary) purchases a
Mortgage Note pursuant to the related Note Put Agreement. Each Note Put
Agreement will provide that, in the event (a)(i) a Tenant fails to pay when due
any Lease Payment within 10 days (or 30 days if the Tenant is Kmart) after
notice to the Tenant of such default and (ii) if the Tenant is a Subsidiary,
Kmart fails to pay any such Lease Payment within 30 days after notice to Kmart
of such Subsidiary's failure to do so (which notice may be given concurrently
with the corresponding notice to such Subsidiary), (b) completion of
construction of the Facility to be leased to the Tenant does not occur prior to
the Completion Date, or (c) if the Tenant is a Subsidiary, a Lease Guaranty
Termination occurs (each, a Triggering Event), the Trustee, or Collateral
Trustee, if applicable, will have the right to require the Tenant, and in the
event of the Tenant's failure to do so when the Tenant is a Subsidiary, to
require Kmart to purchase the related Mortgage Note(s) in whole (but not in
part) at the Purchase Price. In the event the Trustee or Collateral Trustee
exercises such right, the Purchase Price will be deposited with the Trustee, or,
if applicable, the Collateral Trustee which will transfer it to the related
Pass-Through Trustees on the next Business Day. Upon receipt of the Purchase
Price with respect to such Mortgage Note(s), the Trustee, or the Pass-Through
Trustee if applicable, will endorse the related Mortgage Notes(s), and the
Trustee, or the Collateral Trustee if applicable, will assign the related Loan
Documents to the purchaser of the Mortgage Note(s), whereupon the Trust, or the
Pass-Through Trust and the Collateral Trust if applicable, will terminate as to
such Mortgage Note(s) and the related Collateral. Any Purchase Price received by
the Trustee or Pass-Through Trustee as a result of its exercise of its rights
under a Note Put Agreement, less any expense incurred by the Trustee, or the
Pass-Through Trustee and Collateral Trustee, will be distributed to the related
Certificateholders within 30 days of the receipt of such Purchase Price by the
Trustee, or Collateral Trustee if applicable. If the Trust or Pass-Through Trust
holds any other Mortgage Note(s), Debt Service distributable to the
Certificateholders will be proportionately reduced to reflect the reduction in
the aggregate Scheduled Payments payable to the Trust or Pass-Through Trust
after the sale of the Mortgage Note(s) pursuant to the Note Put Agreement. See
"THE NOTE PUT AGREEMENTS."
Distribution Due to Casualty or Condemnation
If a Lease is terminated pursuant to the terms thereof by the related
Tenant as a result of casualty loss or condemnation, the Borrower will be
required to prepay the related Mortgage Note(s) at the Purchase Price. Any
related Condemnation Proceeds or Insurance Proceeds will be used to make such
prepayment, but there can be no assurance that such amounts will be sufficient
for that purpose. Unless the Borrower prepays the related Mortgage Note(s) at
the Purchase Price, the only additional sources of funds to make such prepayment
will be any amounts recoverable through foreclosure or other disposition of any
remaining part of the Mortgaged Property. Any such Borrower prepayment,
Insurance Proceeds or Condemnation Proceeds will
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be deposited with the Trustee, or the Collateral Trustee if applicable which on
the next Business Day will transfer a proportionate amount of such prepayment
(based upon the respective Purchase Prices of the related Mortgage Notes) to the
related Pass-Through Trustees. Any such prepayments will be distributed by the
Trustee, or Pass-Through Trustee if applicable, to the Certificateholders within
30 days of receipt of such amounts by the Trustee, or Collateral Trustee if
applicable. If the Trust or Pass-Through Trust holds Mortgage Notes relating to
other Facilities, subsequent distributions to the Certificateholders of Debt
Service will be proportionately reduced to reflect the deduction from aggregate
Scheduled Payments of principal and interest payable under the Mortgage Note(s)
required to be prepaid. In the event that Condemnation Proceeds or Insurance
Proceeds deposited with the Trustee exceed the Purchase Price for the related
Mortgage Note(s), such excess amount will be distributed to the related
Borrower.
If Lease Payments under a Lease are abated due to a condemnation which does
not result in a termination of the related Lease, Scheduled Payments on the
related Mortgage Note(s) will be reduced in proportion to the reduced Lease
Payments, and Debt Service will be correspondingly reduced. Any Condemnation
Proceeds resulting from such condemnation will be applied first by the related
Tenant toward restoration of the related Facility. In the unlikely event that
such Condemnation Proceeds exceed the amount necessary to restore the Facility,
such excess will be used to prepay a portion of the related Mortgage Note(s)
(including the Make-Whole Premium with respect to such portion). Unless such
excess Condemnation Proceeds are sufficient to prepay the portion of the related
Mortgage Note(s) that is proportionate to the reduction of Scheduled Payments as
a consequence of such Lease Payment abatement, Scheduled Payments following such
condemnation will be less than the amounts necessary to amortize the remaining
principal balance of the related Mortgage Note and to pay the interest thereon.
In that event: (i) subsequent Scheduled Payments will be applied first to pay
accrued interest on the related Mortgage Note(s) and then to reduce the
principal of such Mortgage Note(s); (ii) if any such Scheduled Payments are
insufficient to pay accrued interest on a related Mortgage Note, such unpaid
interest will, to the extent permitted under applicable law, be added to
principal; and (iii) the unpaid principal balance of the related Mortgage
Note(s), together with all accrued and unpaid interest thereon, will, if not
already paid, be due and payable at the maturity date of the Mortgage Note with
the longest term issued pursuant to the related Loan Agreement. At such maturity
date, if such amounts are not paid by the related Borrower, the only source of
payment will be the proceeds recovered from a foreclosure on the related
Facility, which depends upon the fair market value of the Facility, and there
can be no assurance that such proceeds will be sufficient to make such payments.
Such modification of the Lease Payments, the related Scheduled Payments and the
amortization of the related Mortgage Note(s) will not constitute an Event of
Default under such Mortgage Note(s) or any of the related Loan Documents or give
rise to any rights under the related Note Put Agreement. See "THE MORTGAGE
NOTES, THE LOAN AGREEMENTS AND RELATED DOCUMENTS -- Prepayments -- Mandatory
Prepayments and -- Purchase Price" and "THE LEASES, THE LEASE GUARANTIES AND
RELATED DOCUMENTS -- The Leases -- Condemnation and Casualty."
Distribution Due to Liquidation
If any Mortgage Note is liquidated as a result of foreclosure or other
disposition pursuant to the terms of the related Loan Documents, any amounts
received with respect to such liquidation, net of expenses incurred in
connection with such liquidation, will be distributed to the related
Certificateholders within 30 days of receipt by the Trustee, or Collateral
Trustee if applicable. There can be no assurance that the amounts realized from
a foreclosure or other disposition of a Mortgage Note will be sufficient to pay
the principal of, interest on and Make-Whole Premium with respect thereto. If
the Trust or Pass-Through Trust holds other Mortgage Notes, subsequent
distributions to the Certificateholders of Debt Service will be proportionately
reduced to reflect the deduction from aggregate Scheduled Payments of principal
and interest payable under the liquidated Mortgage Note. See "THE MORTGAGE
NOTES, THE LOAN AGREEMENTS AND RELATED DOCUMENTS -- Prepayments -- Liquidation."
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THE TRUSTS, PASS-THROUGH TRUSTS AND COLLATERAL TRUSTS
The following summaries describe certain provisions of the Trust
Agreements, the Pass-Through Trust Agreements and the Collateral Trust
Agreements. The summaries do not purport to be complete and are subject to, and
qualified in their entirety by reference to, the provisions of such documents,
the forms of which (each in substantially the form in which it will be used)
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. The Pass-Through Trust Agreement and the Collateral Trust
Agreement will be used when there are Mortgage Notes of more than one maturity
issued pursuant to one or more Loan Agreements. A Pass-Through Trust Agreement
will provide for the Pass-Through Trustee to hold one or more Mortgage Notes,
but Collateral securing such Mortgage Note(s), including, with respect to each
such Mortgage Note, the related Loan Agreement, Mortgage, Note Put Agreement,
Lease, Lease Guaranty, if applicable, and all other Loan Documents, will be held
by the related Collateral Trustee. For purposes of the following summaries,
unless otherwise indicated, the Trust Agreements and Pass-Through Trust
Agreements are each referred to as a "Trust Agreement," the Trust and
Pass-Through Trust are each referred to as a "Trust" and the Trustee and
Pass-Through Trustee are each referred to as a "Trustee."
GENERAL
The Depositor will sell, transfer, assign, set over and convey the Mortgage
Note(s) to the Trustee without recourse for the benefit of the
Certificateholders of each Series. If the related Loan Agreements provide for
Mortgage Notes of a single maturity, then the Trust Property of the Trust will
also include, but not be limited to, the following Collateral with respect to
each Mortgage Loan: (i) a Mortgage on the Facility securing the related Mortgage
Note(s), (ii) all of the Depositor's rights under the Loan Agreement pursuant to
which the related Mortgage Note(s) were issued, (iii) an assignment of the
related Lease, Lease Payments and Lease Guaranty, if applicable, (iv) a pledge
of certain moneys held in certain funds established pursuant to the Trust
Agreement, (v) a Note Put Agreement, (vi) an assignment of the Borrower's right,
title and interest in and to any Construction Fund Disbursement Agreement and
any Construction Fund Disbursement Agreement -- Common Area, (vii) a pledge of
certain investments of fund balances held under the Trust Agreement and income
earned thereon, and (viii) any other Loan Documents.
In some cases a Loan Agreement may provide that a Mortgage Loan will be
evidenced by two or more Mortgage Notes having different maturities. In such
case, the Depositor will sell, transfer, assign, set over and convey each such
Mortgage Note to a different Pass-Through Trust. In the event Mortgage Notes are
issued pursuant to more than one Loan Agreement, all Mortgage Notes having the
same maturity will be conveyed to a different Pass-Through Trust such that each
Pass-Through Trust will hold only Mortgage Notes having the same maturity. Each
Certificate will evidence a fractional undivided beneficial ownership interest
in the assets of the related Pass-Through Trust and will have no rights,
benefits or interests in respect of any other Pass-Through Trust or the Trust
Property held in any other Pass-Through Trust. When Mortgage Notes having
different maturities are issued, the Collateral with respect to such Mortgage
Notes will be held by the Collateral Trustee in a separate Collateral Trust for
the benefit, pari passu, of the separate Pass-Through Trusts holding the
Mortgage Notes.
ACCOUNTS
Rental Payment Account
Lease Payments (including Lease Payments made after any Due Date), payments
pursuant to any Lease Guaranty and payments pursuant to any Indemnity Agreement
with respect to each Facility will be deposited in a Rental Payment Account
created and maintained pursuant to the Trust Agreement, or, if applicable,
pursuant to the Collateral Trust Agreement, for the related Series of
Certificates to secure the obligations of the Borrower under the related Loan
Documents and Mortgage Note(s). Each Rental Payment Account will be maintained
as a fund separate and distinct from other accounts created under the Trust
Agreement or Collateral Trust Agreement and will remain the property of the
related Borrower subject to the rights of the Trustee, or the Collateral
Trustee, as the case may be, under the related Loan Documents, the related Trust
Agreement or Collateral Trust Agreement and the pledge of the Rental Payment
Account by such Borrower
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to secure the related Mortgage Loan. On each Due Date, amounts on deposit in
such Rental Payment Account equal to Scheduled Payments due under the related
Mortgage Note will be deposited in the Certificate Account maintained pursuant
to the Trust Agreement, or, if such Rental Payment Account is maintained in a
Collateral Trust pursuant to a Collateral Trust Agreement, transferred to the
Certificate Accounts maintained pursuant to the related Pass-Through Trust
Agreements and will be applied on the related Remittance Date to pay Debt
Service on the Certificates. On the second scheduled Remittance Date after the
Closing Date and on each anniversary thereafter of such Remittance Date, amounts
remaining in such Rental Payment Account after such deposit in or transfer to
the Certificate Account will be distributed to the related Borrower. If the
Trustee, or the Collateral Trustee if applicable, becomes aware of an Event of
Default under any of the related Loan Documents (other than a non-monetary
default by the related Tenant under the related Lease), amounts in the Rental
Payment Account will be transferred to the Certificate Account in the Trust or,
if applicable, to the related Mortgage Note Account in the Collateral Trust and
will continue to be held as Collateral by the Trustee or, if applicable, the
Collateral Trustee.
On the next Business Day after receipt, any Lease Payments made after the
applicable Due Date will be deposited in the Certificate Account maintained
pursuant to the Trust Agreement, or if the Rental Payment Account into which
such Lease Payments were initially deposited is maintained in a Collateral Trust
pursuant to a Collateral Trust Agreement, transferred to the Certificate Account
maintained pursuant to the related Pass-Through Trust Agreements and will be
distributed to Certificateholders within ten Business Days of receipt.
Certificate Account
All Scheduled Payments required to be made by a Borrower pursuant to the
terms of the related Mortgage Note(s) and Loan Documents will be paid from the
Lease Payments deposited in the related Rental Payment Account and will be
transferred to a Certificate Account maintained pursuant to the Trust Agreement
or, in the case of Mortgage Notes with different maturities, will be transferred
from the Rental Payment Account or Mortgage Note Account, if applicable,
maintained in the Collateral Trust to the Certificate Accounts maintained
pursuant to the Pass-Through Trust Agreements. On each Remittance Date, the
Trustee or Pass-Through Trustee will distribute to each Certificateholder its
pro rata share of the Available Distribution Amount for the payment of Debt
Service due on such Remittance Date. See "THE CERTIFICATES -- Distribution of
Scheduled Payments." In addition, any prepayments on the related Mortgage
Note(s), Insurance Proceeds or Condemnation Proceeds (to the extent required for
mandatory prepayment of the related Mortgage Note(s) pursuant to the related
Loan Agreement), net proceeds from the liquidation of the related Mortgage and
the Purchase Price under the Note Put Agreement will be deposited in the
Certificate Account, or, if there is a Collateral Trust, deposited in the
Mortgage Note Account and the next Business Day deposited in the Certificate
Accounts of the related Pass-Through Trusts, for distribution in accordance with
the Trust Agreement or Pass-Through Trust Agreements. See "THE CERTIFICATES --
Other Distributions." If an Event of Default occurs and is continuing with
respect to any Mortgage Loan (other than a non-monetary default by the related
Tenant under the related Lease), all amounts in the related Rental Payment
Account will be transferred to the Certificate Account established by such Trust
or to the Mortgage Note Account in the Collateral Trust, if applicable. All
related Lease Payments subsequently received by the Trustee will be deposited in
such Certificate Account, and all related Lease Payments subsequently received
by the Collateral Trustee will be deposited in the Mortgage Note Account. All
such amounts deposited into the Certificate Account or the Mortgage Note Account
after the occurrence of, and during the continuation of, an Event of Default
will continue to be held as Collateral by the Trustee or Collateral Trustee.
Capitalized Debt Service Account
In cases where proceeds of the Certificates are to be used to finance
construction of a Facility, Lease Payments will not commence until a date
specified in the related Prospectus Supplement. In such event, the Depositor
will establish, out of the proceeds of the related Mortgage Loan, a Capitalized
Debt Service Account in an amount sufficient to pay Scheduled Payments on the
related Mortgage Note(s) before Lease
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Payments commence. Each Capitalized Debt Service Account will be maintained as a
fund separate and distinct from other accounts created under the Trust
Agreement, or under the Collateral Trust Agreement, if applicable, and will
remain the property of the Borrower on whose behalf it was established, subject
to the rights of the Trustee, or the Collateral Trustee, as the case may be,
under the Loan Documents, the Trust Agreement or the Collateral Trust Agreement,
and the pledge of the Capitalized Debt Service Account by such Borrower to
secure the related Mortgage Loan. Amounts in the Capitalized Debt Service
Account will be transferred to the related Certificate Account(s) on the Due
Dates and in the amounts specified in the related Trust Agreement, or Collateral
Trust Agreement if applicable, to pay, in whole or in part, the Scheduled
Payments on the Mortgage Note(s). After all amounts required to be transferred
from a Capitalized Debt Service Account to the related Certificate Account have
been so transferred, any amounts remaining in such Capitalized Debt Service
Account will be transferred to the related Tenant. If an Event of Default occurs
under any of the related Loan Documents (other than a non-monetary default by
the related Tenant under the related Lease), all amounts in the related
Capitalized Debt Service Account will be transferred to the Certificate Account
or, if applicable, the related Mortgage Note Account and will continue to be
held as Collateral by the Trustee or, if applicable, the Collateral Trustee.
Mortgage Note Account
With respect to each Mortgage Loan evidenced by Mortgage Notes of different
maturities, the Collateral Trustee will establish a separate Mortgage Note
Account. Each Mortgage Note Account will be maintained as a fund separate and
distinct from other accounts created under the Collateral Trust Agreement. The
Collateral Trustee will deposit in the Mortgage Note Account any prepayments on
the related Mortgage Notes, including any Condemnation Proceeds or Insurance
Proceeds (to the extent required for mandatory prepayments of the related
Mortgage Notes pursuant to the related Loan Agreement), any Purchase Price
received pursuant to any Note Put Agreement, and any net proceeds from the
liquidation of the related Mortgage. All amounts in the Mortgage Note Account
used to pay Scheduled Payments on the Mortgage Notes will be transferred to the
Certificate Accounts of the related Pass-Through Trusts on the Due Dates. All
other amounts in the Mortgage Note Account will be transferred to the related
Pass-Through Trusts the next Business Day after receipt thereof. If an Event of
Default occurs and is continuing with respect to any Mortgage Loan or any
related Loan Document (other than a non-monetary default by the related Tenant
under the related Lease), all amounts in the related Rental Payment Account and
any Capitalized Debt Service Account will be transferred to such Mortgage Note
Account, and all related Lease Payments subsequently received will be deposited
in such Mortgage Note Account. All such amounts transferred or deposited into
the Mortgage Note Account will continue to be held as Collateral by the
Collateral Trustee.
THE TRUST AGREEMENTS AND PASS-THROUGH TRUST AGREEMENTS
The Trustee
The Trustee under each Trust Agreement will be named in the related
Prospectus Supplement. The Trustee must be a corporation or national banking
association organized under the laws of the United States of America or of any
State, must be authorized to exercise corporate trust powers, must have a
combined capital and surplus of at least $50,000,000 in the case of United
States Trust Company of New York and of at least $100,000,000 in the case of any
other trustee and must be subject to regulation and examination by state or
federal regulatory authorities.
The Trustee may resign at any time by giving written notice to the
Depositor and the Certificateholders. If a Trustee (i) fails to comply with
certain requirements of the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") after written request for such compliance by any
Certificateholder who has been a bona fide Certificateholder for at least six
months, or (ii) ceases to be eligible to continue as Trustee under a Trust
Agreement and fails to resign after written request therefor by the Depositor or
any such bona fide Certificateholder, or (iii) becomes incapable of acting as
Trustee or becomes insolvent, then, in any such case, (i) the Depositor may
remove the Trustee and appoint a successor trustee, or (ii) subject to certain
provisions of the Trust Agreement, any Certificateholder who has been a bona
fide Certificateholder for at least six months may, on behalf of itself and all
others similarly situated, petition any court of competent jurisdiction
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for the removal of the Trustee and the appointment of a successor trustee. A
Trustee may also be removed at any time by the holders of Certificates
evidencing not less than a 66 2/3 Percentage Interest. Any resignation or
removal of a Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
Each Trust Agreement will provide that the Trustee's Fees will be paid by
the Tenants pursuant to the Consent and Agreements. See "THE LEASES, LEASE
GUARANTIES AND RELATED DOCUMENTS -- The Consent and Agreements."
Modification of the Trust Agreements
Each Trust Agreement will contain provisions permitting the Depositor and
the Trustee to enter into a supplement to the Trust Agreement with the consent
of Kmart (except that no consent will be required with respect to (vii) below)
but without the consent of the Certificateholders, (i) to evidence the
succession of another Person to the Depositor and the assumption by such Person
of the Depositor's obligations under such Trust Agreement; (ii) to add to the
covenants of the Depositor for the benefit of the Certificateholders; (iii) to
cure any ambiguity, to correct or supplement any defective or inconsistent
provisions of such Trust Agreement or any supplement, or to make any other
provisions with respect to matters or questions arising under such Trust
Agreement or any supplement, provided such action will not materially adversely
affect the interests of the Certificateholders; (iv) to correct or amplify the
description of any property constituting property of the Trust or to acknowledge
any change relating to title to a Mortgaged Property that does not materially
adversely affect the rights of the Certificateholders; (v) to surrender any
rights or powers conferred upon the Depositor or add to the rights of the
Certificateholders; (vi) to evidence or provide for the appointment of a
successor trustee or to add or change any provision of such Trust Agreement as
may be necessary to provide for or facilitate the administration of the Trust
created thereby by more than one Trustee; or (vii) to add, eliminate or change
any provision under such Trust Agreement to the extent necessary to continue the
qualification of the Trust Agreement under the Trust Indenture Act; provided,
that in each case such supplement does not cause the Trust to fail to be
characterized as a trust for federal income tax purposes or the Collateral
Trust, if applicable, to become taxable as an association within the meaning of
Treasury Regulation Section 301.7701-2.
Each Trust Agreement will also contain provisions permitting the Depositor
and the Trustee, with the consent of the Certificateholders evidencing
fractional undivided beneficial ownership interests aggregating not less than a
66 2/3 Percentage Interest of the Trust, to execute supplements adding any
provisions to or changing or eliminating any of the provisions of the Trust
Agreement or modifying the rights of the Certificateholders, except that no such
supplement may, without the consent of each affected Certificateholder and, with
respect to (ii) and (unless there is a monetary default under the related Lease)
(iii), Kmart, (i) modify the provision of the Trust Agreement that concerns
notifying Certificateholders and Kmart of the occurrence of an Event of Default,
modify the provision of the Trust Agreement concerning approval by
Certificateholders of supplements to the Trust Agreement, or modify the
definition of "Certificateholder" in the Trust Agreement; (ii) modify the
definition of "Percentage Interest" in the Trust Agreement or reduce the
Percentage Interests, the consent of the Holders of Certificates of which is
required for any such supplement to the Trust Agreement, or the consent of the
Holders of Certificates of which is required for any waiver provided for in the
Trust Agreement; (iii) reduce the amount or extend the time of payment of any
amount owing or payable under the Mortgage Note(s) or distributions to be made
on any Certificate; (iv) impair the right of any Certificateholder to commence
legal proceedings to enforce a right to receive payment under such Certificate
or under the Trust Agreement; or (v) create or permit the creation of any lien
on the Trust Property or any part thereof, or deprive any Certificateholder of
the benefit of the Trust Agreement, whether by disposition of such Trust
Property or otherwise; provided however, in each case such supplement does not
cause the Trust to fail to be characterized as a trust for federal income tax
purposes or the Collateral Trust, if applicable, to become taxable as an
association within the meaning of Treasury Regulations Section 301.7701-2.
Events of Default
Events of Default under a Trust Agreement in respect of a Series of
Certificates will consist of the occurrence of any event constituting an Event
of Default under any of the Loan Documents or Mortgage
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Note(s) held by the Trustee, or Collateral Trustee if applicable. The Trustee
will be obligated to notify the Certificateholders and Kmart of any Event of
Default within the later of 90 days from the occurrence thereof or 30 days after
obtaining knowledge thereof, unless such Event of Default has been cured or
waived before the giving of such notice. Except in the case of a default in the
payment of principal of, or interest on, the Mortgage Note(s), the Trustee may
withhold such notice so long as its board of directors, the executive committee
or a committee of its directors and/or responsible officers in good faith
determines that the withholding of such notice is in the interests of the
Certificateholders.
Rights Upon Event of Default
So long as an Event of Default has not been remedied, the Trustee, at the
written direction of the holders of Certificates evidencing not less than a
66 2/3 Percentage Interest, will exercise any rights and remedies that it may
have against a Borrower, a Tenant or Kmart (if the Tenant is a Subsidiary)
pursuant to the related Loan Documents, Mortgage Note(s), Lease or Lease
Guaranty, if applicable, or at law or in equity, including injunctive relief and
specific performance, subject to the rights of the related Tenant and Kmart (if
the Tenant is a Subsidiary) under the related Lease, the related Consent and
Agreement, the related Construction Fund Disbursement Agreement, if any, and the
related Construction Fund Disbursement Agreement -- Common Area, if any;
provided that, if as a result of the occurrence of an Event of Default, the
Trustee acquires any property other than cash, whether pursuant to foreclosure
or otherwise, the Trustee will be required to sell such property as promptly as
is reasonably possible. In addition, the Trustee will not be required to take
title to a Facility in a foreclosure or similar proceeding if the Trustee has
actual knowledge or reasonably believes that all or any part of such Facility is
affected by hazardous or toxic wastes or substances. In the case of an Event of
Default which also constitutes a Triggering Event, the Trustee's rights will
include the right to require the related Tenant or Kmart (if the Tenant is a
Subsidiary) to purchase the related Mortgage Note(s) pursuant to the Note Put
Agreement. See "THE NOTE PUT AGREEMENTS."
Where there is both a Collateral Trust and a Pass-Through Trust, the
Pass-Through Trustee will hold a Mortgage Note but not the related Loan
Documents. Consequently, upon an occurrence of an Event of Default under the
Pass-Through Trust Agreement with respect to a Mortgage Note, the Pass-Through
Trustee's principal right and remedy will be to vote the principal balance of
such Mortgage Note, as directed by the Certificateholders of such Pass-Through
Trust, in favor of the exercise by the Collateral Trustee of its rights and
remedies under the related Loan Documents, and accordingly to direct the related
Collateral Trustee to exercise such rights and remedies. The Collateral Trustee
will be required to exercise such rights and remedies if such Collateral Trustee
receives written directions in favor of such exercise from the related
Pass-Through Trustees voting not less than 66 2/3% of the outstanding principal
balance of all Mortgage Note(s) affected by such Event of Default.
The occurrence of an Event of Default pursuant to the Loan Documents
relating to any Mortgage Loan, the related Mortgage Note(s), the related Lease
or the related Lease Guaranty, if applicable, will not give rise to an election
to terminate the Trust. The occurrence of such an Event of Default will not
constitute a cross default with respect to any other Mortgage Loan and will have
no effect on any Loan Documents, Mortgage Note, Lease or Lease Guaranty with
respect to any such other Mortgage Loan. Consequently, remedies may be exercised
only with respect to the related Mortgage Note and Loan Documents. Any amounts
realized upon the exercise of such remedies may be less than the Purchase Price
for such Mortgage Note. No person or entity, including the related Tenant, Kmart
(if the Tenant is a Subsidiary), the related Borrower or the Depositor has any
liability for any deficiency which may result from a sale of a Facility upon
foreclosure of the related Mortgage.
Each Trust Agreement will contain a provision entitling the Trustee,
subject to the duty of the Trustee during the continuance of an Event of Default
to act with the required standard of care, to be indemnified by the
Certificateholders before exercising any right or power under such Trust
Agreement or the related Loan Documents.
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Rights Upon Triggering Event
If a Triggering Event other than a Lease Guaranty Termination occurs, the
Trustee, at the written direction of the holders of Certificates evidencing not
less than a 66 2/3 Percentage Interest (which direction must be given within 90
days after the giving by the Trustee to the Certificateholders of a notice
stating that such Triggering Event has occurred), will exercise its rights under
the Note Put Agreement. If the Triggering Event is a Lease Guaranty Termination,
the Trustee will exercise its rights under the Note Put Agreement unless, within
30 days after notice by the Trustee to the Certificateholders of the occurrence
of such Lease Guaranty Termination, holders of Certificates evidencing not less
than a 66 2/3 Percentage Interest elect not to exercise such rights. In cases
where the Note Put Agreement is held in a Collateral Trust, the 66 2/3
Percentage Interest required for the exercise of such rights (or, in the case of
a Lease Guaranty Termination, the election not to exercise such rights) will be
computed by reference to the outstanding principal amount of all Mortgage Notes
issued pursuant to the applicable Loan Agreement. See "THE NOTE PUT AGREEMENTS."
Termination
Each Trust Agreement and the obligations of the Depositor and the Trustee
created thereby will terminate as to any Mortgage Note and the related Loan
Documents upon the final payment, prepayment in full or other liquidation of
such Mortgage Note, including the disposition of all property acquired upon
foreclosure of such Mortgage Note and the remittance of all funds due thereunder
with respect to such Mortgage Note. In no event, however, will any Trust
continue beyond the expiration of 21 years from the death of the survivor of
certain persons described in such Trust Agreement. Written notice of termination
of the Trust Agreement will be given to each Certificateholder and the final
payment on the Certificates will be made only upon surrender and cancellation of
the Certificates at the corporate trust office of the Trustee.
Reports to Certificateholders
The Trustee will furnish to Certificateholders on each Remittance Date a
statement setting forth the following information (per $1,000 aggregate
principal amount, as to (i) and (ii) below):
(i) that portion of the distribution paid on such Remittance Date
which is allocable to principal on the related Mortgage Note(s);
(ii) that portion of such distribution which is allocable to interest
on the related Mortgage Note(s);
(iii) any amounts expended by the Trustee or the Collateral Trustee,
if applicable, following an Event of Default under any of the Loan
Documents in connection with enforcing the Trustee's or the Collateral
Trustee's rights and remedies thereunder for the benefit of the
Certificateholders; and
(iv) whether any Mortgage Note is delinquent.
So long as the Certificates of any Series are registered in the name of
Cede, as nominee for DTC, on the Record Date prior to each Remittance Date, the
Trustee will request from DTC a securities position listing setting forth the
names of all DTC Participants reflected on DTC's books as holding positions in
such Certificates on such Record Date. On each Remittance Date, the Trustee will
mail to each such DTC Participant the statement described above, and will make
available additional copies as requested by such DTC Participant, to be
available for forwarding to the related Beneficial Owners.
In addition, within 90 days after the end of each calendar year, the
Trustee will prepare for each Certificateholder a report setting forth the
interest paid on the related Mortgage Note(s) during the year with respect to
the Certificates held by such Certificateholder. Such report will be prepared by
the Trustee and will be delivered by the Trustee to such DTC Participants to be
available for forwarding by DTC Participants to Beneficial Owners in the manner
described in the immediately preceding paragraph for so long as the Certificates
of any Series are registered in the name of Cede, as nominee for DTC. If the
Certificates of any Series are issued as Definitive Certificates, the Trustee
will prepare and deliver the information described above to each
Certificateholder of record as the name of such Certificateholder appears on the
records of the Trustee.
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THE COLLATERAL TRUST AGREEMENTS
The Collateral Trustee
The Collateral Trustee under each Collateral Trust Agreement, if any, will
be named in the related Prospectus Supplement. The Collateral Trustee must be a
corporation or national banking association organized under the laws of the
United States of America or of any State, authorized to exercise corporate trust
powers, must have a combined capital and surplus of at least $50,000,000 in the
case of United States Trust Company of New York and of at least $100,000,000 in
the case of any other trustee and must be subject to regulation and examination
by state or federal regulatory authorities. The same entity may serve as
Trustee, Pass-Through Trustee and Collateral Trustee.
The Collateral Trustee may resign at any time by giving written notice to
the related Pass-Through Trustees for distribution to their Certificateholders.
If a Collateral Trustee (i) ceases to be eligible to continue as Collateral
Trustee under the Collateral Trust Agreement, and fails to resign after written
request therefor by the Depositor or a related Pass-Through Trustee at the
direction of a bona fide Certificateholder who has been a bona fide
Certificateholder for at least six months or (ii) becomes incapable of acting as
Collateral Trustee or becomes insolvent, then, in any such case, the Depositor
or the related Pass-Through Trustees may remove the Collateral Trustee and
appoint a successor collateral trustee. A Collateral Trustee may also be removed
at any time by the related Pass-Through Trustees, at the direction of holders of
Certificates evidencing not less than a 66 2/3 Percentage Interest. Any
resignation or removal of a Collateral Trustee will not become effective until
acceptance of the appointment by the successor Collateral Trustee.
Each Collateral Trust Agreement will provide that the Collateral Trustee's
Fees will be paid by the related Tenants pursuant to the Consent and Agreements.
See "THE LEASE, THE LEASE GUARANTIES AND RELATED DOCUMENTS -- The Consent and
Agreements."
Modification of the Collateral Trust Agreements
Each Collateral Trust Agreement will contain provisions permitting the
Depositor and the Collateral Trustee to enter into a supplement to the
Collateral Trust Agreement with the consent of Kmart but without the consent of
the Pass-Through Trustees or the Certificateholders, (i) to evidence the
succession of another Person to the Depositor and the assumption by such Person
of the Depositor's obligations under such Collateral Trust Agreement; (ii) to
add to the covenants of the Depositor for the benefit of the Pass-Through
Trustees and the Certificateholders; (iii) to cure any ambiguity, to correct or
supplement any defective or inconsistent provisions of such Collateral Trust
Agreement or any supplement, or to make any other provisions with respect to
matters or questions arising under such Collateral Trust Agreement or any
supplement, provided such action will not materially adversely affect the
interests of the Pass-Through Trustees or the Certificateholders; (iv) to
correct or amplify the description of any property constituting property of the
Collateral Trust or to acknowledge any change relating to title to the Mortgaged
Property that does not materially adversely affect the rights of the
Certificateholders; (v) to surrender any rights or powers conferred upon the
Depositor or add to the rights of the Pass-Through Trustees for the benefit of
the Certificateholders; or (vi) to evidence or provide for a successor
Collateral Trustee or to add or change any provision of such Collateral Trust
Agreement as may be necessary to provide for or facilitate the administration of
the Collateral Trust created thereby by more than one Collateral Trustee;
provided, that in each case such supplement does not cause the Collateral Trust
to become taxable as an association within the meaning of Treasury Regulation
Section 301.7701-2 or cause any Trust to fail to be characterized as a trust for
federal income tax purposes.
Each Collateral Trust Agreement will also contain provisions permitting the
Depositor and the Collateral Trustee, with the consent of the Pass-Through
Trustees at the direction of holders of Certificates evidencing pass-through
ownership of not less than 66 2/3% of the aggregate outstanding principal
balance of all Mortgage Notes, to execute supplements adding any provisions to
or changing or eliminating any of the provisions of the Collateral Trust
Agreement or modifying the rights of the Pass-Through Trustees or the
Certificateholders, except that no such supplement may, without the consent of
each affected Certificateholder and, with respect to (ii) and (unless there is a
monetary default under the related Lease) (iii), Kmart, (i) modify the provision
of the Collateral Trust Agreement that concerns notifying the related
Pass-Through Trustees and Kmart of
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the occurrence of an Event of Default, modify the provision of the Collateral
Trust Agreement concerning approval by the related Pass-Through Trustees and
Certificateholders of supplements to the Collateral Trust Agreement, or modify
the definitions of "Pass-Through Trust," "Pass-Through Trustee" or
"Certificateholder" in the Collateral Trust Agreement, (ii) modify the
definition of "Percentage Interest" in the Collateral Trust Agreement or reduce
the Percentage Interest vote that is required for any such supplement to the
Collateral Trust Agreement, or the consent required from the related
Pass-Through Trustees for any waiver provided for in the Collateral Trust
Agreement; (iii) reduce the amount or extend the time of payment of any amount
owing or payable under the Mortgage Note(s); (iv) impair the right of any
related Pass-Through Trustee or Certificateholder to commence legal proceedings
to enforce a right to receive payment on a related Mortgage Note; or (v) create
or permit the creation of any lien on the Collateral Trust Property or any part
thereof, or deprive any Certificateholder of the benefit of the Collateral Trust
Agreement, whether by disposition of such Collateral Trust Property or
otherwise; provided, that in each such case such supplement does not cause the
Collateral Trust to become taxable as an association within the meaning of
Treasury Regulation Section 301.7701-2 or cause any Pass-Through Trust to fail
to be characterized as a trust for federal income tax purposes.
Events of Default
Events of Default under a Collateral Trust Agreement will consist of the
occurrence of any event constituting an Event of Default under any of the Loan
Documents held by the Collateral Trustee or the Mortgage Notes held by the
related Pass-Through Trustees. The Collateral Trustee will be obligated to
notify the Pass-Through Trustees of such Event of Default within five Business
Days after the Collateral Trustee obtains knowledge thereof, unless such Event
of Default has been cured or waived before the giving of such notice.
Rights Upon Event of Default
So long as an Event of Default has not been remedied, the Collateral
Trustee, at the written direction of Pass-Through Trustees voting not less than
66 2/3% of the outstanding principal balance of the Mortgage Notes affected by
such Event of Default, will exercise any rights and remedies that it may have
against a Borrower, a Tenant or, if the Tenant is a Subsidiary, Kmart pursuant
to the related Loan Documents, Mortgage Notes, Lease or Lease Guaranty, if
applicable, or at law or in equity, including injunctive relief and specific
performance, subject to the rights of the Tenant and, if the Tenant is a
Subsidiary, Kmart under the related Lease, the related Consent and Agreement,
the related Construction Fund Disbursement Agreement, if any, and the related
Construction Fund Disbursement Agreement -- Common Area, if any; provided that,
if as a result of the occurrence of an Event of Default, the Collateral Trustee
acquires any property other than cash, whether pursuant to foreclosure or
otherwise, the Collateral Trustee will sell such property as promptly as is
reasonably possible. In addition, the Collateral Trustee will not be required to
take title to a Facility in a foreclosure or similar proceeding if the
Collateral Trustee has actual knowledge or reasonably believes that all or any
part of such Facility is affected by hazardous or toxic wastes or substances. In
the case of an Event of Default which also constitutes a Triggering Event, the
rights of the Collateral Trustee will include the right to require the related
Tenant or Kmart (if the Tenant is a Subsidiary) to purchase the related Mortgage
Note(s) pursuant to the Note Put Agreement. See "THE NOTE PUT AGREEMENTS."
The occurrence of an Event of Default pursuant to any of the Loan Documents
relating to any Mortgage Loan, the related Mortgage Notes, the related Lease or
the related Lease Guaranty, if applicable, will not give rise to an election to
terminate the Collateral Trust as to such Mortgage Loan. The occurrence of such
an Event of Default will not constitute a cross default with respect to any
other Mortgage Loan held by the Collateral Trust and will have no effect on any
Loan Documents, Mortgage Note, Lease or Lease Guaranty, if applicable, with
respect to any such other Mortgage Loan. Consequently, remedies may only be
exercised with respect to the related Mortgage Note and Loan Documents. Any
amounts realized upon the exercise of such remedies may be less than the
Purchase Price for such Mortgage Note.
Each Collateral Trust Agreement will contain a provision entitling the
Collateral Trustee, subject to the duty of the Collateral Trustee during the
continuance of an Event of Default to act with the required standard
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of care, to be indemnified by the holders of Certificates evidencing
pass-through ownership of not less than 66 2/3% of the aggregate outstanding
principal balance of the Mortgage Notes before exercising any right or power
under such Collateral Trust Agreement.
Termination
Each Collateral Trust Agreement and the obligations of the Depositor and
the Collateral Trustee created thereby will terminate with respect to any
Mortgage Loan and related Loan Documents upon the final payment, prepayment in
full or other liquidation of the Mortgage Notes held by the related Pass-Through
Trusts, including the disposition of all property acquired upon foreclosure of
such Mortgage Notes, and the remittance to the Pass-Through Trustee of all funds
due with respect thereto under the Collateral Trust Agreement. In no event,
however, will any Collateral Trust continue beyond the expiration of 21 years
from the death of the survivor of certain persons described in such Collateral
Trust Agreement.
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THE MORTGAGE NOTES, THE LOAN AGREEMENTS AND RELATED DOCUMENTS
The following summaries describe certain provisions of the Mortgage Notes,
the Loan Agreements, the Mortgages and the Assignments of Leases and Rents. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of such documents, the forms of
which (each in substantially the form in which it will be used) have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
Concurrently with the issuance of each Series of Certificates, the
Depositor will make one or more Mortgage Loans from the proceeds of such
issuance to one or more Borrowers. Each Mortgage Loan will be made to a
different Borrower, which will enter into a Loan Agreement with the Depositor.
The Loan Agreements will require the Borrowers to execute and deliver to the
Depositor Mortgage Notes evidencing the Mortgage Loans together with the other
Loan Documents securing the Mortgage Loans. The Depositor in turn will assign
all of its right, title and interest in, under and to the Loan Documents and the
Mortgage Notes to the Trustee under the related Trust Agreement for such Series
if all Mortgage Notes have the same maturity. If the Mortgage Notes have
different maturities, the Depositor will assign all of its right, title and
interest in, under and to the Mortgage Notes to different Pass-Through Trusts
such that all the Mortgage Notes in any Pass-Through Trust will have the same
maturity, and the Depositor will assign all of its right, title and interest in,
under and to the other Loan Documents to the Collateral Trustee under the
related Collateral Trust Agreement.
SCHEDULED PAYMENTS
Each Mortgage Note will be a promissory note obligating a Borrower to make
Scheduled Payments which will be passed through to the Trust or Pass-Through
Trust to pay Debt Service on the related Series of Certificates. The Lease
Payments due pursuant to a Lease will be scheduled to be sufficient to pay
Scheduled Payments on the related Mortgage Notes(s). The maturity date of the
Mortgage Notes acquired by each Trust will correspond to the final scheduled
Remittance Date applicable to the Certificates evidencing interests in such
Trust. Each Mortgage Note will provide for an increased interest rate applicable
to any overdue principal or interest payments with respect to such Mortgage
Note. The related Lease will provide for a late payment rate on any Lease
Payments or portions thereof that are not paid when due (including any grace
period). The late payment rate in a Lease is scheduled to be sufficient to pay
the overdue rate on the related Mortgage Note(s). See "THE CERTIFICATES --
Distributions of Scheduled Payments."
Each Trust will acquire Mortgage Notes having an interest rate
corresponding to the interest rate on the Certificates evidencing interests in
such Trust. The aggregate principal amount of the Certificates evidencing
interests in each Trust will be equal to the aggregate principal amount of the
Mortgage Notes held in such Trust.
PREPAYMENTS
Optional Prepayment
Unless otherwise specified in the related Prospectus Supplement, each
Borrower will have the option at any time and from time to time to prepay a
Mortgage Note in whole or in part (but if in part, then in units of $1,000,000
or an integral multiple of $100,000 in excess thereof) by payment of the
Purchase Price. Any optional prepayment of a Mortgage Note will be distributed
by the Trustee or Pass-Through Trustee to the related Certificateholders based
upon their Percentage Interests. See "THE CERTIFICATES -- Other Distributions --
Optional Prepayment Distribution."
Mandatory Prepayments
A Borrower will be required to prepay a Mortgage Note at the Purchase Price
in the event the related Lease is terminated in connection with a taking by
condemnation of all or any part of, or a casualty affecting,
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the related Facility. See "THE LEASES, LEASE GUARANTIES AND RELATED DOCUMENTS --
The Leases -- Condemnation and Casualty." In the event of any such required
prepayment, any Insurance Proceeds or Condemnation Proceeds will be used to pay
the Purchase Price of the related Mortgage Loan. There can be no assurance that
such Insurance Proceeds or Condemnation Proceeds will be sufficient to pay such
Purchase Price in full, although, in the case of a termination resulting from
damage or destruction during the last two years of the term of the Leases, the
resulting Insurance Proceeds may, in light of the fact that the Mortgage Note
fully amortizes during its term, be sufficient to pay all amounts due under the
Mortgage Note, except in the case of extraordinary devaluation of the Facility
during the term of the Mortgage Note. If the Insurance Proceeds or Condemnation
Proceeds are insufficient to pay the Purchase Price in full, the Borrower will
in all likelihood not have sufficient funds to pay the deficiency, and there can
be no assurance that such deficiency will be satisfied out of the proceeds of
any subsequent foreclosure of the related Facility.
In the event of any condemnation of a Facility which does not result in the
termination of the related Lease, the Lease Payments under such Lease may be
abated (see "THE LEASES, LEASE GUARANTIES AND RELATED DOCUMENTS -- The Leases --
Condemnation and Casualty") and, in such event, Scheduled Payments under the
related Mortgage Note(s) will be reduced in the same proportion as Lease
Payments have been abated under such Lease. Any Condemnation Proceeds resulting
from such condemnation will be applied by the related Tenant to restore the
related Facility. In the unlikely event that such Condemnation Proceeds exceed
the amount necessary to restore the Facility, such excess will be used to prepay
a portion of the related Mortgage Note(s) (including the Make-Whole Premium with
respect to such portion). Subsequent Scheduled Payments will be applied first to
pay accrued interest on the related Mortgage Note(s) and then to reduce the
principal of such Mortgage Note(s), and any unpaid interest will, to the extent
permitted under applicable law, be capitalized. The unpaid principal amount of
such Mortgage Note(s), together with all accrued and unpaid interest, will be
due and payable at the maturity date of Mortgage Note with the longest term
issued pursuant to the related Loan Agreement. See "THE CERTIFICATES -- Other
Distributions -- Distribution Due to Casualty or Condemnation."
Any prepayment of any Mortgage Loan in connection with a casualty or
condemnation will be distributed by the Trustee or Pass-Through Trustee to the
related Certificateholders based upon their Percentage Interests.
Liquidation
If an Event of Default under a Loan Document occurs (other than a
non-monetary default by a Tenant under a Lease) and if the Trustee, or
Collateral Trustee if applicable, accelerates the related Mortgage Note, the
related Borrower will be required to pay the Purchase Price to the Trustee or
Collateral Trustee. All proceeds of any foreclosure or any other liquidation of
the related Mortgage Note under the related Loan Documents, net of expenses
incurred in connection therewith, from such liquidation will be applied toward
payment of such Purchase Price. All of such net proceeds will be distributed by
the Trustee, or the Pass-Through Trustee if applicable, to the
Certificateholders based upon their Percentage Interests. There can be no
assurance that the proceeds of any such liquidation will be sufficient to pay
the Purchase Price of the related Mortgage Note(s). See "THE CERTIFICATES --
Other Distributions -- Distribution Due to Liquidation."
Purchase Price
The Purchase Price for a Mortgage Note in case of an optional prepayment,
mandatory prepayment or liquidation will be equal to the outstanding principal
balance of such Mortgage Note, accrued interest thereon and the Make-Whole
Premium related thereto. Under the laws of certain states the enforceability of
the obligation to pay amounts similar to the Make-Whole Premium is unclear, and
there can be no assurance that the obligation to pay the Make-Whole Premium will
be enforceable in the event of a prepayment or acceleration of a Mortgage Note.
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EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a Series, Events
of Default under each Loan Agreement and Mortgage Note will include the
following (after the expiration of any applicable cure periods):
(i) a default in the payment or prepayment of the principal of,
Make-Whole Premium, if any, or interest on, a Mortgage Note when due;
(ii) if applicable, the construction of a Facility ceases for a period
longer than that specified in the Loan Agreement or is abandoned or is not
completed in compliance with the Loan Agreement on or before the date
specified in the Loan Agreement;
(iii) the occurrence of a default under a Lease, a Lease Guaranty, if
applicable, or an Indemnity Agreement, if applicable; and
(iv) the occurrence of any default by Kmart in the performance of its
obligations under a Note Put Agreement.
Each Loan Agreement also will provide for other Events of Default that are
customary in mortgage loan transactions. An event or condition giving rise to an
Event of Default under a Loan Agreement will not necessarily give rise to an
Event of Default under the related Lease or permit the Trustee, or the
Collateral Trustee if applicable, to exercise any remedy against the Tenant or,
if the Tenant is a Subsidiary, Kmart under the related Lease, Lease Guaranty, if
applicable, or Note Put Agreement. An Event of Default with respect to one
Mortgage Loan will not constitute an Event of Default under any other Mortgage
Loan or the Loan Documents related thereto or permit the Trustee, or Collateral
Trustee if applicable, to exercise any remedies with respect to any other
Mortgage Loan or the Loan Documents related thereto.
REMEDIES UPON EVENT OF DEFAULT
If any Event of Default occurs and is continuing following any applicable
cure period, the Trustee, or the Collateral Trustee if applicable, as assignee
of the Depositor will upon the direction of 66 2/3 Percentage Interests of the
Certificateholders, declare the entire unpaid principal amount of such Mortgage
Note, interest accrued thereon and the Make-Whole Premium immediately due and
payable and the Trustee, or the Collateral Trustee if applicable, will be
entitled to commence proceedings for immediate foreclosure of the Mortgage and
may avail itself of any other relief to which the Trustee, or the Collateral
Trustee if applicable, may be legally or equitably entitled under the other Loan
Documents, the Mortgage Notes, or otherwise. The Trustee, or the Collateral
Trustee if applicable, will, upon becoming the owner of the Facility pursuant to
any such foreclosure, take title subject to the related Lease, provided that, if
a monetary Event of Default exists under such Lease and, if the Tenant is a
Subsidiary, any Lease Guaranty, the Trustee, or the Collateral Trustee if
applicable, will have the right, after completion of such foreclosure (possibly
including the expiration of any redemption period) or prior to such completion
if permitted under the laws of the state in which the Facility is located, to
exercise the right of the Borrower as lessor to terminate such Lease. In the
case of an Event of Default which also constitutes a Triggering Event, the
rights of the Trustee, or Collateral Trustee if applicable, will include the
right to require the related Tenant or Kmart (if the Tenant is a Subsidiary) to
purchase the related Mortgage Note(s) pursuant to the Note Put Agreement. See
"THE NOTE PUT AGREEMENTS."
LIMITATION OF A BORROWER'S LIABILITY
Each Loan Agreement will provide that the recourse of the Trustee, or the
Collateral Trustee if applicable, will be limited to foreclosure and other
remedies set forth in the Loan Documents. Generally, neither a Borrower nor any
of its affiliates will be personally liable for payment of principal, interest
or other amounts which may become due and payable under any of the Loan
Documents, the holder of a Mortgage Note will be entitled to look solely to the
security provided for in the Loan Documents, and no deficiency judgment for
amounts unsatisfied after the application of such security and the proceeds
thereof may be obtained against a Borrower or its affiliates. The general
limitation on the personal liability of the Borrower and its affiliates will not
prejudice the rights of the Trustee, or the Collateral Trustee if applicable, to
recover
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(i) for fraud, intentional misrepresentation or breach of any representation or
warranty or willful misconduct by or on behalf of a Borrower, (ii) certain
funds, deposits, advances and other amounts which may be held by or for a
Borrower at the time of an Event of Default under a Mortgage Note or any other
Loan Documents, and (iii) amounts recoverable for certain environmental hazards.
However, because each Borrower is expected to be an entity without any assets
(other than the related Facility) the recourse of the Trustee or the Collateral
Trustee will be limited even in those instances where personal liability may be
established against a Borrower.
THE MORTGAGES
General
The Mortgage Note(s) issued under a Loan Agreement, and the payment and
performance of all of the obligations of the Borrower under such Loan Agreement,
will be secured by a first mortgage and security interest in (i) a Facility and
all improvements thereon; (ii) all leases, rents, profits, royalties and income
and other benefits derived from the Facility; (iii) all right, title and
interest of a Borrower in and to all tangible personal property, whenever
acquired by the Borrower, which is located on or at the Facility and used solely
in connection therewith; (iv) all of the Borrower's interest in intangible
property related to the acquisition, ownership, leasing, construction,
operation, servicing or management of the Facility; and (v) all of the
Borrower's interest in claims or demands including those with respect to
Insurance Proceeds and Condemnation Proceeds of the whole or any part of the
Facility. Each Mortgage will be subordinate to the related Lease.
Each Mortgage will provide that the Borrower may transfer its interest in
the Facility prior to the completion of construction only with the consent of
the Trustee, or Collateral Trustee if applicable, as assignee of the Depositor.
Thereafter, if no default under the Mortgage has occurred and is continuing, and
subject to satisfying certain conditions set forth in the Mortgage, the Borrower
may transfer its interest in the Facility without the consent of the Trustee or
the Collateral Trustee.
Events of Default
An Event of Default under a Loan Agreement will also be an Event of Default
under the related Mortgage. In addition, any failure on the part of a Borrower
to perform any covenants or agreements contained in the related Mortgage which
are not cured within 30 days after notice thereof will constitute an Event of
Default under such Mortgage.
Remedies Upon Event of Default
Upon the occurrence of an Event of Default, the Trustee, or the Collateral
Trustee if applicable, may declare all obligations secured by a Mortgage to be
due and payable and thereafter, subject to the provisions of applicable state
law, the Trustee, or Collateral Trustee if applicable, may (i) enter upon and
take possession of the related Facility; (ii) commence an action to foreclose
the Mortgage; (iii) exercise any and all of the remedies available to a secured
party under applicable law; and (iv) apply to any court having jurisdiction to
appoint a receiver of the Facility or to specifically enforce any of the
covenants set forth in the Mortgage.
If the Trustee, or the Collateral Trustee if applicable, forecloses by
reason of the occurrence of an Event of Default prior to the completion of
construction of a Facility, the Tenant will, prior to the occurrence of a
Triggering Event, retain its right under the related Construction Fund
Disbursement Agreement and any Construction Fund Disbursement Agreement --
Common Area to complete construction of the Facility and Common Area. See "THE
LEASES, THE LEASE GUARANTIES AND RELATED DOCUMENTS -- Construction Fund
Disbursement Agreements."
If the Trustee, or Collateral Trustee if applicable, forecloses on a
Facility, it may not be able subsequently to exercise its rights under the
related Note Put Agreement if the Mortgage Note is deemed to have been
extinguished in or satisfied by the foreclosure proceeding. However, a
foreclosure will not affect the continuing rights and obligations of the Tenant
under the Lease or of Kmart (if the Tenant is a Subsidiary) under the Lease
Guaranty.
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THE ASSIGNMENTS OF LEASES AND RENTS
Pursuant to an Assignment of Leases and Rents, all Lease Payments due under
a related Lease will be assigned to the Trustee or Collateral Trustee, if
applicable. The Assignment of Leases and Rents will also give the Trustee or
Collateral Trustee the right, upon the occurrence of an Event of Default under
the related Loan Agreement, to exercise the rights and remedies of the related
Borrower as lessor under the Lease. Although each Assignment of Leases and Rents
will, by its terms, be a present assignment of the related Lease and Lease
Payments, it may, under the laws of certain states in which Facilities are
located, be deemed a collateral assignment. In such event, the rights of the
Trustee or Collateral Trustees thereunder may be exercisable only upon
completion of a foreclosure of the related Mortgage (possibly including the
expiration of any redemption period) or otherwise as permitted or required under
the laws of the applicable state.
THE NOTE PUT AGREEMENTS
The following summary describes certain provisions of the Note Put
Agreements to be entered into by and among Kmart, a Subsidiary (if it is a
Tenant) and the Depositor. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of
each Note Put Agreement, the form of which (in substantially the form in which
it will be used) has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Each Note Put Agreement will provide that, in the event (a) (i) a Tenant
fails to pay when due any Lease Payment within 10 days (or 30 days if the Tenant
is Kmart) after notice to the Tenant of such default and (ii) if the Tenant is a
Subsidiary, Kmart fails to pay any such Lease Payment within 30 days after
notice to Kmart of such Subsidiary's failure to do so (which notice may be given
concurrently with the corresponding notice to such Subsidiary), (b) completion
of construction of the Facility to be leased to the Tenant does not occur prior
to the Completion Date, or (c) if the Tenant is a Subsidiary, a Lease Guaranty
Termination occurs (each, a Triggering Event), the Trustee, or Collateral
Trustee if applicable, will have the right to require the Tenant, and in the
event of the Tenant's failure to do so when the Tenant is a Subsidiary, to
require Kmart to purchase the related Mortgage Note(s) in whole (but not in
part) at the Purchase Price. If a Triggering Event other than a Lease Guaranty
Termination occurs, the Trustee, at the written direction of the holders of
Certificates evidencing not less than a 66 2/3 Percentage Interest (which
direction must be given within 90 days after the giving by the Trustee to the
Certificateholders of a notice stating that such Triggering Event has occurred),
will exercise its rights under the Note Put Agreement. If the Triggering Event
is a Lease Guaranty Termination, the Trustee will exercise its rights under the
Note Put Agreement unless, within 30 days after notice by the Trustee to the
Certificateholders of the occurrence of such Lease Guaranty Termination, holders
of Certificates evidencing not less than a 66 2/3 Percentage Interest elect not
to exercise such rights. In cases where the Note Put Agreement is held in a
Collateral Trust, the 66 2/3 Percentage Interest required for the exercise of
such rights (or, in the case of a Lease Guaranty Termination, the election not
to exercise such rights) will be computed by reference to the outstanding
principal amount of all Mortgage Notes issued pursuant to the applicable Loan
Agreement.
The Purchase Price for a Mortgage Note pursuant to the Note Put Agreement
will be equal to (i) the outstanding principal balance of such Mortgage Note,
(ii) accrued interest thereon and (iii) the Make-Whole Premium related thereto,
or, in the case of a purchase of a Mortgage Note as a result of a Lease Guaranty
Termination, the lesser of the Make-Whole Premium and the Termination Premium.
Under the laws of certain states the enforceability of the obligation to pay
amounts similar to the Make-Whole Premium or the Termination Premium is unclear,
and there can be no assurance that the obligation to pay the Make-Whole Premium
or the Termination Premium will be enforceable upon the occurrence of a
Triggering Event.
In the event the Trustee, or the Collateral Trustee, if applicable,
exercises its rights under the related Note Put Agreement, the date of sale of
the Mortgage Note(s) will be not more than 35 Business Days after the Trustee,
or Collateral Trustee, receives direction to sell such Mortgage Note(s). The
Purchase Price will be deposited with the Trustee, or, if applicable, with the
Collateral Trustee which will transfer it to the related Pass-Through Trustees
on the next Business Day. Any Purchase Price received by a Trustee, or
Collateral Trustee, pursuant to the exercise of rights under a Note Put
Agreement, less any expense incurred by the
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Trustee, or Pass-Through Trustees and Collateral Trustee, if applicable, will be
distributed to Certificateholders within 30 days of receipt. See "THE
CERTIFICATES -- Other Distributions -- Distribution from Proceeds of Purchase of
Mortgage Note."
The Note Put Agreement will terminate if the related Mortgage Note(s) are
not required to be purchased in accordance with such Note Put Agreement as a
consequence of a Lease Guaranty Termination. See "THE LEASES, THE LEASE
GUARANTIES AND RELATED DOCUMENTS -- The Lease Guaranty Agreements --
Termination."
THE LEASES, THE LEASE GUARANTIES AND RELATED DOCUMENTS
The following summaries describe certain provisions of the Leases, the
Lease Guaranties, the Consent and Agreements, the Indemnity Agreements and the
Construction Fund Disbursement Agreements. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to the
provisions of, such documents, the forms of which (each in substantially the
form in which it will be used) have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
THE LEASES
General
Each Facility will be leased to a Tenant which will be either Kmart or a
Subsidiary. The obligations of a Subsidiary under a Lease will be guaranteed by
Kmart pursuant to a Lease Guaranty. The Leases will be assigned by the Borrower
to the Depositor pursuant to an Assignment of Leases and Rents and the Mortgage,
and the Depositor's rights under those documents will then be assigned to the
Trustee, or to the Collateral Trustee if applicable.
Term and Rental
Each Lease will have a primary term that, excluding renewal or extension
terms, will expire on or after the scheduled maturity of the related Mortgage
Note(s) unless terminated due to certain casualty, condemnation or bankruptcy
events. Lease Payments will be payable monthly and will be scheduled to be in
amounts sufficient to pay Scheduled Payments on the related Mortgage Note(s).
The term of each Lease and the obligation of the Tenant to make Lease Payments
will commence on the date specified in each Lease whether or not construction of
the Facility has been completed, the Tenant takes occupancy or accepts the
Facility as constructed.
Net Lease
The obligation of the Tenant under each Lease will, except with respect to
the cost of construction and certain environmental costs and liabilities, be
that of a lessee under a "net lease." The Tenant's obligation to pay rent under
each Lease will be absolute and unconditional and amounts payable by the Tenant
under each Lease will be paid as absolute net sums, without diminution for any
reason except for a permitted termination by the Tenant by reason of certain
casualty or condemnation events as described below (see "Condemnation and
Casualty"), a rejection of the Lease by a Borrower as lessor in a bankruptcy
proceeding if the Tenant is deprived of possession of the Facility by reason of
such rejection, certain Tenant bankruptcy events (see "CONSEQUENCES OF
BANKRUPTCY OF A TENANT OR A BORROWER") or an abatement of Lease Payments
following a condemnation which does not result in a Lease termination. The
Tenant will be obligated to pay all costs, including without limitation real
estate taxes and utilities, associated with the Facility, except for the costs
of construction and acquisition and certain environmental costs and liabilities.
Maintenance and Alterations
Each Lease will require the Tenant to make and pay for all maintenance,
replacement and repair necessary to keep the related Facility in a good state of
repair and tenantable condition. The Tenant may, at its own expense, from time
to time, make such additions or changes, structural or otherwise in and to the
Facility
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as it may deem necessary or suitable, which additions or changes (other than a
Tenant's trade fixtures) will become the property of the related Borrower. The
Tenant may also, at its own expense, at any time, erect or construct additional
buildings, structures or improvements, which will become a part of the Facility
and subject to all obligations under the Lease. Any alterations, additions or
improvements will be required to be made in a good and workmanlike manner and in
compliance with applicable law.
Use, Assignment and Subletting
Except as otherwise specified in the related Prospectus Supplement, each
Lease will generally provide that the related Facility may be used for any
lawful purpose. Each Lease will permit the Tenant to assign the Lease or sublet
the whole or any part of the related Facility without the consent of the
Borrower or the related Trustee, or Collateral Trustee if applicable, but in any
such case, the Tenant will remain primarily liable under the Lease, and Kmart,
if the Tenant is a Subsidiary, will remain liable under the Lease Guaranty. The
Tenant will not be required continuously to operate or occupy the Facility.
Insurance
Provided that the net worth of the Tenant or Kmart (if the Tenant is a
Subsidiary) exceeds $100,000,000, as determined in accordance with generally
accepted accounting principles consistently applied, the Tenant will be
permitted under each Lease to self-insure. If the Tenant elects not to, or is
not entitled to, self-insure, the Tenant will be required, at its own cost and
expense, to obtain and maintain insurance in the amounts and upon the terms and
conditions set forth in the Lease. All property insurance maintained by the
Tenant must be for 100% of the replacement value of the Facility, exclusive of
excavation costs.
Condemnation and Casualty
In the event that at any time during the term of a Lease the related
Facility is damaged or destroyed (partially or totally) by fire or other
casualty, the Lease will require that the Tenant, at its own expense, promptly
repair, rebuild and restore the Facility to the condition existing just prior to
such damage or destruction, or for the same use and purpose but in accordance
with such plans and specifications as are then generally in use by the Tenant
for the construction of the Tenant's stores and related structures; provided,
however, the repaired, rebuilt or replaced building has a value not less than
its fair market value immediately prior to such loss. Notwithstanding the
foregoing, each Lease will provide that if such damage or destruction takes
place within two years prior to the expiration date of the current term of the
Lease and if the cost of restoration exceeds 50% of the fair market value of the
Facility at the time such damage or destruction took place, the Tenant will have
the option to terminate the Lease as of the date such damage or destruction took
place by giving written notice to the Borrower within 30 days thereafter. After
such termination, the Tenant will have an additional 60 days, rent free, within
which to remove its property from the Facility. If the Tenant so terminates the
Lease and is carrying property insurance, all Insurance Proceeds will be paid to
the Trustee, or the Collateral Trustee if applicable. If the Facility is
self-insured and the Tenant terminates the Lease, the Tenant will pay the
Trustee, or the Collateral Trustee if applicable, an amount sufficient to
rebuild the Facility whether or not rebuilt.
In the event that all of a Facility is permanently expropriated, the
related Lease will automatically terminate. If (i) the points of ingress and
egress to public roadways are materially impaired by a permanent expropriation
by a public or quasi-public authority (with no reasonable replacement points of
ingress and egress) so as to render the Facility unsuitable for its intended
use, or (ii) less than the whole, but more than 10%, or such other greater
percentage as may be specified in the Prospectus Supplement, of the square
footage of the building or land constituting the Facility is permanently
expropriated by public or quasi-public authority, the Tenant will have the
option to terminate the related Lease as of the date of such permanent
expropriation.
In the event a Lease is terminated because of casualty loss or
condemnation, the only source of funds to prepay the related Mortgage Note(s) is
likely to be the Insurance Proceeds or Condemnation Proceeds, respectively, and
any amounts that could be realized from the liquidation of the related Mortgaged
Property.
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There can be no assurance that such amounts would be sufficient to pay the
Purchase Price of the related Mortgage Note(s).
In the event of an expropriation of a portion of a Facility under
circumstances where the Lease is not terminated, the Lease will continue as to
the portion of the Facility which has not been expropriated or taken. If the
floor area of the Facility is reduced as a result of such expropriation, Lease
Payments will be proportionately reduced to reflect such reduction. The Tenant
will be required, at its sole cost and expense, promptly to restore the Facility
as nearly as practicable to the condition existing prior to such expropriation,
or for the same use and purpose but in accordance with such plans and
specifications as are then generally in use by the Tenant for the construction
of the Tenant's stores and related structures. All Condemnation Proceeds will be
paid over to the Tenant for restoration, and restoration costs in excess of the
Condemnation Proceeds will be paid by the Tenant. Any Condemnation Proceeds in
excess of restoration costs will be paid to the Trustee, or the Collateral
Trustee if applicable, as assignee of the Depositor and will be applied against
amounts outstanding under the related Mortgage Note(s). See "THE CERTIFICATES --
Other Distributions -- Distribution Due to Casualty or Condemnation" and "THE
MORTGAGE NOTES AND THE LOAN AGREEMENTS -- Prepayments -- Mandatory Prepayments."
Borrower Bankruptcy
If a Borrower is in bankruptcy and rejects the related Lease, the related
Consent and Agreement will require the related Tenant to elect under Section
365(h) of the Bankruptcy Code to remain in possession of the Facility for the
remaining term of such Lease. However, if, notwithstanding such election, the
Tenant is deprived of possession of the Facility as a result of such Borrower's
rejection of the Lease in the bankruptcy proceeding, the Lease will terminate
and such Tenant and Kmart (if the Tenant is a Subsidiary) will have no further
obligations under such Lease, the related Lease Guaranty or the related Note Put
Agreement.
Remedies Upon Event of Default
Each Lease will provide that in the case of nonpayment of rent, if the
Tenant is in default for a period of 10 days after notice to the Tenant, and (if
the Tenant is a Subsidiary) Kmart is in default under the related Lease Guaranty
for 30 days after written notice to Kmart, then the Borrower, as lessor under
the Lease, with the consent of the Trustee, or Collateral Trustee if applicable,
may by giving notice to the Tenant at any time thereafter during the continuance
of such default either terminate the Lease, or reenter the related Facility by
summary proceedings or otherwise, and, in either case, expel the Tenant and
remove all property therefrom, relet the Facility at the best possible rent
readily attainable and receive the rent from the Facility; provided, however
that the Tenant and, if the Tenant is a Subsidiary, Kmart, as guarantor under
the Lease Guaranty, will remain liable for any and all deficiencies in Lease
Payments. The Lease by its terms gives neither the Borrower, as lessor under the
Lease, nor the Trustee (or Collateral Trustee, if applicable) as assignee of the
Borrower's rights under the Lease, any right to collect such deficiencies on an
accelerated basis. The Borrower (or the Trustee or Collateral Trustee) must
instead proceed against the Tenant for such deficiencies as and when they become
due. However, in the event of a payment default under the Lease and a default
under the related Lease Guaranty, the Trustee or Collateral Trustee, if
applicable, will be entitled, if such defaults are not cured within the period
specified in the Note Put Agreement, to exercise its rights under the Note Put
Agreement. See "THE NOTE PUT AGREEMENTS." Neither the Borrower nor the Trustee
(or Collateral Trustee, if applicable) have the right to terminate the Lease by
reason of non-monetary defaults by the Tenant; however, the Borrower will, in
the event of any such default, be entitled to bring an action against the Tenant
for damages or injunctive relief.
Indemnification
Each Lease will contain provisions obligating the Tenant to indemnify the
related Borrower and the Trustee, or the Collateral Trustee if applicable, as
assignee of the Depositor against any liability for damage to property or
injuries sustained by any person within the Facility prior to or during the term
of the Lease, except for liabilities arising from the Borrower's negligence.
Each Lease and the related Consent and Agreement will further contain provisions
obligating the Tenant to indemnify the Borrower, the Depositor and the Trustee,
or
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the Collateral Trustee if applicable, and to provide insurance, against
liabilities caused by the Tenant, its employees or agents during the Tenant's
occupancy of the Facility (although not during any construction at the Facility
by the Tenant prior to its taking occupancy) and arising out of the release,
use, storage, treatment, transportation, transfer, manufacture, refinement,
handling, production, disposal or threatened release of hazardous materials or
related violations of environmental laws.
The Borrower will be required under the Lease to indemnify the Tenant
against environmental liabilities which are not caused by the Tenant, its
employees or agents. If the Borrower incurs any liability under its indemnity in
favor of the Tenant, or any liability to a third party by reason of any
environmental condition as to which the Tenant has not given its indemnity, the
Borrower will in all likelihood not have any assets (other than the Facility) in
order to satisfy such liability (although, under the Lease, the Tenant will have
no recourse against the Borrower until the earlier of the expiration of the
initial term of the Lease or the payment in full of the related Mortgage
Note(s)). In addition, if the Trustee or Collateral Trustee, if applicable,
becomes the owner of a Borrower's interest in a Facility as the result of a
foreclosure, it may become subject to liability for environmental costs and
liabilities as to which it has not been indemnified by the Tenant or, if the
Tenant is a Subsidiary, by Kmart pursuant to the related Lease Guaranty. It will
be a condition to the making of each Mortgage Loan that the Depositor obtain or
cause to be obtained a phase I environmental audit of the related Facility
satisfactory to the Depositor and such further information or studies as the
Depositor deems necessary. In addition, the Loan Documents will require the
maintenance of insurance against environmental liabilities, although there can
be no assurance that such insurance will cover all environmental risks or that
such insurance will remain available at all times. The Tenant will pay premiums
for such environmental liability insurance pursuant to the Consent and
Agreement.
THE LEASE GUARANTY AGREEMENTS
General
If the Tenant is a Subsidiary, Kmart will enter into a Lease Guaranty
Agreement ("Lease Guaranty") with a Borrower with respect to the related
Facility. The Lease Guaranty will be assigned by the Borrower to the Depositor
pursuant to an Assignment of Leases and Rents and the Mortgage, and the
Depositor's rights under those documents then will be assigned to the Trustee,
or to the Collateral Trustee if applicable.
The Lease Guaranty
Pursuant to the terms of each Lease Guaranty, Kmart will absolutely and
unconditionally guarantee to a Borrower the full and punctual payment,
performance and observance by the related Subsidiary of all of the terms,
conditions, covenants and obligations to be performed and observed by the
Subsidiary under the related Lease. Except for the right of Kmart and the
Subsidiary to terminate the Lease Guaranty in certain circumstances described
below, the liability of Kmart under the Lease Guaranty will be irrevocable,
continuing, absolute, independent and unconditional except that Kmart will be
relieved of any liability under the Lease Guaranty if the Lease is rejected and
terminated by a trustee or debtor-in-possession in the Borrower's bankruptcy
proceeding and, as a result, the Subsidiary has been deprived of its possessory
rights pursuant to the Lease. Kmart will also be relieved of liability under the
Lease Guaranty if the Lease is terminated by the Subsidiary in the event of a
condemnation or casualty.
Termination
Kmart or a Subsidiary may terminate Kmart's obligations under a Lease
Guaranty if (i) the related Subsidiary achieves Investment Grade Status without
regard to Kmart's credit rating, (ii) the related Lease is assigned to a third
party (a) which has achieved or achieves Investment Grade Status or (b) an
affiliate of which has achieved or achieves Investment Grade Status and such
affiliate delivers to the Trustee, or the Collateral Trustee if applicable, a
new lease guaranty agreement with substantially the same terms as the Lease
Guaranty and an indemnity agreement with substantially the same terms as the
Indemnity Agreement, or (iii) more than 50% of the issued and outstanding stock
of the Subsidiary is acquired by a third party and such third party or an
affiliate of such third party has achieved or achieves Investment Grade Status
and
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delivers to the Trustee, or the Collateral Trustee if applicable, a new lease
guaranty agreement with substantially the same terms as the Lease Guaranty and
an indemnity agreement with substantially the same terms as the Indemnity
Agreement. The Lease Guaranty provides that any new lease guaranty agreement
will not contain a Lease Guaranty Termination provision. In the case of a
termination of a Lease Guaranty in connection with an assignment of the Lease or
the delivery of a new lease guaranty and indemnity agreement, the third party
assignee or the new guarantor will also be required to deliver to the Trustee,
or the Collateral Trustee if applicable, a new note put agreement with
substantially the same terms as the Note Put Agreement and such Note Put
Agreement will terminate if the related Mortgage Note(s) is not required to be
purchased in accordance with such Note Put Agreement as a consequence of such
Lease Guaranty Termination. For purposes of the Lease Guaranty, an entity will
have achieved "Investment Grade Status" if the senior debt of such entity will
have been rated at least Standard & Poor's rating of BBB- or Moody's rating of
Baa3 for the immediately preceding twelve month period. The exercise by Kmart or
a Subsidiary of the right to terminate a Lease Guaranty is a Triggering Event
under the related Note Put Agreement. See "THE NOTE PUT AGREEMENTS."
THE CONSENT AND AGREEMENTS
Each Consent and Agreement will provide that Kmart, the related Tenant if
it is a Subsidiary and the related Borrower consent to the Depositor's sale,
conveyance, transfer and absolute assignment of all of its right, title and
interest in the related Loan Documents and Lease to the Trustee, or the
Collateral Trustee if applicable. Each Consent and Agreement will further
provide that all Lease Payments will be paid directly to the Trustee, or the
Collateral Trustee if applicable, for the benefit of the Borrower and that such
payment will constitute payment to the Borrower in accordance with the Lease.
Each Consent and Agreement will also provide that the Tenant will pay the annual
Trustee's Fee and the Collateral Trustee's Fee, if applicable, and premiums for
environmental liability insurance. Kmart, the Tenant (if it is a Subsidiary),
the Borrower and the Depositor will acknowledge and agree that the Trustee, or
the Collateral Trustee if applicable, will have the sole right to pursue any
claim for Lease Payments and, subject to the rights of the Tenant and Kmart (if
the Tenant is a Subsidiary) under the related Construction Fund Disbursement
Agreement and any Construction Fund Disbursement Agreement -- Common Area, to
perform all other necessary and appropriate acts to protect and preserve any
right, title and interest of the Trustee, or the Collateral Trustee if
applicable, Borrower and Depositor in and to the Loan Documents. Each Consent
and Agreement will provide that without the prior consent of the Trustee or
Collateral Trustee, if applicable, the Borrower will not modify the Lease,
except with respect to modifications that do not reduce Lease Payments, alter
the initial term of the Lease, add to the Borrower's covenants under the Lease
or limit the obligations of the Tenant under the Lease. Each Consent and
Agreement will also provide that no amendment to the Loan Agreement, the
Mortgage Notes or the Loan Documents may be made without the prior consent of
the Tenant and, if the Tenant is a Subsidiary, Kmart, unless a monetary default
exists under the related Lease.
THE INDEMNITY AGREEMENTS
If the Tenant is a Subsidiary, Kmart will enter into an Indemnity Agreement
pursuant to which Kmart will indemnify the Trustee, or the Collateral Trustee if
applicable, in the event any Lease Payments made to such Trustee or Collateral
Trustee by such Subsidiary pursuant to the related Lease or by Kmart pursuant to
the related Lease Guaranty are asserted to be voidable under the Bankruptcy
Code, whether by preference or otherwise, in a proceeding in a bankruptcy case
filed by or against such Subsidiary.
The Indemnity Agreement will terminate if the related Mortgage Note(s) are
not required to be purchased in accordance with the related Note Put Agreement
as a consequence of a Lease Guaranty Termination. See "The Lease Guaranty
Agreements -- Termination" and "THE NOTE PUT AGREEMENTS."
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THE CONSTRUCTION FUND DISBURSEMENT AGREEMENTS
General
In those cases where Mortgage Loan proceeds are being used in whole or in
part to construct a Facility, the related Borrower will be obligated under its
Lease with the related Tenant to construct the Facility in accordance with the
provisions of the Lease. The obligation of such Tenant to make Lease Payments
will commence on the date specified in the Lease whether or not the Facility is
completed, the Tenant takes occupancy, or the Tenant accepts the improvements as
constructed. In addition, the Tenant and, if the Tenant is a Subsidiary, Kmart
will be obligated under the related Note Put Agreement to purchase the related
Mortgage Note(s) in the event construction of the Facility is not completed on
or before the Completion Date. In an effort to provide assurance to the Tenant
that each such Facility will be developed and constructed in a timely manner in
accordance with the plans and specifications referred to in the related Loan
Agreement, unless otherwise specified in the Prospectus Supplement, the
Depositor, the related Tenant, the related Borrower, Kmart (if the Tenant is a
Subsidiary), an Escrow Agent and, in some cases, a Construction Monitor engaged
at the request of the Tenant will enter into a Construction Fund Disbursement
Agreement which will provide that the proceeds of the Mortgage Loan being used
for the construction of the Facility will be deposited in an Escrow Account and
disbursed to the Borrower upon approval by the Tenant. It will also provide for
certain remedies in favor of the Tenant and Kmart, including the right to
foreclose on a second mortgage on the Facility given by the Borrower to the
Tenant and the right to acquire the Facility pursuant to an option granted by
the Borrower to the Tenant, in the event of a default by the Borrower in the
performance of its obligations under the related Lease to construct the Facility
in accordance with such Lease and the Construction Fund Disbursement Agreement.
If a portion of the proceeds from more than one Mortgage Loan will be used
to construct a Common Area to be used by the Tenants leasing the Facilities to
be constructed with the balance of such Mortgage Loans, then, in addition to the
previously described Construction Fund Disbursement Agreement, there will be a
Construction Fund Disbursement Agreement -- Common Area among the Depositor, the
related Borrowers, an Escrow Agent, such Tenants, Kmart (if any of the Tenants
are Subsidiaries) and a Construction Monitor, if applicable. Such Construction
Fund Disbursement Agreement -- Common Area will provide that the proceeds from
such Mortgage Loans which will be used for the construction of such Common Area
will be deposited in an Escrow Account -- Common Area and disbursed upon
approval by the applicable Tenants. It will also provide for certain remedies in
favor of such Tenants and Kmart (if any of the Tenants are Subsidiaries) in the
event of the default by the related Borrowers in the performance of their
obligations to construct such Common Area.
Prior to a Triggering Event under the related Note Put Agreement, neither
the Depositor, the Trustee, nor the Collateral Trustee, if applicable, will have
any rights with respect to the disbursement of Mortgage Loan proceeds used in
the construction of the related Facility and, if applicable, the related Common
Area. In addition, in the event the Trustee or Collateral Trustee forecloses on
a related Facility, it will do so subject to the right of the related Tenant or
Tenants to control disbursements from the Escrow Account and, if applicable, the
Escrow Account -- Common Area and to complete construction of the Facility and
the Common Area, if any.
Remedies Upon Default Under Lease
Upon the occurrence of a default by a Borrower in the performance of its
obligation in favor of the related Tenant under the Lease and prior to the
occurrence of a Triggering Event, such Tenant may, in addition to any remedies
it may have at law or in equity, (i) within the first three (3) years of the
term of the Mortgage Loan, foreclose on the second mortgage on the Facility
given by the Borrower to the Tenant or, at any time prior to completion of
construction acquire the Facility pursuant to the option granted by the Borrower
to the Tenant, and (ii) if Borrower's default is related to construction of the
Facility, (x) cease approving disbursements to a Borrower from the Escrow
Account, (y) exercise its rights under the license granted to the Tenant under
the Construction Fund Disbursement Agreement to complete the construction of the
Facility if the Borrower fails to do so, or (z) specifically enforce the
Borrower's obligations to complete the work. However, the Tenant will
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not have the right, prior to the earlier of the payment in full of the related
Mortgage Note(s) or the expiration of the initial term of the Lease, to withhold
Lease Payments, terminate the Lease, or recover monetary damages by reason of
the Borrower's default under the Lease, including Borrower's failure to complete
the Facility.
THE BORROWERS
Each Borrower will be a special purpose corporation, limited partnership,
limited liability company or other entity that will not be permitted to have any
significant assets or sources of funds other than the Mortgage Loan made to such
Borrower and the Facility owned or leased by such Borrower and leased or
subleased to a Tenant. No Borrower will receive the proceeds of or be a party to
more than one Loan Agreement, and no Borrower will own or lease more than one
Facility. No Borrower will be an affiliate of Kmart, any Subsidiary, the
Depositor, the Trustee or the Collateral Trustee.
CONSEQUENCES OF BANKRUPTCY OF A TENANT
OR A BORROWER
In the event a bankruptcy case is commenced by or against a Tenant, such
Tenant, as a debtor-in-possession, or its trustee in bankruptcy would have the
right, subject to bankruptcy court approval, to assume or reject any Lease. If
such Tenant were to reject a Lease its payments thereunder would terminate,
thereby leaving the related Borrower without cash flow to make payments on the
related Mortgage Note(s). In addition, under Section 502(b)(6) of the Bankruptcy
Code, any unsecured claim of the Trustee or the Collateral Trustee, as the case
may be, for termination damages would be limited to an 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 such Lease (plus
rent already due but unpaid as of the commencement date of the bankruptcy
proceeding). Therefore, if such Tenant were to reject the Lease, the damages
that could be claimed for rejection, even assuming full recovery on such claims
(which may not occur), would, in all likelihood, not be sufficient to repay the
related Mortgage Note(s). Subject to bankruptcy court approval, such Tenant, as
a debtor-in-possession, or its trustee, would also have the right, in lieu of
rejecting the Lease, to assume and to assign all of its rights and obligations
under the Lease provided, among other requirements, adequate assurance of future
performance by the assignee were provided.
It is possible that a bankruptcy court could characterize the transactions
described herein not as a lease that may be rejected, but instead as a secured
loan to the bankrupt Tenant. In such event, the Borrower, as a secured creditor,
would be prohibited by operation of the automatic stay contained in Section
362(a) of the Bankruptcy Code from taking any action against the Tenant or its
property without bankruptcy court approval. In addition, the Tenant may be
permitted to use or, under certain circumstances, sell the related Facility,
together with any other property securing the Tenant's obligations to the
Borrower, over the objection of the Trustee or the Collateral Trustee. Finally,
as a secured creditor of the Tenant, the Borrower may be required to accept
restructured payments under a Chapter 11 plan filed by the Tenant provided that
it satisfies certain plan confirmation requirements set forth in the Bankruptcy
Code. The occurrence of any of these events would have a material adverse effect
on the Certificateholders.
In the event of bankruptcy proceedings instituted by or against a
Subsidiary that is a Tenant, Kmart would continue to be obligated under the
Lease Guaranty for the payment of the Subsidiary's obligations under the Lease,
even if the Lease were rejected in bankruptcy, and would continue to be
obligated under the Note Put Agreement to purchase the related Mortgage Note(s)
if a Triggering Event occurred. See "THE LEASES, THE LEASE GUARANTIES AND
RELATED DOCUMENTS" and "THE NOTE PUT AGREEMENTS."
Although Lease Payments under each Lease will be scheduled to be sufficient
to pay Scheduled Payments under the related Mortgage Notes, and although the
Tenant under each Lease will be required to pay substantially all of the
expenses relating to the Facility, each Borrower will incur certain obligations
which will not be passed on to the Tenant under the Lease. The most significant
of these obligations will consist of
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agreements to compensate contractors, architects and other third parties in
connection with the construction of the Facility, to pay certain environmental
liabilities for which the Tenant is not responsible under the Lease, and to pay
any Make-Whole Premium in connection with the prepayment of the related Mortgage
Note(s). It is also possible that the Borrower will, in violation of the Loan
Documents, incur obligations which are unrelated to the Facility. If the cost of
completing the Facility exceeds the amount of Mortgage Loan proceeds available
to the Borrower, or if the Borrower otherwise lacks the funds to pay obligations
which are not required to be paid by the Tenant under the Lease, it is possible
that a bankruptcy petition may be filed by or against the Borrower even in the
absence of a default by the Tenant in its obligations under the Lease. In such
event, the Borrower may benefit from various powers and remedies available to
debtors-in-possession under the Bankruptcy Code. Although the outcome of a
bankruptcy case involving the Borrower is difficult to predict, events may
transpire in the case that may adversely affect the interests of the
Certificateholders. For example, upon the filing of its bankruptcy petition, the
Borrower would enjoy the protection of the automatic stay that would prohibit
the Trustee or the Collateral Trustee, as the case may be, from taking any
action against the Borrower or its property, including foreclosing upon the
related Facility and collecting the Lease Payments directly. In order to take
such action, the Trustee or the Collateral Trustee, as the case may be, would be
required to obtain permission from the bankruptcy court by satisfying certain
requirements set forth in Section 362(d) of the Bankruptcy Code for obtaining
relief from the stay. In addition, the Borrower may be able to use the
Collateral, including the funds in the Capitalized Debt Service Account, the
Rental Payment Account, the Certificate Account and the Mortgage Note Account,
without the consent of the Trustee or the Collateral Trustee, if the Borrower
obtains bankruptcy court approval and provides such parties with adequate
protection (which adequate protection may take the form of a replacement lien,
substitute collateral or periodic cash payments). The Borrower may also have
access to the funds in the Escrow Account established under the Construction
Fund Disbursement Agreement or in the Escrow Account -- Common Area established
under the Construction Fund Disbursement Agreement -- Common Area. So long as
Lease Payments are made in accordance with the terms of the Lease or, if
applicable, the related Lease Guaranty or as otherwise ordered by the bankruptcy
court, the Trustee, or Collateral Trustee if applicable, would in no event have
any right to proceed against the Tenant or (if the Tenant is a Subsidiary) Kmart
under such Lease, such Lease Guaranty or the related Note Put Agreement.
It is also possible that the secured claims of the Trustee or the
Collateral Trustee, as the case may be, may receive economically unfavorable
treatment under the Borrower's Chapter 11 plan. For example, in the event that
it is determined that the value of the Collateral is less than the indebtedness
evidenced by the Mortgage Note(s), there may be no entitlement to receive
interest that accrued on the Mortgage Note(s) after the filing of the Borrower's
petition. In addition, if the Borrower were unable to satisfy all of the
requirements of Section 1129(a) of the Bankruptcy Code to confirm a consensual
Chapter 11 plan, the Borrower might attempt to restructure the secured claims of
the Trustee or the Collateral Trustee over its objections by invoking the
"cramdown" provisions of Section 1129(b). In such event Certificateholders may
be required, for example, to accept deferred payments in respect to the
Certificates over a longer period of time than the original term of the Mortgage
Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
summary is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change or possibly differing interpretations. The
discussion below does not purport to deal with federal income tax consequences
applicable to all categories of investors, such as foreign persons or tax exempt
entities, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Certificates.
Unless otherwise specified in the Prospectus Supplement for a Series of
Certificates, it is intended that each Trust will be classified for federal
income tax purposes as a grantor trust and that each Trust and any
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Collateral Trust will not be classified as an association taxable as a
corporation. For each Series, Squire, Sanders & Dempsey, counsel to the
Depositor, will deliver a separate opinion to that general effect.
In rendering its opinion for each Series that each Trust will be classified
as a grantor trust, counsel will have considered whether two or more Trusts
holding separate Mortgage Notes from (i) the same obligor with respect to the
same Facility or (ii) different obligors with respect to different Facilities,
to the extent those facts are present, could be recharacterized as a "taxable
mortgage pool" or as a single grantor trust with impermissible multiple classes
of ownership, each of which is treated as a corporation for federal income tax
purposes. Generally, an entity is classified as a "taxable mortgage pool" only
if, among other requirements, the entity is the obligor on debt obligations (or
equity interests treated as debt obligations) with two or more maturities.
Similarly, if certificates in a single grantor trust have different maturities,
it would have multiple classes of ownership. However, under Treasury
Regulations, such multiple classes are permissible if the trust was formed to
facilitate direct investment in the assets of the trust, and the existence of
multiple classes of ownership interests is incidental to that purpose. Because
each Trust will generally issue only one class of beneficial ownership interest
having only one maturity date, such Trust could be treated as a "taxable
mortgage pool" or as a single grantor trust with potentially impermissible
multiple classes of ownership only if such Trust is integrated with one or more
other Trusts, or if the Trusts serve to recast the manner in which principal and
interest on the debt obligations held therein are paid to Certificateholders.
While there is no authority directly on point, each Trust should be respected as
a separate entity because (i) each Trust will own separate assets in the form of
100 percent interests in separate Mortgage Notes issued directly by the obligors
thereof to such Trusts, which Mortgage Notes will not be secured by other debt
obligations, (ii) each Trust will issue a separate Series of Certificates to a
substantially separate set of Beneficial Owners, and (iii) each Trust will have
independent economic substance, in that the Trusts serve primarily to facilitate
the offering of fractional undivided participation interests in one or more
separate Mortgage Notes without recasting the interest and principal payments
thereon. Moreover, even if two or more Trusts were integrated (e.g., Trusts
holding Mortgage Notes with different maturities issued by the same obligor with
respect to the same Facility were treated as a single Trust), the integrated
single Trust will not alter the payment terms of the Mortgage Notes held;
rather, Beneficial Owners will have a fractional undivided interest in all of
the principal and interest payments received by the Trusts with respect to only
one or the other Mortgage Note (or groups of Mortgage Notes having the same
maturity). Accordingly, because the integrated single Trust would serve merely
to facilitate investment in assets that might have been separately invested in,
it should not be treated as having impermissible multiple classes of ownership.
Finally, pursuant to proposed regulations under the taxable mortgage pool
provisions, an ownership interest in an entity that is classified as an
investment trust will not be treated as a debt obligation of the trust.
Accordingly, if such proposed regulations are ultimately adopted, assuming that
the Trusts qualify as trusts under the analysis set forth above, they should not
be subject to taxable mortgage pool treatment.
Each Beneficial Owner will be treated as the owner of a pro rata fractional
undivided interest in the related Trust Property. Each Beneficial Owner, in
accordance with its method of accounting, will be required to report on its
federal income tax return its pro rata share of the interest and other income
from any Mortgage Note or other property held in the related Trust and may
deduct its pro rata share of the deductible expenses of the related Trust, at
the same time and to the same extent as if it held directly a pro rata interest
in the Trust Property and received and paid directly the amounts received by the
Trust. A Beneficial Owner who is an individual, trust or estate will be allowed
a deduction for certain itemized deductions subject to certain limitations in
the Code.
Collateral Trusts will be viewed as mere security arrangements and not as
separate entities for federal income tax purposes.
Market Discount
A purchaser of a Certificate of any Series will be treated as purchasing an
interest in any Mortgage Note and other Trust Property in the related Trust at a
price determined by allocating the purchase price paid for the Certificate among
such Mortgage Note and other Trust Property in proportion to their respective
fair market values at the time of purchase of the Certificate. To the extent
that the portion of the purchase price of
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a Certificate allocated to a Mortgage Note is less than the portion of the
principal balance of the Mortgage Note allocable to the Certificate by more than
a prescribed de minimis amount, that interest in the Mortgage Note will be
deemed to have been acquired with original issue discount. It is not anticipated
that the Mortgage Notes will have "original issue discount" because the purchase
price of a Certificate of any Series, as well as the portion of such purchase
price allocable to the related Mortgage Note, are not expected to be less than
the principal amount of such related Mortgage Note by more than the prescribed
de minimis amount. A Beneficial Owner may have market discount if it purchases a
Certificate subsequent to the origination of the respective Trust and the
remaining principal amount of the Mortgage Note allocable to the Certificate
exceeds the Beneficial Owner's tax basis allocable to such Mortgage Note, unless
the excess does not exceed a prescribed de minimis amount. In the event such
excess exceeds the de minimis amount, the Beneficial Owner will be subject to
the market discount rules of sections 1276 to 1278 of the Code with regard to
its interest in the Mortgage Note, with the result that actual or deemed
receipts of principal on a Mortgage Note may be treated as the receipt of
taxable interest income to the extent of accrued market discount. In particular,
in the case of a sale or certain other dispositions of a Mortgage Note subject
to the market discount rules, any gain from such sale or disposition will be
treated as ordinary income to the extent such payment does not exceed the market
discount that has accrued on such Mortgage Note during the period in which it
was held. A partial principal payment on a Mortgage Note subject to the market
discount rules will be included in gross income as ordinary income to the extent
such payment does not exceed the market discount that has accrued on such
Mortgage Note during the period in which it was held, with adjustments to
prevent double inclusion.
Generally, market discount accrues under a straight line method, unless the
taxpayer elects a constant interest method. However, in the case of installment
obligations, such as the Mortgage Notes, Congress has indicated its intent that,
until Treasury regulations are issued, holders of installment obligations with
market discount may elect to accrue market discount either on the basis of a
constant interest rate or, assuming the installment obligation was issued
without original issue discount, on the basis of that portion of remaining
market discount which corresponds to the ratio of the amount of stated interest
paid in the accrual period to the total amount of stated interest remaining to
be paid on the installment obligation as of the beginning of such period. Rules
are also provided that defer the deduction of part or all of the interest paid
or accrued on indebtedness incurred or continued to purchase or carry market
discount indebtedness to the extent it exceeds the interest currently includable
in income with respect to such market discount indebtedness. As an alternative
to the rules stated in this section, taxpayers can elect to include market
discount in gross income currently, without regard to the actual or deemed
receipt of principal payments, as discussed above.
A Beneficial Owner purchasing Certificates subsequent to the creation of
the respective Trust at a price which is less than the allocable principal
amount of a Mortgage Note should consult its tax advisor with respect to the
manner of reporting accrued market discount on its annual tax return and on sale
or other disposition of its Certificates.
Premium
A Beneficial Owner will generally be considered to have acquired an
interest in a Mortgage Note at a premium to the extent that its tax basis
allocable to such interest, determined as described above, exceeds the principal
amount of the Mortgage Note allocable to such interest (or the remaining
principal amount of the Mortgage Note allocable to such interest in the case of
Certificates purchased subsequent to the creation of the respective Trust). It
is not anticipated that Certificates will be issued at a premium above the
principal amount of the Mortgage Notes because the aggregate principal amount of
the Certificates evidencing interests in each Trust will be equal to the
aggregate principal amount of the Mortgage Notes held in such Trust (see "THE
MORTGAGE NOTES, THE LOAN AGREEMENTS AND RELATED DOCUMENTS -- Scheduled
Payments"). The existence of a premium with respect to Certificates acquired
subsequent to original issuance is, of course, a function of market conditions.
A Beneficial Owner owning a Certificate as a capital asset may elect to amortize
any such premium as an offset to interest income under section 171 of the Code,
with corresponding reductions in the Beneficial Owner's tax basis in that
Mortgage Note. Generally, such amortization is on a constant yield basis, based
on the Beneficial Owner's yield to maturity. However, Congress has indicated its
intent that, until regulations are issued by the Treasury Department, an
alternate
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method of amortization may be used where, as here, installment obligations are
involved. Such alternate method is based on the ratio of stated interest paid
during a particular period to stated interest remaining to be paid on the
Mortgage Note at the beginning of such period, multiplied by the amount of
unamortized premium. Beneficial Owners are urged to consult their own tax
advisors as to the amount of any such amortizable premium.
Sale of Certificates
If a Certificate is sold, gain or loss will be recognized equal to the
difference between the amount realized on the sale and the Beneficial Owner's
adjusted tax basis in the Certificate. Such tax basis will equal the Beneficial
Owner's cost for the Certificate, increased by any discount previously included
in income, and decreased by any deduction previously allowed for amortization of
premium and by the amount of principal payments previously received on the
Certificate. Any such gain or loss will be capital gain or loss if the
Certificate was held as a capital asset for more than one year, except that gain
may be treated in whole or in part as ordinary interest income under the market
discount rules of the Code.
Backup Withholding
Payments made on the Certificates, and proceeds from the sale of the
Certificates to or through certain brokers, may be subject to a "backup"
withholding tax of 31% unless the Beneficial Owner complies with certain
reporting procedures or is an exempt recipient under section 6049(b)(4) of the
Code. Any such withheld amounts will be allowed as a credit against the
Beneficial Owner's federal income tax.
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership and disposition
of the Certificates. State and local income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax law of any state or other political
subdivision. Therefore, potential investors should consult their own tax
advisors with respect to the various state and local consequences of an
investment in the Certificates.
ERISA CONSIDERATIONS
In considering an investment of the assets of an employee benefit plan in a
Certificate, a fiduciary should consider, among other things (i) the purposes,
requirements and liquidity needs of such plan; (ii) the plan asset rules under
ERISA and the U.S. Department of Labor regulations; (iii) whether the investment
satisfies the diversification standards of Section 404(a)(1)(C) of ERISA, (iv)
whether the investment is prudent, considering the nature of an investment in
the Certificate; and (v) whether the investment can be valued annually. The
prudence of a particular investment must be determined by the responsible
fiduciary (usually the trustee or investment manager) with respect to each
employee benefit plan taking into account all of the facts and circumstances of
the investment.
Section 406 of ERISA and Section 4975 of the Code prohibit certain pension,
profit sharing or other employee benefit plans, individual retirement accounts
("IRAs") or annuity and employee annuity plans from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan. A
violation of these "prohibited transaction" rules may generate excise tax and
other liabilities under ERISA and the Code for such persons.
The U.S. Department of Labor has issued a regulation (the "Plan Asset
Regulation") concerning "plan assets" of certain employee benefit plans
(including annuities and individual retirement accounts) that are subject to
ERISA or to the prohibited transaction provisions of the Code (collectively
referred to as "Benefit Plans"). Under the Plan Asset Regulation the assets and
properties of corporations, partnerships and certain
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other entities in which a Benefit Plan makes an equity investment could be
deemed to be assets of the Benefit Plan in certain circumstances.
In general, the Plan Asset Regulation applies to the purchase by a Benefit
Plan of an "equity interest" in an entity. An equity interest is defined as any
interest in an entity other than an instrument that is treated as debt under
applicable local law and which has no substantial equity features. Although no
assurance can be given that the Certificates will be treated as debt under
applicable law, if the Certificates are deemed to be debt rather than equity
interests, the Trust's assets would not be treated as plan assets solely as a
result of the purchase of a Certificate by a Benefit Plan.
If the Certificates represent equity interests, however, and investments
are made in a Trust by Benefit Plans, the Trust could be deemed to hold plan
assets unless an exception is applicable to the Trust. The Plan Asset Regulation
states that an entity's assets will not be deemed to be plan assets if equity
participation in the entity by "benefit plan investors" is not significant.
Benefit plan investors include employee welfare benefit plans and employee
pension benefit plans that are employee benefit plans as defined pursuant to
Section 3(3) of ERISA, trusts described in Section 401(a) of the Code or plans
described in Section 403(a) of the Code, which are exempt from tax under Section
501(a) of the Code, IRAs under Section 408 of the Code and any entity whose
underlying assets include plan assets by reason of a plan's investment in the
entity. Equity participation in an entity by benefit plan investors is not
significant on any date if, immediately after the most recent acquisition of any
equity interest in the entity, less than 25% of the value of any class of equity
interests in the entity is held by benefit plan investors.
If an exception is not applicable, then (i) the prudence standards and
other provisions of Part 4 of Title I of ERISA applicable to investments by
Benefit Plans (other than IRAs) and their fiduciaries would extend to
investments of the Trust; (ii) fiduciaries of Benefit Plans that are subject to
ERISA could be liable for investments of the Trust that do not conform to such
ERISA standards; (iii) certain transactions that may be entered into between or
among the Depositor, the Trustee, the Collateral Trustee, Kmart, or a Subsidiary
might be "prohibited transactions" under ERISA and/or the Code; and (iv) the
assets of the Trust would be subject to certain reporting and disclosure
requirements under ERISA.
Finally, fiduciaries of certain types of Benefit Plans are required to
determine the fair market value of the assets of the Benefit Plan as of the
close of the Benefit Plan's fiscal year. To the extent there is a public market
in the Certificates, fiduciaries should be able to value the Benefit Plan's
investment; however, no assurances can be given that a public market will
develop or that the fiduciary will be able to determine precisely the fair
market value of the Certificates. Although the Trustee will provide periodic
statements to investors with respect to principal and interest distributions on
the Certificates, these statements will not state the fair market value of the
Certificates, and neither Kmart, the Depositor nor the Trustee can assume any
responsibility for providing such a valuation.
In light of the foregoing, fiduciaries of a Benefit Plan considering the
purchase of Certificates should consult their own counsel regarding the impact
of ERISA and the Code upon such an investment.
No transfer of a Certificate or of a beneficial ownership interest in a
Certificate will be made unless the Trustee or Pass-Through Trustee (i) has
received a representation from the transferee of the Certificate or from the
proposed Beneficial Owner of a beneficial interest in a Certificate that such
transferee or Beneficial Owner is not a Benefit Plan, or a person acting on
behalf of or purchasing for the benefit of any such Benefit Plan; (ii) has
received an opinion of counsel reasonably satisfactory to the Trustee or
Pass-Through Trustee to the effect that the purchase or holding of such
Certificate or beneficial interest in a Certificate will not result in the
assets of the Trust or Pass-Through Trust being deemed to be "plan assets"
subject to the prohibited transaction provisions of ERISA or the Code, or that
the purchase or holding of such Certificates or such beneficial interest
qualifies as an exempt prohibited transaction under the provisions of ERISA or
the Code, and will not subject the Trustee or Pass-Through Trustee or the
Depositor to any obligation in addition to those undertaken in the Trust
Agreement or Pass-Through Trust Agreement, or (iii) otherwise authorizes such
transfer. In the absence of an opinion of counsel or the Trustee's or
Pass-Through Trustee's authorization as provided in (ii) or (iii) above, the
representation as described in (i) above shall be deemed to have been made to
the Trustee or Pass-Through Trustee by the transferee's or Beneficial Owner's
acceptance of a
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Certificate or beneficial interest therein. In the event that such
representation is violated, or any attempt is made to transfer a Certificate or
a beneficial interest therein to a Benefit Plan, or a person acting on behalf of
or purchasing for the benefit of any such Benefit Plan, without an opinion of
counsel or the Trustee's or Pass-Through Trustee's authorization as provided in
(i) or (ii) above, such attempted transfer shall be void and of no effect.
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. There may be
restrictions on the ability of certain investors, including depository
institutions, either to purchase the Certificates or to purchase Certificates
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Certificates constitute legal investments for such investors.
PLAN OF DISTRIBUTION
The Certificate offered hereby will be sold through Sutro & Co.
Incorporated ("Sutro") or through Sutro and one or more other underwriters or
underwriting syndicates. The Prospectus Supplement for each Series will set
forth the terms of the offering of such Series, including the name or names of
the underwriters, the use of proceeds thereof, and either the initial offering
price, the discounts and commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers, or the method by which the
price at which the underwriters will sell the Certificates will be determined.
The Certificates of a Series may be acquired by the underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
underwriter will be subject to certain conditions precedent and such
underwriters will be severally obligated to purchase all the Certificates of a
Series described in the related Prospectus Supplement, if any are purchased.
The place and time of delivery for the Certificates of a Series in respect
of which this Prospectus is delivered will be set forth in the Prospectus
Supplement.
LEGAL MATTERS
The legality of the Certificates and certain other legal matters will be
passed upon for the Depositor by Squire, Sanders & Dempsey. Certain legal
matters will be passed upon for Kmart by its general counsel and Dickinson,
Wright, Moon, Van Dusen & Freeman, Detroit, Michigan, and for the underwriter by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. The material
federal income tax consequences of the Certificates will be passed upon by
Squire, Sanders & Dempsey.
EXPERTS
The consolidated financial statements and schedules of Kmart appearing in
or incorporated by reference in Kmart's 1993 Annual Report on Form 10-K to the
Commission have been examined by Price Waterhouse, independent accountants, to
the extent stated in their report incorporated by reference therein and herein.
The financial statements referred to are incorporated by reference herein in
reliance upon such report and the authority of such firm as experts in
accounting and auditing.
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GLOSSARY
There follows an abbreviated definition of certain capitalized terms used
in this Prospectus and in the Prospectus Supplement. The Trust Agreement, the
Pass-Through Trust Agreement, the Collateral Trust Agreement if applicable, and
the Loan Agreement may contain a more complete definition of certain of the
terms defined herein and reference should be made to such documents for a more
complete definition of such terms. If there is a conflict between the definition
of any term contained in any agreement referred to in this Prospectus and the
definition included herein, the definition contained in such agreement controls.
"Assignment of Leases and Rents": Each Assignment of Leases and Rents by
and between a Borrower and the Depositor pursuant to which a Borrower will
assign to the Depositor all its rights under a Lease and Lease Guaranty, if
applicable, including, where permitted by law, a present assignment of its
rights to Lease Payments.
"Available Distribution Amount": As to any Remittance Date, an amount equal
to the amount on deposit in the Certificate Account as of the close of business
on the Business Day immediately preceding such Remittance Date.
"Bankruptcy Code": Title 11 of the United States Code.
"Beneficial Owner": A Person having a beneficial ownership interest in any
Certificate which is registered in the name of Cede.
"Borrower": A special purpose corporation, limited partnership, limited
liability company or other entity which is the obligor under the related Loan
Agreement and Mortgage Note and the lessor under the related Lease.
"Business Day": Any day other than (i) a Saturday or Sunday, or (ii) a day
on which banks in New York or California are required by law to be closed or are
customarily closed.
"Called Principal": With respect to a Mortgage Note, the principal of such
Mortgage Note that is to be paid or prepaid or is declared to be immediately due
and payable or, in the case of the purchase of a Mortgage Note under the related
Note Put Agreement, the outstanding principal balance of such Mortgage Note.
"Capitalized Debt Service Account": Each Capitalized Debt Service Account
created and maintained pursuant to a Trust Agreement, or a Collateral Trust
Agreement if applicable, from which Scheduled Payments on the related Mortgage
Note(s) will be made prior to the date Lease Payments are scheduled to commence
under the related Lease.
"Capitalized Debt Service Reserve": With respect to each Mortgage Loan, an
amount equal to all Scheduled Payments due (on a prorated basis) under the
related Mortgage Note(s) through the date when Lease Payments under the related
Lease will commence as specified in the Prospectus Supplement.
"Cede": Cede & Co. as nominee of DTC.
"Certificate Account": Each Certificate Account created and maintained
pursuant to a Trust Agreement or Pass-Through Trust Agreement.
"Certificateholder" or "Holder": The person in whose name a Certificate is
registered in the Certificate Register.
"Certificate Register": The register maintained pursuant to a Trust
Agreement or Pass-Through Trust Agreement.
"Certificates": The mortgage pass-through certificates, issuable in Series.
"Closing Date": The date on which the sale of a Series is closed and the
Certificates issued.
"Code": The Internal Revenue Code of 1986, as amended.
"Collateral": The Collateral for the Mortgage Note(s) issued pursuant to a
Loan Agreement will consist of the following: (i) a Mortgage on the related
Facility securing such Mortgage Note(s); (ii) all of the
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<PAGE> 68
Depositor's rights under the Loan Agreement pursuant to which the related
Mortgage Note(s) were issued; (iii) an assignment of the related Lease, Lease
Payments and Lease Guaranty, if applicable; (iv) a pledge of certain moneys held
in certain funds established pursuant to the Trust Agreement or Collateral Trust
Agreement, if applicable; (v) a Note Put Agreement requiring the related Tenant
and Kmart (if the Tenant is a Subsidiary) to purchase the related Mortgage
Note(s) upon the occurrence of a Triggering Event; (vi) an assignment of the
Borrower's right, title and interest in and to any Construction Fund
Disbursement Agreement and Construction Fund Disbursement Agreement-Common Area
related to such Facility; (vii) a pledge of certain investments of fund balances
held under the Trust Agreement, or Collateral Trust Agreement if applicable, and
income earned thereon; and (viii) any other Loan Documents.
"Collateral Trust": A collateral trust created pursuant to a Collateral
Trust Agreement.
"Collateral Trustee": The bank, trust company or other fiduciary named in
the Prospectus Supplement for each Series of Certificates for which a Collateral
Trust has been established as the collateral trustee under the Collateral Trust
Agreement related to such Series.
"Collateral Trustee's Fee": The amount of the annual fee paid to a
Collateral Trustee for its ordinary fees and expenses arising under a Collateral
Trust Agreement.
"Collateral Trust Agreement": An agreement between the Depositor and a
Collateral Trustee pursuant to which the Depositor will transfer, convey and
assign to such Collateral Trustee all of the Collateral related to Mortgage
Notes having different maturities to be held for the benefit, pari passu, of the
Pass-Through Trusts holding such Mortgage Notes.
"Collateral Trust Property": The corpus of the Collateral Trust created by
a Collateral Trust Agreement related to certain Mortgage Notes, consisting of
(i) the Collateral related to such Mortgage Notes; (ii) property which secured
any related Mortgage Loan and which has been acquired by foreclosure or deed in
lieu of foreclosure; and (iii) Insurance Proceeds, Condemnation Proceeds and any
other amounts receivable under any related Loan Document.
"Commission": The Securities and Exchange Commission.
"Common Area": Area used in common by more than one Facility in a shopping
center.
"Completion Date": With respect to any Note Put Agreement, the second
anniversary of the related Mortgage Note(s).
"Condemnation Proceeds": Awards in respect of, or settlements in lieu of,
condemnation proceedings affecting the Mortgaged Property, net of any amounts to
which Tenant is entitled under the Lease in respect of unamortized leasehold
improvements by Tenant, Tenant's relocation expenses and Tenant's loss of
goodwill.
"Consent and Agreement": A Consent and Agreement among a Tenant, Kmart (if
the Tenant is a Subsidiary), a Borrower, the Depositor and the Trustee, or
Collateral Trustee if applicable, (i) providing for the direct payment of Lease
Payments to the Trustee, or Collateral Trustee if applicable, (ii) requiring
such Tenant to pay the Trustee's Fee, or Collateral Trustee's Fee if applicable,
(iii) requiring such Tenant to pay the premium on certain required environmental
insurance, and (iv) concerning certain other matters.
"Construction Fund Disbursement Agreement": Each Construction Fund
Disbursement Agreement among a Borrower, Tenant, Kmart (if the Tenant is a
Subsidiary), the Depositor, a Construction Monitor, if applicable, and an Escrow
Agent pursuant to which an Escrow Account will be created and certain procedures
regarding the disbursement of the proceeds from a Mortgage Loan for construction
of a Facility will be established.
"Construction Fund Disbursement Agreement -- Common Area": Each
Construction Fund Disbursement Agreement -- Common Area among two or more
Borrowers, Kmart, two or more Tenants, the Depositor, a Construction Monitor, if
applicable, and an Escrow Agent pursuant to which an Escrow Account -- Common
Area will be created and certain procedures for the disbursement of the portion
of the proceeds from two or more Mortgage Loans to be used for construction of a
Common Area will be established.
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<PAGE> 69
"Construction Monitor": A party, in some cases, to a Construction Fund
Disbursement Agreement or a Construction Fund Disbursement Agreement -- Common
Area who is responsible for monitoring the progress of the construction of the
related Facility or Common Area.
"Debt Service": The principal and interest which is scheduled to be paid
with respect to a Series of Certificates in the amounts specified in the
Prospectus Supplement on each scheduled Remittance Date.
"Definitive Certificates": Certificates issued in fully registered,
certificated form to Certificateholders other than DTC or its nominee.
"Demised Premises": The interest of a Borrower (which may be fee title
ownership or a ground leasehold) in the land on which the Facility is or will be
located and which will be leased to a Tenant pursuant to a Lease, including the
Borrower's interest in any rights, licenses, privileges and easements
appurtenant thereto.
"Depositor": National Tenant Finance Corporation, a Delaware corporation
and its successors and assigns.
"Discounted Prepayment Value": With respect to the Called Principal, the
amount obtained by discounting all Remaining Scheduled Payments with respect to
such Called Principal from their respective scheduled Due Dates to the Purchase
Date with respect to such Called Principal, in accordance with generally
accepted financial practice and at a discount factor (applied generally on a
semiannual basis) equal to the Reinvestment Yield.
"DTC": The Depository Trust Company.
"DTC Participants": Those participants for whom DTC holds securities on
deposit.
"Due Date": With respect to a Mortgage Note, the last Business Day of the
month on which each Scheduled Payment is due, exclusive of any days of grace.
"ERISA": The Employee Retirement Income Security Act of 1974, as amended.
"Escrow Account": An escrow account created pursuant to a Construction Fund
Disbursement Agreement.
"Escrow Account -- Common Area": An escrow account created pursuant to a
Construction Fund Disbursement Agreement -- Common Area.
"Escrow Agent": The bank, trust company or other fiduciary named in the
Prospectus Supplement for each Series of Certificates as the escrow agent under
a Construction Fund Disbursement Agreement or Construction Fund Disbursement
Agreement -- Common Area related to such Series.
"Event of Default": For any Trust Agreement, Pass-Through Trust Agreement,
Collateral Trust Agreement, Mortgage Note or Loan Document, an event of default
described in such Trust Agreement, Pass-Through Trust Agreement, Collateral
Trust Agreement, Mortgage Note or Loan Document, as the context requires.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Facility": Each Demised Premises and the improvements constructed or to be
constructed thereon, as described in the Prospectus Supplement for each Series.
"Indemnity Agreement": Each Indemnity Agreement between Kmart and the
Depositor when the Tenant is a Subsidiary pursuant to which Kmart will indemnify
the Depositor and its successors and assigns in the event that any Lease Payment
under the related Lease or Lease Guaranty is asserted to be voidable in any
bankruptcy case filed by or against such Subsidiary.
"Indirect Participants": Those Persons who clear through, or maintain a
custodial relationship with, a DTC Participant, either directly or indirectly.
55
<PAGE> 70
"Insurance Proceeds": Proceeds paid by any insurer pursuant to any
insurance policy (other than liability insurance) and self-insurance proceeds
paid by any of the Tenants or, pursuant to a Lease Guaranty, Kmart with respect
to any Mortgaged Property.
"Investment Grade Rating": A rating by Standard & Poor's of BBB- or better
or a rating by Moody's of Baa3 or better.
"Investment Grade Status": The long-term senior unsecured debt of the
entity issuing such debt has continuously had an Investment Grade Rating for a
period of not less than 12 full calendar months immediately prior to the related
Lease Guaranty Termination.
"Kmart" or "Kmart Corporation": Kmart Corporation, a Michigan corporation.
"Lease": Each Lease by and between a Tenant and a Borrower pursuant to
which such Borrower will lease a Facility to the Tenant described in the
Prospectus Supplement for each Series.
"Lease Guaranty": Each Lease Guaranty Agreement by and between Kmart and a
Borrower pursuant to which Kmart will guarantee to such Borrower the obligations
of a Tenant which is a Subsidiary under the related Lease.
"Lease Guaranty Termination": The giving of notice by Kmart or a Subsidiary
to the Borrower and the Trustee, or the Collateral Trustee if applicable, that
Kmart or the Subsidiary has elected to terminate the related Lease Guaranty
because such Subsidiary which is a Tenant under the related Lease, the new
tenant pursuant to an assignment of the related Lease, or a new guarantor of the
performance of such Lease, as the case may be, has achieved Investment Grade
Status and provided that certain other conditions are satisfied.
"Lease Payments": The annual rental and additional rent payable by a Tenant
under a Lease, other than real estate taxes and amounts payable directly to a
third party, which will be payable in accordance with such Lease.
"Loan Agreement": Each Loan Agreement between a Borrower and the Depositor
pursuant to which the Depositor will loan funds to a Borrower to provide
permanent financing for, or to finance the acquisition or acquisition and
construction of, a Facility described in the Prospectus Supplement for each
Series of Certificates.
"Loan Documents": Collectively, each Loan Agreement, Mortgage, Assignment
of Leases and Rents, Lease, Lease Guaranty, if applicable, Construction Fund
Disbursement Agreement, Construction Fund Disbursement Agreement - Common Area,
and Note Put Agreement related to a Mortgage Loan, and any other document
identified in any Loan Agreement as a Loan Document.
"Make-Whole Premium": With respect to any amount of Called Principal of a
Mortgage Note, an amount equal to the positive excess, if any, as of the
Purchase Date of the Discounted Prepayment Value of the Called Principal of such
Mortgage Note over such Called Principal.
"Moody's": Moody's Investors Service, Inc., a corporation organized and
existing under the laws of the State of Delaware, its successors and assigns.
"Mortgage": Each Mortgage, Security Agreement, Assignment of Leases and
Rents and Fixture Filing by and between the Depositor and a Borrower which will
create a first lien priority interest in the Facility securing each Mortgage
Note.
"Mortgage Loan": Each loan from the Depositor to a Borrower evidenced by
one or more Mortgage Notes and secured by a Mortgage and other Collateral.
"Mortgage Note": Each promissory note executed and delivered by a Borrower
to the Depositor which evidences all or a portion of a Mortgage Loan, which is
sold and assigned by the Depositor to the Trustee or Pass-Through Trustee and
which is the subject of a Trust Agreement or Pass-Through Trust Agreement
pursuant to which a Series of Certificates is issued.
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<PAGE> 71
"Mortgage Note Account": Each Mortgage Note Account created and maintained
pursuant to a Collateral Trust Agreement.
"Mortgaged Property": The real and personal property securing a Mortgage
Note.
"Note Put Agreement": Each Note Put Agreement by and among a Tenant, Kmart
(if the Tenant is a Subsidiary) and a Depositor pursuant to which the Tenant and
Kmart agree to purchase the related Mortgage Note at the Purchase Price upon the
occurrence of a Triggering Event.
"Pass-Through Trust": A grantor trust created pursuant to a Pass-Through
Trust Agreement.
"Pass-Through Trustee": The bank, trust company or other fiduciary named in
a Prospectus Supplement for a Series of Certificates as the trustee under a
Pass-Through Trust Agreement pursuant to which such Series is issued.
"Pass-Through Trust Agreement": A Trust Agreement when Mortgage Notes of
different maturities are issued pursuant to one or more Loan Agreements.
"Pass-Through Trust Property": The corpus of a Pass-Through Trust created
by a Pass-Through Trust Agreement for a Series of Certificates, consisting of
(i) one or more Mortgage Notes; and (ii) all assets deposited in the Certificate
Account, including investments of funds in such account.
"Percentage Interest": (i) In the case of property held in a Trust (other
than a Collateral Trust) the percentage of the whole undivided beneficial
interest in such property held by a holder of one or more Certificates of such
Trust and evidenced by such Certificates, and (ii) in the case of property held
in a Collateral Trust, the percentage of the whole undivided beneficial interest
in such property held indirectly by a holder of one or more Certificates in a
Pass-Through Trust having an interest in such Collateral Trust. When used in
connection with the exercise of any right which by its terms can be exercised
only by holders of Certificates of a single Pass-Through Trust, such term shall
mean the percentage of the whole undivided interest in the Mortgage Note(s)
owned by such Trust held by a holder of one or more Certificates in such
Pass-Through Trust and evidenced by such Certificates.
"Person": Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization or government or any agency or political subdivision
thereof.
"Purchase Date": With respect to the Called Principal of a Mortgage Note or
with respect to the purchase of a Mortgage Note pursuant to a Note Put
Agreement, the date on which such Called Principal is to be paid or prepaid or
is declared to be immediately due and payable under any of the related Loan
Documents or the date on which such Mortgage Note is to be purchased.
"Purchase Price": The sum of the Called Principal plus the Make-Whole
Premium and accrued interest with respect to the Called Principal to the
Purchase Date, except that if a Mortgage Note is being purchased pursuant to a
Note Put Agreement as a consequence of a Lease Guaranty Termination, the
Purchase Price will include the Termination Premium instead of the Make-Whole
Premium.
"Record Date": The close of business on the fifteenth day preceding the
related Remittance Date, except that the Record Date with respect to Scheduled
Payments received after the Due Date shall mean the close of business on the
fifteenth day preceding the Remittance Date such Scheduled Payments would have
been distributable to the Certificateholders if they had been paid on such Due
Date.
"Reinvestment Yield": With respect to the Called Principal of a Mortgage
Note, the sum of (x) the yield to maturity implied by the following: (i) the
yields reported, as of 10:00 a.m. (New York City time) on the third Business Day
preceding the Purchase Date with respect to such Called Principal, on the
display designated as "Page 678" on the Telerate Service (or such other display
as may replace Page 678 on the Telerate Service) for actively traded U.S.
Treasury securities having a maturity equal (as nearly as practicable) to the
Remaining Average Life of the Called Principal being paid or prepaid as of such
Purchase Date, or (ii) if such yields have been reported as of such time or the
yields reported as of such time are not ascertainable, the Treasury Constant
Maturity Series yields reported, for the latest day for which such yields
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have not been so reported as of the third Business Day preceding the Purchase
Date with respect to such Called Principal, in Federal Reserve Statistical
Release H.15 (519) (or any comparable successor publication) for actively traded
U.S. Treasury securities having a constant maturity equal (as nearly as
practicable) to the Remaining Average Life of the Called Principal being paid or
prepaid as of such Purchase Date; and (y) 50 basis points. Such implied yield
will be determined, if necessary, by (a) converting U.S. Treasury bill
quotations to bond-equivalent yields in accordance with accepted financial
practice and (b) interpolating linearly between reported yields.
"Remaining Average Life": With respect to any amount of Called Principal of
a Mortgage Note, the number of years (calculated to the nearest one-twelfth
year) obtained by dividing (i) such Called Principal into (ii) the sum of the
products obtained by multiplying (a) each Remaining Scheduled Payment of such
Called Principal (excluding interest thereon) by (b) the number of years
(calculated to the nearest one-twelfth year) which will elapse between the
Purchase Date with respect to such Called Principal and the scheduled due date
of such Remaining Scheduled Payment.
"Remaining Scheduled Payments": With respect to the Called Principal, all
payments of such Called Principal and interest thereon that would be due on or
after the Purchase Date with respect to such Called Principal if no payment of
such Called Principal were made prior to its maturity date.
"Remittance Date": Each date specified in the Prospectus Supplement for
each Series of Certificates on which principal of, and/or interest on, the
Mortgage Notes is distributable to the Certificateholder or such other date on
which a distribution is made to Certificateholders as a result of the prepayment
or other liquidation of a Mortgage Note or as a result of the sale of a Mortgage
Note pursuant to the related Note Put Agreement.
"Rental Payment Account": Each Rental Payment Account created and
maintained pursuant to a Trust Agreement or a Collateral Trust Agreement if
applicable.
"Scheduled Payments": Payments of principal of, if any, and interest on, a
Mortgage Note held in a Trust or a Pass-Through Trust which will be scheduled to
be received by the Trustee or Collateral Trustee on each Due Date.
"Securities Act": The Securities Act of 1933, as amended.
"Series": A group of Certificates issued by a separate Trust or
Pass-Through Trust.
"Standard & Poor's" or "S&P": Standard & Poor's Ratings Group or its
successor in interest.
"Subsidiary": One or more of the following subsidiaries of Kmart identified
in the related Prospectus Supplement as the Tenant under a related Lease:
Borders, Inc.; Walden Book Company Inc.; Builders Square, Inc.; OfficeMax Inc.;
or The Sports Authority, Inc.
"Tenant": The lessee under each Lease named in the Prospectus Supplement
for each Series of Certificates, which lessee will be either Kmart or a
Subsidiary.
"Termination Premium": With respect to any Mortgage Note, an amount equal
to the unpaid principal balance of such Mortgage Note multiplied by a percentage
as set forth in the related Prospectus Supplement.
"Triggering Event": With respect to a Note Put Agreement, (a) (i) the
failure by a Tenant to pay when due any related Lease Payment within 10 days (or
30 days if the Tenant is Kmart) after notice to such Tenant of such default and
(ii) if the Tenant is a Subsidiary, the failure by Kmart to pay such Lease
Payment within 30 days after notice to Kmart of such Subsidiary's failure to do
so (which notice may be given concurrently with the corresponding notice to such
Subsidiary), (b) completion of construction of the Facility to be leased to the
Tenant does not occur prior to the related Completion Date, or (c) if the Tenant
is a Subsidiary, a Lease Guaranty Termination occurs.
"Trust": A grantor trust created pursuant to a Trust Agreement.
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<PAGE> 73
"Trust Agreement": An agreement between the Depositor and the Trustee
pursuant to which a Series of Certificates will be issued and, if Mortgage Notes
having the same maturity are issued pursuant to a Loan Agreement, pursuant to
which the Collateral with respect to the related Mortgage Notes will be held.
"Trust Indenture Act": The Trust Indenture Act of 1939, as amended.
"Trust Property": The corpus of the Trust created by a Trust Agreement for
each Series of the Certificates, consisting of (i) one or more Mortgage Notes;
and (ii) all assets deposited in the Certificate Account, including the
investment of funds in such account. If Mortgage Notes of the same maturity are
issued pursuant to the related Loan Documents, then any Trust Property will also
include: (i) all rights which secure the obligations of the Borrowers of the
proceeds of such Mortgage Notes, (ii) all related Loan Documents and any rights
thereunder of holders of the Mortgage Notes; (iii) property which secured the
related Mortgage and which has been acquired by foreclosure or deed in lieu of
foreclosure; and (iv) Insurance Proceeds, Condemnation Proceeds and any other
amounts receivable under any related Loan Document.
"Trustee": The bank, trust company or other fiduciary named in a Prospectus
Supplement for a Series of Certificates as the trustee under a Trust Agreement
pursuant to which such Series is issued.
"Trustee's Fee": The amount of the annual fee(s) paid to the Pass-Through
Trustees, if applicable, or the Trustee for its ordinary fees and expenses
arising under the Pass-Through Trust Agreements, if applicable, or the Trust
Agreement.
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- ---------------------------------------------------------------
- ---------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CERTIFICATES OFFERED HEREBY, NOR AN OFFER OF THE CERTIFICATES IN ANY STATE
OR JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR ANY PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary Information............................ S-3
Use of Proceeds................................ S-6
The Certificates............................... S-6
The Pass-Through Trusts and The Collateral
Trust........................................ S-8
The Mortgage Notes............................. S-8
The Facilities and The Leases.................. S-10
Plan of Distribution........................... S-12
Legal Matters.................................. S-13
Ratings........................................ S-13
PROSPECTUS
Available Information.......................... 2
Reports to Certificateholders.................. 2
Incorporation of Certain Documents by
Reference.................................... 2
Prospectus Summary............................. 3
Special Considerations......................... 8
Kmart.......................................... 10
The Depositor.................................. 14
Use of Proceeds................................ 14
Diagrams of Transaction Structure.............. 15
Structure of the Financings.................... 19
The Certificates............................... 20
The Trusts, Pass-Through Trusts and Collateral
Trusts....................................... 26
The Mortgage Notes, the Loan Agreements and
Related Documents............................ 35
The Note Put Agreements........................ 39
The Leases, the Lease Guaranties and Related
Documents.................................... 40
The Borrowers.................................. 46
Consequences of Bankruptcy of a Tenant or a
Borrower..................................... 46
Certain Federal Income Tax
Consequences................................. 47
State and Local Tax Considerations............. 50
ERISA Considerations........................... 50
Legal Investment Considerations................ 52
Plan of Distribution........................... 52
Legal Matters.................................. 52
Experts........................................ 52
Glossary....................................... 53
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
$85,000,000*
KMART
CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1994A-1
SERIES 1994A-2
------------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------------
SUTRO & CO. INCORPORATED
AUGUST , 1994
* Preliminary subject to change.
---------------------------------------------------------------
---------------------------------------------------------------
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Filing Fee................................................................ $ 86,206.90
Printing and Engraving........................................................ 130,000.00*
Legal Fees and Expenses....................................................... 2,500,000.00*
Trustee Fees and Expenses..................................................... 60,000.00**
Blue Sky Fees and Expenses (including fees and expenses of counsel)........... 30,000.00*
Rating Agency Fees............................................................ 250,000.00*
Miscellaneous Expenses........................................................ 100,000.00*
-------------
Total.................................................................... $3,156,206.90
============
</TABLE>
- -------------------------
* Estimated.
** Estimated; does not include annual Trustee expense.
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
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. In addition, the Registrant maintains directors' and
officers' liability insurance which, under certain circumstances, would cover
alleged violations of the Securities Act of 1933.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of National Tenant Finance Corporation
3.2 By-Laws of National Tenant Finance Corporation
4.1 Form of Trust Agreement between the Depositor and the Trustee
4.2 Form of Pass-Through Trust Agreement between the Depositor and the Pass-Through
Trustee
4.3 Form of Collateral Trust Agreement between the Depositor and the Collateral
Trustee
4.4 Form of Certificate used with Trust Agreement (included in 4.1)
4.5 Form of Certificate used with Pass-Through Trust Agreement (included in 4.2)
4.6 Form of Loan Agreement
4.7 Form of Mortgage Note
4.8 Form of Leases
4.9 Form of Lease Guaranty
4.10 Form of Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture
Filing
4.11 Form of Assignment of Leases and Rents
4.12 Form of Construction Fund Disbursement Agreement
4.13 Form of Construction and Disbursement Agreement -- Common Area
4.14 Form of Note Put Agreement
4.15 Form of Consent and Agreement
</TABLE>
II-1
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------
<S> <C>
4.16 Form of Indemnity Agreement
5.1 Opinion of Squire, Sanders & Dempsey regarding validity of Certificates,
including consent
8.1 Opinion of Squire, Sanders & Dempsey as to certain tax matters, including consent
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Price Waterhouse*
23.2 Consent of Squire, Sanders & Dempsey (included in Exhibit 5.1)
23.3 Consent of Squire, Sanders & Dempsey (included in Exhibit 8.1)
24.1 Power of Attorney (included as part of signature page of this Registration
Statement)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of
Trustee
</TABLE>
- -------------------------
* Filed with this Amendment No. 3
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 unless the information required to be included in
such post-effective amendment is contained in a periodic report filed by
the Registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 and incorporated herein by reference;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement unless the information required to be
included in such post-effective amendment is contained in a periodic
report filed by the Registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 and incorporated herein by
reference;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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 section 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.
If the Trustee is not identified until after the Registration Statement is
declared effective, the undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to
II-2
<PAGE> 77
act under subsection (a) of section 310 of the Trust Indenture Act of 1939, as
amended (the "TIA"), in accordance with the rules and regulations prescribed by
the Commission under section 305(b)(2) of the TIA.
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 Act 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 against the Registrant by such director, officer or
controlling person in connection with the 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 Act and will be governed by the final adjudication of such
issue.
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)(1) 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 the
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 78
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. 3 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 August
19, 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. 3 to the Registration Statement has been signed below by the following
persons in the capacities indicated on August 19, 1994.
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------
/s/ JOSEPH E. ANTONINI* Chairman of the Board, President
- --------------------------------------------- (Principal Executive Officer) and
Joseph E. Antonini Director
/s/ THOMAS F. MURASKY* Executive Vice President
- --------------------------------------------- (Principal Financial and Accounting
Thomas F. Murasky Officer)
/s/ LILYAN H. AFFINITO* Director
- ---------------------------------------------
Lilyan H. Affinito
/s/ JOSEPH A. CALIFANO, JR.* Director
- ---------------------------------------------
Joseph A. Califano, Jr.
/s/ WILLIE D. DAVIS* Director
- ---------------------------------------------
Willie D. Davis
/s/ ENRIQUE C. FALLA* Director
- ---------------------------------------------
Enrique C. Falla
/s/ JOSEPH P. FLANNERY* Director
- ---------------------------------------------
Joseph P. Flannery
/s/ DAVID B. HARPER* Director
- ---------------------------------------------
David B. Harper
/s/ F. JAMES MCDONALD* Director
- ---------------------------------------------
F. James McDonald
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ RICHARD S. MILLER* Director
- ---------------------------------------------
Richard S. Miller
/s/ J. RICHARD MUNRO* Director
- ---------------------------------------------
J. Richard Munro
Director
- ---------------------------------------------
Donald S. Perkins
/s/ GLORIA M. SHATTO* Director
- ---------------------------------------------
Gloria M. Shatto
/s/ JOSEPH R. THOMAS* Director
- ---------------------------------------------
Joseph R. Thomas
*By: /s/ NANCIE W. LaDUKE
- ------------------------------------------------------
Nancie W. LaDuke
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of National Tenant Finance Corporation
3.2 By-Laws of National Tenant Finance Corporation
4.1 Form of Trust Agreement between the Depositor and the Trustee
4.2 Form of Pass-Through Trust Agreement between the Depositor and the
Pass-Through Trustee
4.3 Form of Collateral Trust Agreement between the Depositor and the
Collateral Trustee
4.4 Form of Certificate used with Trust Agreement (included in 4.1)
4.5 Form of Certificate used with Pass-Through Trust Agreement (included
in 4.2)
4.6 Form of Loan Agreement
4.7 Form of Mortgage Note
4.8 Form of Leases
4.9 Form of Lease Guaranty
4.10 Form of Mortgage, Security Agreement, Assignment of Leases and Rents
and Fixture Filing
4.11 Form of Assignment of Leases and Rents
4.12 Form of Construction Fund Disbursement Agreement
4.13 Form of Construction and Disbursement Agreement -- Common Area
4.14 Form of Note Put Agreement
4.15 Form of Consent and Agreement
4.16 Form of Indemnity Agreement
5.1 Opinion of Squire, Sanders & Dempsey regarding validity of
Certificates, including consent
8.1 Opinion of Squire, Sanders & Dempsey as to certain tax matters,
including consent
12 Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of Price Waterhouse*
23.2 Consent of Squire, Sanders & Dempsey (included in Exhibit 5.1)
23.3 Consent of Squire, Sanders & Dempsey (included in Exhibit 8.1)
24.1 Power of Attorney (included as part of signature page of this
Registration Statement)
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939 of Trustee
</TABLE>
- -------------------------
* Filed with this Amendment No. 3
<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. 3 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.
/s/ PRICE WATERHOUSE
Price Waterhouse
Detroit, Michigan 48243
August 19, 1994
