<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1994
REGISTRATION NO. 33-50297
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 6
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
KMART CORPORATION
(Exact Name of Registrant as Specified in its Charter)
-------------------------
<TABLE>
<S> <C>
MICHIGAN 38-0729500
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
3100 WEST BIG BEAVER ROAD
TROY, MICHIGAN 48084
(810) 643-1000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------------
A. N. Palizzi
Executive Vice President and
General Counsel
Kmart Corporation
3100 West Big Beaver Road
Troy, Michigan 48084
(810) 643-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Verne C. Hampton, II Renwick D. Martin
Dickinson, Wright, Moon, Brown & Wood
Van Dusen & Freeman One World Trade Center
500 Woodward Avenue, Suite 4000 New York, New York 10048
Detroit, Michigan 48226
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
/ /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH SERIES OF AMOUNT BEING OFFERING PRICE OFFERING AMOUNT OF
SECURITIES BEING REGISTERED REGISTERED PER UNIT PRICE REGISTRATION FEE
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Secured Lease Bonds............................. $175,500,000 100% $175,500,000 $56,227.37*
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</TABLE>
* Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
$175,500,000
Kmart Funding Corporation
Secured Lease Bonds, Series A, B, C, D, E, F & G
Kmart Corporation, as Lessee
------------------------
The seven series of Secured Lease Bonds (the "Bonds") offered hereby will be
secured by the seven series of Notes described herein pledged by Kmart Funding
Corporation (the "Issuer"), a New York corporation, which has been formed solely
to facilitate the financing transaction contemplated hereby. The Notes have been
issued as nonrecourse obligations of twenty-four separate Owner Trusts (as
defined herein) in connection with a leveraged lease financing transaction to
finance not more than 92% of the cost of twenty-four properties described herein
(each, a "Property" and collectively, the "Properties") which have been sold by
and leased back to the Kmart Corporation ("Kmart"). There will be seven series
of Notes in respect of each Property. Each series of the Notes will have the
same interest rate, principal amount and maturity date as the interest rate,
principal amount and maturity date of the Bonds of the related series.
The Bonds will also be secured by (i) a present assignment by the Issuer of
its rights under the Note Indentures (as defined herein) and (ii) a present
assignment of all of the Note Trustee's (as defined herein) rights and interests
in and to (a) the Leases (as defined herein), (b) the Mortgages (as defined
herein) and (c) the Options to Lease (as defined herein).
THE ISSUER IS NOT OWNED OR CONTROLLED BY OR AFFILIATED WITH KMART. ALTHOUGH
NEITHER THE BONDS NOR THE NOTES ARE DIRECT OBLIGATIONS OF OR GUARANTEED BY KMART
OR ANY OF ITS AFFILIATES, THE AMOUNTS UNCONDITIONALLY PAYABLE BY KMART UNDER THE
LEASES FOR LEASE OF THE PROPERTIES WILL BE SUFFICIENT TO PAY IN FULL WHEN DUE
ALL PAYMENTS REQUIRED TO BE MADE ON THE NOTES PLEDGED AS SECURITY FOR THE BONDS.
Interest on each series of Bonds will be payable to holders of such Bonds on
January 1 and July 1 commencing January 1, 1995, at the applicable interest
rates set forth below, until the final maturity date for such series of Bonds.
Principal on Series A, Series B, Series C, Series D and Series E Bonds will be
payable in full on their respective maturity dates. Principal on Series F and
Series G Bonds will be payable in scheduled amounts on January 1 or July 1, or
both, of each year commencing on the initial scheduled principal distribution
dates set forth below, until the maturity date for such series. Principal on the
Bonds may be prepaid under certain circumstances, in whole or in part, at a
price equal to the unpaid principal amount thereof or the portion thereof to be
prepaid, plus accrued interest thereon and, in certain circumstances, a
Make-Whole Premium. See "DESCRIPTION OF THE BONDS -- Distributions on the Bonds"
herein.
Elections will be made to treat seven separate pools of the assets securing
the Bonds as real estate mortgage investment conduits (the "REMICs") for federal
income tax purposes. Each series of the Bonds offered hereby will constitute the
"regular interests" in the corresponding designated REMIC. See "Certain Federal
Income Tax Considerations" herein.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
<TABLE>
<CAPTION>
INITIAL SCHEDULED
SECURED LEASE PRINCIPAL INTEREST PRINCIPAL MATURITY PRICE TO
BONDS AMOUNT RATE DISTRIBUTION DATE DATE PUBLIC(1)(2)
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<S> <C> <C> <C> <C> <C>
Series A $ 9,141,000 5.33% January 1, 1995 January 1, 1995 100%
Series B 3,187,000 6.56 January 1, 1996 January 1, 1996 100
Series C 7,598,000 7.04 January 1, 1997 January 1, 1997 100
Series D 8,265,000 7.36 January 1, 1998 January 1, 1998 100
Series E 8,873,000 7.56 January 1, 1999 January 1, 1999 100
Series F 117,510,000 8.80 July 1, 2000 July 1, 2010 100
Series G 20,926,000 9.44 July 1, 2016 July 1, 2018 100
</TABLE>
- ------------
(1) Plus accrued interest, if any, at the applicable interest rate from
August 29, 1994.
(2) The underwriting commission of $1,430,156 constitutes .815% of the
principal amount of the Secured Lease Bonds. The underwriting
commissions and certain other expenses, estimated at $3,233,228, will be
payable as described herein.
------------------------
The Bonds are offered by the Underwriters, subject to prior sale, when, as
and if accepted by the Underwriters, and subject to approval of certain legal
matters by Brown & Wood, counsel for the Underwriters. It is expected that
delivery of the Bonds in book-entry form will be made on or about August 29,
1994 through the facilities of The Depository Trust Company, against payment
therefor in immediately available funds.
------------------------
MORGAN STANLEY & CO. BEAR, STEARNS & CO. INC.
Incorporated
August 22, 1994
<PAGE> 3
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY KMART OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF KMART SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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Available Information................................................................. 3
Reports to Bondholders by the Bond Trustee............................................ 3
Incorporation of Certain Documents by Reference....................................... 3
Prospectus Summary.................................................................... 4
Kmart................................................................................. 10
Kmart Corporation Selected Financial Information...................................... 13
Structure of the Transaction.......................................................... 15
Diagram of Payments................................................................... 16
Diagram of Structure.................................................................. 17
Use of Proceeds....................................................................... 17
Description of the Properties......................................................... 18
Description of the Leases............................................................. 20
The Issuer and the Owner Trusts....................................................... 25
Description of the Bonds.............................................................. 26
Description of the Notes.............................................................. 34
Certain Federal Income Tax Considerations............................................. 41
ERISA Considerations.................................................................. 47
Underwriting.......................................................................... 49
Legal Opinions........................................................................ 50
Ratings............................................................................... 50
Experts............................................................................... 50
Index of Principal Terms.............................................................. 51
</TABLE>
2
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT LEVELS
ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Kmart is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Proxy statements, reports and other information
can be inspected and copied at the public reference facilities at the
Commission's office at 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's regional offices in Chicago (500 West Madison Avenue, Chicago, IL
60661) and New York (7 World Trade Center, 13th Floor, New York, NY 10048).
Copies of such material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates.
Kmart's common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange and the Pacific Stock Exchange. Reports, proxy statements and other
information concerning Kmart can be inspected and copied at the New York Stock
Exchange, 20 Broad Street, New York, NY 10005 and at the Pacific Stock Exchange,
301 Pine Street, San Francisco, CA 94104.
Kmart has filed with the Commission a registration statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Bonds. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. The Registration Statement may be inspected without
charge at the public-reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549, and copies thereof may be
obtained from the Commission upon payment of prescribed rates.
REPORTS TO BONDHOLDERS BY THE BOND TRUSTEE
Unless and until Definitive Bonds (as defined herein) are issued (which
will occur only under the limited circumstances described herein), certain
periodic statements concerning payments on the Bonds will be sent by The Bank of
New York, as Bond Trustee under the Bond Indenture pursuant to which the Bonds
are to be issued (as more fully described herein), to Cede & Co. ("Cede"), as
nominee of DTC, the registered holder of the Bonds. See "DESCRIPTION OF THE
BONDS -- Registration of the Bonds" and "-- Definitive Bonds" herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Kmart's Annual Report on Form 10-K for the fiscal year ended January 26,
1994, its Quarterly Report on Form 10-Q for the quarter ended April 27, 1994,
its Form 8-K filed on June 8, 1994, its Form 8-K filed on August 19, 1994 and
all documents filed by Kmart pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act, after the date of this Prospectus and prior to the termination
of the offering of the Bonds described herein, shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
dates of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this Prospectus modifies
or supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
KMART WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS
DELIVERED, UPON SUCH PERSON'S WRITTEN OR ORAL REQUEST, A COPY OF ANY OR ALL OF
THE INFORMATION THAT HAS BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS (NOT
INCLUDING EXHIBITS TO SUCH INFORMATION UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH INFORMATION). ANY SUCH REQUEST SHOULD BE
DIRECTED TO THE CORPORATE REPORTING DEPARTMENT, KMART CORPORATION, 3100 WEST BIG
BEAVER ROAD, TROY, MI 48084 (TELEPHONE NO. (810) 643-1093).
3
<PAGE> 5
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the detailed
information appearing elsewhere or incorporated by reference in this Prospectus.
Certain capitalized terms used in this summary are defined elsewhere in the
Prospectus on the pages indicated in "INDEX OF PRINCIPAL TERMS" herein.
<TABLE>
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ISSUER............................... Kmart Funding Corporation, a New York corporation
(the "Issuer"). The Issuer has been formed solely to
facilitate the financing contemplated hereby. Kmart
does not own or control and is not affiliated with
the Issuer.
SECURITIES OFFERED................... $9,141,000 principal amount of 5.33% Secured Lease
Bonds, Series A, due January 1, 1995 (the "Series A
Bonds").
$3,187,000 principal amount of 6.56% Secured Lease
Bonds, Series B, due January 1, 1996 (the "Series B
Bonds"). $7,598,000 principal amount of 7.04% Secured
Lease Bonds, Series C, due January 1, 1997 (the
"Series C Bonds"). $8,265,000 principal amount of
7.36% Secured Lease Bonds, Series D, due January 1,
1998 (the "Series D Bonds"). $8,873,000 principal
amount of 7.56% Secured Lease Bonds, Series E, due
January 1, 1999 (the "Series E Bonds"). $117,510,000
principal amount of 8.80% Secured Lease Bonds, Series
F, due July 1, 2010 (the "Series F Bonds").
$20,926,000 principal amount of 9.44% Secured Lease
Bonds, Series G, due July 1, 2018 (the "Series G
Bonds"; and together with the Series A Bonds, Series
B Bonds, Series C Bonds, Series D Bonds, Series E
Bonds and Series F Bonds, the "Bonds").
The Bonds will be issued pursuant to a Collateral
Trust Indenture (the "Bond Indenture"), to be dated
as of August 29, 1994 (the "Closing Date"), between
the Issuer and the Bond Trustee.
BOND TRUSTEE......................... The Bank of New York, a New York banking corporation,
will act as Bond Trustee (in such capacity, the "Bond
Trustee") under the Bond Indenture.
INTEREST PAYMENTS.................... Interest will be payable in immediately available
funds on the unpaid principal amount of each
outstanding series of Bonds at the applicable
interest rate on each January 1 and July 1 (each, a
"Payment Date"), commencing on January 1, 1995, to
holders of record ("Bondholders") as of the 15th day
of the calendar month prior to the month in which
such Payment Date occurs (each, a "Record Date"). If
any Payment Date is not a business day, any payment
due thereon shall be made on the next succeeding
business day, without any accrued interest from such
Payment Date. Interest payable on any Payment Date
shall accrue on each Bond from and including the
previous Payment Date (or from and including the
Closing Date with respect to the first Payment Date)
to, but excluding, such Payment Date. Interest shall
be calculated on the basis of a 360-day year
consisting of 12 months of 30 days each.
PRINCIPAL PAYMENTS................... Scheduled Payments of Principal. Scheduled principal
payments on the Series A Bonds, Series B Bonds,
Series C Bonds, Series D Bonds and Series E Bonds
will be payable only on the respective maturity dates
of such Bonds. Scheduled principal payments on the
Series F Bonds and Series G Bonds will be payable on
scheduled Payment Dates pursuant to a sinking fund
(the "Sinking Fund") in amounts set forth herein,
</TABLE>
4
<PAGE> 6
<TABLE>
<S> <C>
commencing on July 1, 2000, with respect to the
Series F Bonds, and on July 1, 2016, with respect to
the Series G Bonds. Payments of principal of any
series will be made pro rata in accordance with the
denominations thereof. See "DESCRIPTION OF THE BONDS
-- Distributions on the Bonds -- Scheduled Payments
of Principal" herein.
Prepayments of Principal with a Make-Whole
Premium. The Bonds may be prepaid in part on any
Payment Date, at par, plus a Make-Whole Premium (as
described herein), together with interest accrued to
the date of such prepayment (a) following any
economic abandonment of a Property by Kmart during
the base term of the related Lease, but not earlier
than January 1, 2004, or (b) if a Lease is terminated
due to certain unpermitted uses of the related
Property as further described herein. See
"DESCRIPTION OF THE LEASES -- Early Termination" and
"DESCRIPTION OF THE BONDS -- Distributions on the
Bonds -- Prepayments of Principal with a Make-Whole
Premium" herein.
Prepayments of Principal at Par. The Bonds may be
prepaid in part on any Payment Date, at par, together
with interest accrued to the date of such prepayment,
in the event that (a) a Lease is terminated following
a casualty to or condemnation of the related Property
or (b) a portion of condemnation proceeds is paid to
the Note Trustee pursuant to such Lease, but such
Lease is not terminated. See "DESCRIPTION OF THE
LEASES -- Condemnation and Casualty" and "DESCRIPTION
OF THE BONDS -- Distributions on the Bonds --
Prepayments of Principal at Par" herein.
Prepayments of Principal Following a Note Indenture
Event of Default. The Bonds may be prepaid in part
following a Note Indenture Event of Default, as and
to the extent described under "DESCRIPTION OF THE
NOTES -- Remedies" herein. Such prepayment will be at
par, together with interest accrued to the date of
prepayment, plus, under the circumstances described
under "DESCRIPTION OF THE NOTES -- Remedies", a
Make-Whole Premium on the principal amount then due.
If less than all the principal amount of the Bonds
are to be prepaid, payments will be made pro rata in
the proportion that the aggregate principal amount of
each Bond bears to the aggregate amount of all Bonds
outstanding.
Optional Prepayment. Neither the Notes nor the Bonds
are subject to prepayment at the option of the Owner
Trustee or the Issuer. However, each Note is subject
to repurchase by the related Owner Trustee in the
event of a Note Indenture Event of Default with
respect to such Note as described under "DESCRIPTION
OF THE NOTES -- Remedies" herein.
SOURCE OF PAYMENT OF THE BONDS....... Payments of rent to be made by Kmart pursuant to the
Leases on each Payment Date ("Rental Payments") will
be in amounts that will be at least sufficient to pay
in full, when due, all payments of principal,
interest and any Make-Whole Premium due on the Notes,
and are to be paid pursuant to the Collateral
Assignment (as defined herein) in immediately
available funds directly to the Bond Trustee for
distribution to the Bondholders pursuant to the Bond
Indenture. The remaining amount of each Rental
Payment shall be distributed
</TABLE>
5
<PAGE> 7
<TABLE>
<S> <C>
to the Note Trustee for distribution pursuant to the
Note Indentures. In the event that on any Payment
Date, the amount actually received by the Bond
Trustee is less than the amount necessary to provide
for such payments on the Bonds, the Bond Trustee
shall only be obligated to distribute to the
Bondholders such amounts received on such Payment
Date, which shall be applied pro rata based on the
amount of interest, principal and any Make-Whole
Premium currently payable on the Bonds. Any overdue
payments, plus accrued interest at a rate with
respect to each series of Bonds equal to 1% above the
applicable rate for such series of Bonds shown on the
cover hereof, shall be distributed to Bondholders on
the day such overdue amounts are received by the Bond
Trustee. See "DESCRIPTION OF THE BONDS --
Distributions on the Bonds" herein. Although Rental
Payments are direct obligations of Kmart, the Bonds
are not direct obligations of and are not guaranteed
by Kmart or any of its affiliates.
SECURITY............................. Security for the Bonds. The Bonds will be equally and
ratably secured by (i) a pledge (the "Pledge") by the
Issuer to the Bond Trustee of the seven series of
notes (the "Series A Notes", "Series B Notes",
"Series C Notes", "Series D Notes", "Series E Notes",
"Series F Notes", and "Series G Notes", and
collectively, the "Notes") relating to each Property
issued on a non-recourse basis by one of 24 trusts
(the "Owner Trusts") that were established pursuant
to 24 separate but substantially similar trust
agreements (each, a "Trust Agreement"), between the
owner trustee named therein, acting thereunder not in
its individual capacity but solely as trustee of the
related Owner Trust (in such capacity, the "Owner
Trustee") and the holder or holders of the beneficial
interest in each Owner Trust (the "Owner
Participant") to finance the sale-leaseback
transactions described herein (the "Sale-Leaseback
Transactions"), (ii) a present assignment (the "Note
Assignment") by the Issuer to the Bond Trustee of its
rights under each Note Indenture (as defined below)
and (iii) a present assignment with respect to each
Property (each, a "Collateral Assignment") to the
Bond Trustee of all of the Note Trustee's rights and
interests in and to (a) the Leases, (b) the Mortgages
(as defined below) and (c) the Options to Lease (as
defined herein). The Series A Note, Series B Note,
Series C Note, Series D Note, Series E Note, Series F
Note, and Series G Note issued in respect of each
Property will have a maturity date and an interest
rate corresponding to those on the Series A Bonds,
Series B Bonds, Series C Bonds, Series D Bonds,
Series E Bonds, Series F Bonds, and Series G Bonds,
respectively. The aggregate principal amount of each
series of Notes with respect to all of the Properties
will be the same as the aggregate principal amount of
the corresponding series of Bonds. See "STRUCTURE OF
THE TRANSACTION", "DESCRIPTION OF THE BONDS" and
"DESCRIPTION OF THE NOTES" herein.
Security for the Notes. The Notes with respect to
each Property have been issued by the respective
Owner Trust under 24 separate "Trust Indenture,
Assignment of Lease and Rents and Security
Agreements" (each, a "Note Indenture"), each of which
relates to an individual Property. Each Note and Note
</TABLE>
6
<PAGE> 8
<TABLE>
<S> <C>
Indenture will be amended and restated concurrently
with the issuance of the Bonds. The Bank of New York
is acting as Note Trustee under each of the Note
Indentures (in such capacity, the "Note Trustee").
The trust estate created by each Note Indenture (each
a "Note Trust Estate") consists primarily of (i) a
present assignment to the Note Trustee of the Owner
Trustee's rights and interests in and to (subject to
Excepted Rights and Excepted Payments, each as
defined herein) the Lease relating to such Property,
including the right to receive payments of rent under
such Lease that will be, as of the Closing Date, in
amounts at least sufficient to pay in full, when due,
all payments of principal, interest and any
Make-Whole Premium due on the Notes and of the rights
of the Owner Trustee pursuant to the related Option
to Lease (each, a "Lease Assignment") and (ii) a
first-mortgage lien on the Owner Trust's interest in
the related Property (the "Mortgage"), subject to the
rights of Kmart under the Lease of such Property. See
"DESCRIPTION OF THE NOTES -- Security" herein. Upon
the occurrence of a Note Indenture Event of Default
(as defined herein), the Note Trustee may, pursuant
to the terms of the Note Indenture, exercise its
rights with respect to the related Note Trust Estate
for the equal and ratable benefit of all of the
holders of the Notes issued under or secured by the
related Note Indenture. So long as the Notes are
subject to the lien of the Bond Indenture, the Bond
Trustee shall be entitled to exercise all the rights,
privileges and entitlements of the Noteholders under
each Note Indenture and the Bond Trustee shall be
entitled to exercise all the rights of the Note
Trustee under the Leases, Mortgages and Options to
Lease. None of the Leases, the Notes or the Mortgages
are cross-defaulted or cross-collateralized. See
"STRUCTURE OF THE TRANSACTION" and "DESCRIPTION OF
THE PROPERTIES" herein.
The Bondholders will have no recourse against Kmart
(except pursuant to any remedies available to the
Bond Trustee and the Bondholders upon the occurrence
and continuation of a Lease Event of Default (as
herein defined)), and will have no personal recourse
against the Owner Trustees, the Owner Participant,
the Remainder Purchaser, the Note Trustee, the Bond
Trustee, the Issuer or their respective affiliates.
However, the obligation to make payments of amounts
payable under the Leases constitutes a general
obligation of Kmart and such amounts will be
sufficient to pay in full when due all amounts
required to be paid on the Notes pledged as security
for the Bonds.
SALE-LEASEBACK TRANSACTION........... Each of the Owner Trusts has acquired from Kmart a
separate interest in one of 24 commercial properties
(the "Properties") consisting of either (i) a 30-year
estate-for-years interest in the land comprising one
of 22 of the Properties (collectively, the "Estate
for Years Interests") or (ii) a leasehold estate in
excess of 25 years in the land comprising one of the
remaining two Properties (collectively, the
"Leasehold Estates") and, with respect to each of the
Properties, the improvements thereon. Each Owner
Trust has leased its respective Estate for Years
Interest or sublet its respective Leasehold Estate
(and, in each case, the improvements thereon) to
Kmart pursuant to a net lease (each, a "Lease")
having an interim term from
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C>
December 27, 1993 to June 30, 1994, a base term of
24 1/2 years, which commenced on July 1, 1994, and
options to renew. Concurrently with the sale of the
Estate for Years Interests to the appropriate Owner
Trusts, Kmart sold a remainder interest in such
Properties, which commences upon the expiration of
the related Estate for Years Interest, to FGHK, Ltd.,
A Wyoming Limited Liability Company (the "Remainder
Purchaser"). Approximately 90% of the aggregate
purchase price of $190,923,922 paid by the Owner
Trusts for their interests in the Properties was
financed by the issuance to a single noteholder (the
"Initial Noteholder") of certain notes (the "Interim
Notes") secured by the Properties pursuant to an
interim financing arrangement (the "Interim
Financing") and the balance was obtained from equity
investments in the Owner Trusts by the Owner
Participant. The Initial Noteholder will assign the
Interim Notes to the Issuer in exchange for a portion
of the proceeds from the offering of the Bonds. The
remainder of the proceeds from the offering of the
Bonds will be used to finance an additional amount of
the aggregate purchase price paid by the Owner Trusts
for the Properties and such amount will be
subsequently distributed to the Owner Participant.
BOOK-ENTRY REGISTRATION.............. The Bonds initially will be issued in fully
registered form only, in the name of Cede & Co.,
("Cede") as the nominee of The Depository Trust
Company ("DTC"). No person acquiring a beneficial
interest in the Bonds (a "Bond Owner") will be
entitled to receive a bond representing such Bond
Owner's interest in the Bonds, except in the event
that Definitive Bonds are issued in the limited
circumstances described herein. See "DESCRIPTION OF
THE BONDS -- Definitive Bonds" herein.
DENOMINATIONS........................ The Bonds will be issued in minimum denominations of
$1,000 and integral multiples thereof. The
denomination of each Bond signifies a Bondholder's
pro rata share of the aggregate principal amount of
such series of Bonds. See "DESCRIPTION OF THE BONDS
-- General" herein.
USE OF PROCEEDS...................... The offering of the Bonds is intended to enable the
Owner Trusts to refinance their purchase of their
respective interests in the Properties from Kmart,
including certain costs and expenses associated
therewith. A portion of the proceeds of the sale of
the Bonds (the "Proceeds") will be used by the Issuer
to purchase the Interim Notes and the remainder will
be distributed to the Owner Participant. The proceeds
from the sale of the Properties, including the sale
of the residual interests, have been used by Kmart
for general corporate purposes. See "STRUCTURE OF THE
TRANSACTION" and "USE OF PROCEEDS" herein.
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS..................... Elections will be made to treat seven separate pools
of the assets held subject to the Bond Indenture (the
"Asset Pools"), each of which will consist
principally of one of the seven series of Notes, as
seven separate real estate mortgage investment
conduits ("REMICS") for federal income tax purposes.
As described more fully herein, each series of Bonds
offered hereby (the "Offered Bonds") will constitute
the "regular interests" in the REMIC to which it
relates. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" herein.
</TABLE>
8
<PAGE> 10
<TABLE>
<S> <C>
The Bonds offered hereby will be taxable obligations
under the Internal Revenue Code of 1986, as amended
(the "Code"). The amount of income recognized in any
period by the original purchaser of such a Bond will
equal the amount of interest accrued on such Bond in
accordance with its terms. Bond Owners must use the
accrual method of accounting with respect to their
income on the Bonds, even if they otherwise use the
cash method.
The Bond Trustee initially will act as the tax
administrator for the Bonds (the "Tax
Administrator"), as described in "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein, although the Bond
Trustee may appoint an agent to act as Tax
Administrator at a future date.
For further information regarding the federal income
tax consequences of investing in each series of
Bonds, see "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" herein.
ERISA CONSIDERATIONS................. Subject to certain conditions specified herein, the
Bonds may be purchased by employee benefit plans that
are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
Fiduciaries of employee benefit plans subject to
ERISA or Code Section 4975 should carefully review
with their legal advisors whether the purchase or
holding of the Bonds could give rise to a transaction
prohibited or otherwise not permissible under ERISA
or the Code. See "ERISA CONSIDERATIONS" herein.
RATINGS.............................. It is a condition to the issuance of the Bonds
offered hereby that they be rated at least "A3" by
Moody's Investors Service, Inc. ("Moody's"), "BBB+"
by Standard and Poor's Ratings Group ("S&P") and "A-"
by Duff and Phelps Credit Rating Co. ("D&P"). A
security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating
organization. Each security rating should be
evaluated independently of similar ratings on
different types of securities. The ratings take into
account the structural and legal aspects associated
with the Bonds, the characteristics of the Leases,
and the credit quality of Kmart. The ratings on the
Bonds do not address the payment to the Bondholders
of any Make-Whole Premium or any payment to the
Bondholders of interest at the Default Rate.
</TABLE>
9
<PAGE> 11
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 have been presented as discontinued operations in the
Company's consolidated financial statements.
Kmart's Specialty Retail Groups consist of the Borders-Walden Group, the
Builders Square Group, the OfficeMax Group and The Sports Authority Group. The
Borders-Walden Group is a leading book retailer in the United States, and is
comprised of the Company's Borders, Inc. ("Borders") and Walden Book Company,
Inc. ("Walden") subsidiaries. As of January 23, 1994, Borders operated 44 large
format superstores in 22 states and the District of Columbia, each of which is
designed to be the premier book retailer in its market, and Walden, which is the
largest operator of mall-based bookstores in the United States, operated 1,159
book stores in 50 states and the District of Columbia. Although Borders and
Walden will continue to operate independently, Borders and Walden recently have
been combined under common executive leadership in order to realize synergies in
certain areas, including in the development of inventory control systems and in
merchandise distribution. The Builders Square Group, comprised of the Company's
Builders Square, Inc. subsidiary operated 177 home improvement stores in 26
states and Puerto Rico at January 23, 1994, of which 130 were Builders Square I
Stores and 47 were Builders Square II Stores. The business strategy of Builders
Square is to phase out its self-service warehouse-style home improvement stores
and operate large format superstores that emphasize customer service and provide
an extensive selection of quality products and services to repair, remodel,
redecorate and maintain both home and garden. The OfficeMax Group is one of the
largest operators of high-volume, deep discount office products superstores in
the United States, and is comprised of the Company's OfficeMax, Inc. subsidiary.
It operated 328 superstores in 38 states as of January 22, 1994. The Sports
Authority Group is the largest operator of large format sporting goods stores in
the United States in terms of both sales and number of stores and is also the
largest full-line sporting goods retailer in the United States in terms of
sales. It is comprised of the Company's The Sports Authority, Inc. subsidiary
which operated 80 sporting goods megastores at January 23, 1994.
Kmart was incorporated under the laws of the State of Michigan on March 9,
1916. The principal executive offices of Kmart are located at 3100 West Big
Beaver Road, Troy, Michigan 48084, and its telephone number is (810) 643-1000.
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
10
<PAGE> 12
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 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).
11
<PAGE> 13
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.
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 in
1993.
12
<PAGE> 14
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................... 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.
13
<PAGE> 15
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.
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>
14
<PAGE> 16
STRUCTURE OF THE TRANSACTION
On December 27, 1993, each of the 24 Owner Trusts, the beneficiary of each
of which is the Owner Participant, acquired from Kmart an interest in one of the
Properties, consisting of either (i) a Leasehold Estate or (ii) an Estate for
Years Interest, in each case including the improvements on such Property, for an
aggregate purchase price of $190,923,922. Each Owner Trust immediately leased
its Property to Kmart, pursuant to a Lease which has a term of 25 years, and
options to renew. The Leases are not cross-defaulted. At the same time as the
sale of the Estate for Years Interests, Kmart sold a remainder interest in the
land underlying the Estate for Years Interests, commencing on the expiration of
the Estates for Years Interests, to the Remainder Purchaser. In consideration of
a cash payment, the Remainder Purchaser granted the respective Owner Trusts
options (the "Options to Lease") to lease the land underlying its Property from
the Remainder Purchaser for additional terms commencing on the expiration of the
Estate for Years Interests. The transactions set forth in this paragraph are
collectively referred to herein as the Sale-Leaseback Transaction.
Each Owner Trust obtained approximately 10% of the purchase price for its
interest in the related Property from an equity investment by the Owner
Participant, and the remaining amount was financed by the Initial Noteholder
pursuant to the Interim Financing. As security for the Interim Financing, each
Owner Trust issued Interim Notes with respect to each Property in favor of the
Initial Noteholder. The Interim Notes with respect to each Property were issued
pursuant to, and secured by, a Note Indenture. Each Owner Trustee also granted a
Mortgage on each Property to the Note Trustee for the benefit of the
Noteholders. The Note Trust Estate of each Note Indenture consists primarily of
(i) the Mortgage with respect to the related Property and (ii) the Lease
Assignment including the right to receive rents on the related Lease.
On the Closing Date, the Issuer will acquire the Interim Notes from the
Initial Noteholder in exchange for a portion of the proceeds from the offering
of the Bonds. The remainder of such proceeds will be used to finance an
additional amount of the aggregate purchase price paid by the Owner Trusts for
the Properties and will be subsequently distributed to the Owner Participant.
Concurrently with the Issuer's acquisition of the Interim Notes, each Lease will
be amended and each Note Indenture will be amended and restated in order to
remove terms specific to the Interim Financing, to increase the aggregate
principal amount and series of the Notes, to provide for the issuance of the
Notes and Bonds and to ensure that Rental Payments will be at least sufficient
to pay in full, when due, all payments of principal, interest and any Make-Whole
Premium due on the Notes securing the Bonds. See "DESCRIPTION OF THE LEASES" and
"DESCRIPTION OF THE NOTES" herein.
Each Note Indenture and Mortgage provides for recourse only with respect to
the related Note Trust Estate. None of the Notes, the Note Indentures or the
Mortgages are cross-defaulted or cross-collateralized.
The Issuer will issue the Bonds on a non-recourse basis pursuant to, and
secured by, the Bond Indenture. The trust estate of the Bond Indenture will
consist primarily of (i) the Pledge, (ii) the Note Assignment and (iii) the
Collateral Assignments. The Series A Note, Series B Note, Series C Note, Series
D Note, Series E Note, Series F Note and Series G Note issued in respect of each
Property will have a maturity date and an interest rate corresponding to those
on the Series A Bonds, Series B Bonds, Series C Bonds, Series D Bonds, Series E
Bonds, Series F Bonds and Series G Bonds, respectively. The aggregate principal
amount of each series of Notes with respect to all of the Properties will be the
same as the aggregate principal amount of the corresponding series of Bonds.
The Owner Trusts have agreed not to create liens with respect to their
respective interests in the Properties, except for liens expressly permitted by
the Note Indentures, the Mortgages or the Leases (including certain easements
which do not materially reduce the value of the Properties). The interests of
the Remainder Purchaser in the Properties are not subject to the liens of the
Note Indentures and the Mortgages. For information regarding the Properties, see
"DESCRIPTION OF THE PROPERTIES" herein.
The Rental Payments payable by Kmart under the Leases, as amended as of the
Closing Date, will be in amounts that will be at least sufficient to pay in
full, when due, all required payments of principal, interest and any Make-Whole
Premium due on the Notes, and shall be paid to the Bond Trustee in immediately
available
15
<PAGE> 17
funds on each Payment Date. On each such date, upon receipt by the Bond Trustee
of the Rental Payments from Kmart, the Bond Trustee shall (i) distribute funds
equal to the amount of all payments of principal, interest and any Make-Whole
Premium due on the Notes to the Bondholders, and (ii) transfer any amounts in
excess of amounts distributed to the Bondholders pursuant to clause (i) to the
Note Trustee for distribution to the appropriate Owner Trustee as set forth in
the Note Indentures. See "DESCRIPTION OF THE NOTES -- Security" herein. The
Bonds will be payable solely from amounts paid under the Leases and from amounts
realized from the exercise of remedies under the Note Indentures, the Mortgages
or the Leases, and will be without recourse to the general credit of Kmart, the
Issuer, the Owner Trustees or the Owner Participant. However, the obligation to
make payments of amounts payable under the Leases constitutes a general
obligation of Kmart and such amounts will be sufficient to pay in full when due
all amounts required to be paid on the Notes pledged as security for the Bonds.
A more detailed description of the financing arrangements and the
Properties is set forth below under the headings "DESCRIPTION OF THE
PROPERTIES", "DESCRIPTION OF THE LEASES", "DESCRIPTION OF THE BONDS" and
"DESCRIPTION OF THE NOTES" herein. The statements appearing in this section and
under those headings are subject to the detailed provisions of the documents
being described, the respective copies or forms of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. Such
documents are incorporated by reference herein and references to such documents
are qualified in their entirety by the provisions of such documents.
DIAGRAM OF PAYMENTS
Kmart Corporation
|
| Rental Payments
| Assigned by Owner Trusts
\/
Bond Trustee
|
| Note Debt Service
\/
Series Excess Payments
A, B, C, D, E, F and G -----------------------> Note
Notes Trustee
| |
| | Excess
| | Payments
\/ \/
Series Owner
A, B, C, D, E, F and G Trustee
Bonds |
| Excess
| Payments
\/
Owner
Participant
16
<PAGE> 18
DIAGRAM OF STRUCTURE
Payments for
Remainder Interest
Assigned Rental Payments Kmart<----------------------------
- ----------------------------------------------Corporation------------------- |
| /\ | /\ Remainder | |
| | | | Interest | |
| | | | \/ |
| Lease | | |Purchase Remainder
| | | |Price for Purchaser
| | |Property|Property (1) |
| | |Interest| |
| Mortgages & | | | |
| Assignment Assignment | | | Option to Purchase/ |
\/ of Rights of Rights | \/ | Ground Lease |
Bond Trustee<---------Note Trustee<-----------Owner Trust<----------------------
/\ |
| | Interim Notes
| |
| \/
| Initial Noteholder
| |
| | Assignment of
| | Interim Notes
| \/
| Pledge of Notes Kmart Funding
- --------------------------------------------- Corporation
|
| Bonds
|
\/
Bondholders
- ------------------------
(1) Remainder Purchaser has an interest in 22 out of 24 properties; the
remaining 2 properties are subject to ground leases.
USE OF PROCEEDS
The offering of the Bonds is intended to enable the Owner Trusts to
refinance their purchase of their respective interests in each of the Properties
from Kmart, including certain costs and expenses associated therewith. A portion
of the Proceeds will be used by the Issuer to purchase the Interim Notes and the
remainder will be distributed to the Owner Participant. The transaction will
finance not more than 92% of the cost of the Properties. The proceeds from the
sale of the Properties, including the sale of the remainder interests, have been
used by Kmart for general corporate purposes. See "STRUCTURE OF THE TRANSACTION"
herein.
17
<PAGE> 19
DESCRIPTION OF THE PROPERTIES
The Properties consist of 19 Kmart store locations (including two
combination general-merchandise and grocery Super Kmart Centers), one apparel
warehouse and four Builders Square store locations. On December 27, 1993, Kmart
assigned its rights as lessee under the four leases relating to the Builders
Square locations to its Builders Square, Inc. subsidiary but remains the primary
obligor on such leases. Certain information regarding each of the Properties is
set forth in the following table:
<TABLE>
<CAPTION>
FACILITY SIZE LOT SIZE OPENING
KMART STORE LOCATIONS (SQ. FT.) (ACRES) DATE(1)
- ---------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
Crescent City, CA........... 91,305 6.82 April 1993
Folsom, CA.................. 108,255 9.47 April 1993
Watertown, NY............... 120,727 3.57 April 1993
Galesburg, IL............... 94,970 2.43 November 1992
Kenai, AK................... 146,759 10.70 July 1993
Fairbanks, AK............... 146,300 11.80 October 1993
Marina, CA.................. 90,854 7.77 October 1993
Santee, CA.................. 104,551 8.73 November 1993
San Diego, CA............... 107,210 Ground Lease August 1993
Moorpark, CA................ 108,830 Ground Lease November 1993
Manteca, CA................. 107,489 7.95 May 1993
Fairlea, WV................. 90,933 9.28 May 1993
Sunrise, FL................. 108,408 11.53 November 1993
Perris, CA.................. 116,955 9.95 November 1993
Exmore, VA.................. 94,900 13.64 November 1993
Tustin, CA.................. 108,413 9.10 November 1993
Warwick, RI................. 113,113 13.79 November 1993
SUPER KMART CENTER LOCATIONS
Lorain, OH.................. 193,193 28.32 October 1993
Yuma, AZ.................... 191,271 21.58 November 1993
BUILDERS SQUARE LOCATIONS
Fort Myers, FL.............. 107,400 12.29 July 1993
San Antonio, TX............. 106,881 10.47 May 1993
Tulsa, OK................... 80,229 8.62 October 1986
Austin, TX.................. 108,028 10.08 February 1993
APPAREL WAREHOUSE LOCATION
Forest Park, GA............. 227,401 19.57 October 1992
</TABLE>
- ------------
(1) All of the Properties were completed prior to August 1, 1994.
18
<PAGE> 20
APPRAISALS
All of the Properties were inspected between June 2, 1993 and November 1,
1993 and were valued on December 27, 1993 at the request of the Owner
Participant by Marshall and Stevens Incorporated, an independent appraiser, in
accordance with the requirements of the Code of Professional Ethics and
Standards of Professional Conduct of the Appraisal Institute and the Appraisal
Foundation's Uniform Standards of Professional Appraisal Practice. As a result
of its appraisals, Marshall and Stevens Incorporated has determined that, as of
the date of the appraisal thereof, assuming that those Properties which were not
completed at that time were completed substantially in accordance with the plans
and specifications therefor, the fair market value of each Property on the open
market and as unencumbered by the related Lease is not less than the amount of
the purchase price financed by the proceeds of the Notes, except with respect to
the Properties located in Tustin, California, Crescent City, California and
Forest Park, Georgia. With respect to those three Properties, Marshall and
Stevens Incorporated has also determined that, as of the appraisal date thereof,
the fair market value of each such Property as encumbered by the related Lease
is not less than the amount of the purchase price financed by the proceeds of
the Notes of each such Property. The fair market values of the Tustin, Crescent
City and Forest Park Properties as encumbered by the related Leases reflect an
additional premium value attributable to the rents payable by Kmart.
None of Kmart, the Issuer, the Underwriters, the Note Trustee or the Bond
Trustee has prepared or obtained separate independent appraisals or
reappraisals. None of Kmart, the Issuer, the Underwriters, the Note Trustee or
the Bond Trustee makes any representation as to the fair market value of any of
the Properties or the Owner Trusts' interest therein. Moreover, there can be no
assurance that other appraisers would not arrive at materially different
conclusions as to the fair market value of the Properties or the Owner Trusts'
interest therein.
LEASEHOLD ESTATES
The Properties in Moorpark and San Diego, California are subject to
unsubordinated ground leases. Under the related Leases, Kmart has agreed during
the term of the Lease to pay the rent due under the applicable ground leases and
to comply with all obligations of the ground lessee thereunder.
ENVIRONMENTAL MATTERS
Phase I or other environmental assessment reports were prepared during 1993
for each Property. The reports disclosed no material environmental conditions
which would materially interfere with the intended uses of the Properties. With
respect to the Properties located in Crescent City, California and Fort Myers,
Florida, state regulatory authorities have required certain remediation actions
and continued monitoring, which activities are being undertaken by the
appropriate party. It is not expected that the environmental matters referred to
in the previous sentence will have a material adverse effect on Kmart's ability
to make Rental Payments. Kmart is obligated to indemnify, among other parties,
the Owner Trusts, the Note Trustee and the Bond Trustee for the benefit of the
Bondholders for any past or present environmental liability or any environmental
liability arising during the term of the Leases with respect to the Properties.
Kmart agreed in the Leases that, except for those items such as batteries
and oil typically and customarily sold in Kmart stores or its subsidiaries'
stores, as the case may be, in the ordinary course of business and in compliance
with applicable environmental laws, it would not cause or permit any hazardous
materials to exist on or to be used on the Properties during the term of the
Leases. Kmart is obligated to indemnify the Owner Trusts, the Note Trustee and
the Bond Trustee, among other parties, from any liability arising from the
presence of hazardous materials that pre-existed the Lease or from any use of
the Properties arising during the term of the Lease unless caused by the gross
negligence or willful misconduct of the indemnified parties. Kmart made
covenants in the Leases that it shall comply in all material respects with
applicable environmental laws affecting each Property or the use, modification,
maintenance or operation thereof, and shall have sole responsibility for all
expenses (whether legal, professional or arising from investigation) associated
with such compliance, and shall further comply in all respects with
environmental laws where non-compliance could involve an environmental claim in
excess of $100,000 or where such non-compliance would materially interfere with
the use or operation of the Property.
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DESCRIPTION OF THE LEASES
The statements under this caption are summaries of the terms of the Leases
and do not purport to be complete. The summaries make use of terms defined in
and are qualified in their entirety by reference to all of the provisions of
each Lease, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
TERMS AND RENTALS
Each Owner Trust has leased its respective Property to Kmart pursuant to a
Lease for an interim term from December 27, 1993 until June 30, 1994, and a base
term of 24 1/2 years which commenced on July 1, 1994. Kmart will have the option
to extend a Lease relating to any Estate for Years Interest for at least six
consecutive terms of five years each and the option to extend a Lease relating
to any Leasehold Estate for a term of at least 10 years beyond the maturity date
of the Notes and Bonds. Because the Bonds are scheduled to be retired during the
base term of the Lease, any such extensions should not affect the interests of
the Bondholders. So long as no Lease Event of Default (as defined herein) exists
with respect to an individual Lease, Kmart, as lessee thereunder, will be
entitled to undisturbed possession of the related Property, even if there exists
a default under the related Mortgage or Note Indenture or under the Bond
Indenture. Rental Payments are required to be paid by Kmart under the Leases in
immediately available funds on each January 1 and July 1, commencing on January
1, 1995. On each Payment Date, the aggregate amount of Rental Payments payable
under the Leases, as amended as of the Closing Date, will be at least equal to
the aggregate scheduled amount of principal, interest and any Make-Whole Premium
due on the outstanding Notes on such date. See "STRUCTURE OF THE TRANSACTION"
herein. Kmart is obligated under each Lease to pay interest on any late payments
of rent which shall accrue at a rate equal to the sum of 1% plus the weighted
average of the interest rates of the Notes from the relevant Payment Date to the
date such payments are actually received by the Bond Trustee (the "Default
Rate").
NET LEASES; NO SET-OFF
Each Lease is a net Lease and Kmart is obligated to pay thereunder, on an
absolutely net basis, all Rental Payments without diminution for any reason,
except to the extent a Lease is terminated, as described below. Additionally,
Kmart will pay all taxes (including ad valorem real estate taxes) and
assessments, regardless of how named or denominated, relating to the Properties
together with every fine, penalty, interest or cost which may be added for
non-payment or late payment thereof, and all utility and other charges incurred
in the operation of the Properties, and Kmart shall obtain, and use its
reasonable efforts to maintain, utilities services therefor.
Each Lease also provides that it shall not be terminable by Kmart
thereunder, except under limited circumstances as described herein, nor shall
Kmart be entitled to any abatement, reduction, set-off, counterclaim, defense or
deduction with respect to any payment of rent or other obligation under any
Lease, by reason of: (i) any damage to or destruction of a leased Property; (ii)
any taking of a Property or any part thereof by eminent domain or otherwise;
(iii) any prohibition, limitation, restriction, interference with or prevention
of Kmart's use, occupancy or enjoyment of all or any part of a Property; (iv)
any default by an Owner Trust under a Lease; (v) any eviction by a holder of
paramount title or otherwise; (vi) any purported merger of estates resulting
from Kmart's acquisition of all or any part of a Property; or (vii) any other
cause whether similar or dissimilar to the foregoing, any present or future law
to the contrary notwithstanding.
REPAIRS AND MAINTENANCE
Kmart shall, at its expense and on a timely basis, maintain each Property
in good repair and condition, ordinary wear and tear excepted, and will make
structural and non-structural, foreseen and unforeseen changes, replacements and
repairs which may be required to keep the Property in good repair and condition
and at a standard applicable to similar properties in the marketplace and those
owned or leased by Kmart. In no event are the Owner Trusts required to repair,
rebuild or maintain any of the Properties. An Owner Trust may grant easements,
release existing easements, make dedications, execute annexation petitions and
amend
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covenants and restrictions affecting a Property that are requested by Kmart in
respect of any Property that do not materially impair such Property's useful
life or materially reduce its fair market value.
ALTERATIONS AND IMPROVEMENTS
Kmart, at its expense, may add to, or alter, existing improvements on any
Property, which improvements shall be subject to the lien of the related
Mortgage and Note Indenture, provided that the fair market value or useful life
of such Property shall not be adversely affected thereby and that the work shall
be done in a first-class, workmanlike manner in compliance with applicable laws.
All such additional improvements shall be and remain the property of the
respective Owner Trust and shall be subject to all of the terms and provisions
of the applicable Lease. All inventory, trade fixtures, machinery, equipment and
other personal property installed at the expense of Kmart shall remain the
property of Kmart, not subject to the lien of the related Mortgage or Note
Indenture, and shall be removed from the premises by Kmart, at its expense, at
the expiration of the term of the Lease.
LIENS
Kmart, as lessee, covenants that it shall not, during the term of any
Lease, directly or indirectly create, incur, assume, suffer or permit any lien
on or with respect to the related Property or any part thereof, any rent, title
thereto or interest therein, up to and including the date of the end of such
Lease term, other than Permitted Liens. "Permitted Liens" are: (i) liens
representing the respective rights and interests of Kmart, the Owner Trusts, the
Owner Participant, the Remainder Purchaser, the Bond Trustee, the Note Trustee,
the Issuer, each REMIC and any holder of a lien for the benefit of the
Bondholders; (ii) certain liens caused or permitted to be incurred by the Owner
Trusts or the Remainder Purchaser; (iii) liens for taxes and assessments that
either are not yet due and payable or are being contested in good faith and by
appropriate proceedings diligently conducted, so long as such proceedings do not
(a) subject the Property to foreclosure, forfeiture or loss or result in the
sale of the Property, (b) materially interfere with the use, possession or
disposition of the Property, (c) interfere with the payment of Rental Payments
or (d) involve any risk of loss of the priority of the lien of the Note
Indenture relating thereto; (iv) materialmen's, mechanics', workers',
repairmen's, employees' or other like liens arising after the date of the Lease
in the ordinary course of business for amounts either not yet due or being
contested in good faith and by appropriate proceedings so long as such
proceedings shall not involve any risk of the sale, forfeiture or loss of any
part of the Property and shall not materially interfere with the use, occupancy
or disposition of the Property or interfere with the payment of Rental Payments;
(v) liens arising after the date of the Lease out of judgments or awards with
respect to which at the time an appeal or proceeding for review is being
prosecuted diligently and in good faith and that either have been bonded to the
satisfaction of the Owner Trusts and the Note Trustee or the enforcement of
which has been continuously stayed pending such appeal or review; (vi)
easements, rights-of-way, reservations, servitudes and rights of others against
the Property which (a) are listed as Permitted Exceptions in the Agreement for
Sale of Real Estate (the "Sale Agreement") dated as of the date of the Leases or
(b) are granted pursuant to the specific provisions of such Lease; and (vii)
assignments, leases and subleases expressly permitted by the Operative Documents
(as defined in the Note Indentures).
Kmart shall promptly, but no later than 30 days after the attachment
thereof, at its own expense, discharge, eliminate or bond any lien that is not a
Permitted Lien in a manner satisfactory to the Owner Trusts. In the event such
lien is not so discharged, eliminated or bonded, the Owner Trusts may pay and
discharge any such lien, and Kmart shall reimburse the Owner Trusts upon demand
for the amount so paid together with interest thereon at the Default Rate.
ASSIGNMENT OR SUBLEASE; USE; NO CONTINUOUS OPERATION
Kmart may assign all or sublease all or any part of its leasehold interest
in the Properties without the prior written consent of the respective Owner
Trust. Kmart shall provide notice to the respective Owner Trust of such
assignment or sublease within 15 days prior to the effective date thereof. No
such assignment or sublease shall release Kmart from its obligations and
liabilities under the Lease. Kmart's liability under any Lease shall continue
notwithstanding the rejection of such Lease as to the assignee or sublease as to
the sublessee
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pursuant to Title 11 of the United States Code (the "Bankruptcy Code"). In the
event Kmart assigns the Lease and it is thereafter rejected in a bankruptcy or
similar proceeding, a new lease identical to the rejected Lease shall be
reinstituted as between the appropriate Owner Trustee and Kmart without further
act by either party. Kmart is prohibited from mortgaging or otherwise
encumbering its interest under the Leases.
Each Property may be used for any lawful purpose; provided that no use of
any Property may be made by Kmart or an assignee or sublessee of Kmart that
would: (i) be a public nuisance; (ii) cause a Property to become a "tax-exempt
use property" within the meaning of Section 168(h) of the Code, or any successor
statute thereto, or to become a "tax-exempt bond financed property" within the
meaning of Section 168(g)(5) of the Code; (iii) void any certificate of
occupancy required for such Property; (iv) cancel or make it impossible to
obtain the issuance of any insurance policy required for such Property by the
related Lease; (v) involve the mining or removal of any oil, gas or minerals
from or through the surface of the Property; or (vi) increase the Owner Trust's
risk of environmental liability through any use other than for retail or office
use. Any use of the Property in violation of clause (v) above by an unrelated
third party shall not give rise to a Lease Event of Default, but shall give rise
to an obligation on the part of Kmart to make a purchase offer as described in
"-- Condemnation and Casualty" below.
While the Leases are net Leases requiring Kmart to pay taxes, maintenance
and operating expenses during the period in which Kmart leases a Property, Kmart
has not, under any of the Leases, covenanted to operate a business at the
Properties for the term of the Leases and Kmart may, unless otherwise prohibited
by law or by other agreement binding on the Property, cease actual operations at
any Property.
INSURANCE
Under each Lease, Kmart is required, at its own cost and expense, to carry
workers' compensation insurance, insurance against loss by fire and other
casualties included under extended-coverage, all-risk endorsements in an amount
not less than 100% of the full insurable replacement value of the improvements
constituting part of the Property, comprehensive general public-liability
insurance with minimum coverage of $5,000,000 with respect to injury of any one
person, $5,000,000 with respect to any one accident or disaster and $5,000,000
with respect to damage to property. In no event shall the deductible amount
under any of such casualty insurance policies exceed $100,000. In the event that
Kmart fails to obtain or maintain such insurance, the respective Owner Trust may
obtain such coverage and will be reimbursed by Kmart for the cost thereof, plus
interest at the Default Rate from the date incurred by such Owner Trust. The
Owner Trusts shall have no obligation to maintain insurance of any type on the
Properties and Kmart shall not have any rights to direct actions or subrogation
against any insurance policy obtained by the Owner Trusts. Kmart may elect to
self-insure any leased Property against casualty, workers' compensation and
liability risks; provided that Kmart meets certain financial requirements.
CONDEMNATION AND CASUALTY
In the event of a condemnation or casualty affecting any Property, Kmart
will be obligated to continue paying rent and to restore such Property at its
own expense as nearly as practicable to the condition as existed immediately
before the condemnation or casualty occurred. If Kmart maintains a consolidated
tangible net worth of at least $750,000,000 calculated in accordance with
generally accepted accounting principles (the "Net Worth Standard") at the time
of the condemnation or casualty, or if insurance proceeds or a condemnation
award due to such occurrence are less than $250,000, any such insurance proceeds
or condemnation awards shall be released to Kmart for the restoration of the
Property. If Kmart does not maintain the Net Worth Standard at the time of such
loss, and if such condemnation award or casualty proceeds are in excess of
$250,000, however, the net proceeds of such insurance claim or condemnation
award shall be deposited with the Note Trustee for as long as the related Note
Indenture is outstanding and shall be disbursed to Kmart from time to time upon
its application for funds to meet the costs of rebuilding and repairs as they
become due, subject to certain provisions set forth in the related Lease. In the
event that condemnation proceeds exceed the actual cost of restoration, such
excess proceeds shall be distributed pursuant to the related Note Indenture, as
described in "DESCRIPTION OF THE NOTES" herein.
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Notwithstanding the foregoing, in the event of a casualty affecting a
substantial portion or the entirety of a Property, Kmart may either (i) restore
the Property as set forth above or (ii) make a rejectable purchase offer to the
respective Owner Trustee within 30 days of such damage or destruction. In the
event of a permanent or temporary condemnation of the Property or any
substantial portion thereof that in Kmart's judgment renders the Property
unsuitable for its occupancy and use, or in the event of a condemnation of the
points of ingress and egress of the Property such that the property is rendered
unsuitable for its intended use, Kmart shall be obligated to make such a
rejectable offer to purchase the Property within 30 days of such condemnation
(or, with respect to a partial condemnation, within 90 days after the entry of a
final order of taking). If accepted, such purchase shall be effected on the next
scheduled Payment Date occurring not less than 100 days after the Owner Trust's
receipt of such offer, for a price at least equal to the principal of and
interest due on the related Notes. See "DESCRIPTION OF THE NOTES --
Distributions on the Notes -- Prepayments of Principal at Par" herein.
If Kmart makes such a rejectable offer to purchase such Property, the
corresponding Owner Trust will have 70 days to decide whether to accept such
offer. Such Owner Trust may not reject Kmart's purchase offer unless the Owner
Trust makes satisfactory provisions with the Note Trustee for the redemption of
the related Notes, which provisions shall include the escrowing of cash or cash
equivalents in amounts sufficient to redeem the Notes. If Kmart's offer is
rejected and the Owner Trust makes satisfactory arrangements with the Note
Trustee, Kmart shall, on the Payment Date on which Kmart's purchase would
otherwise have occurred, pay to such Owner Trust all payments accrued and owing
under the Lease as of such Payment Date, at which time the Lease shall terminate
and the Owner Trust shall receive all attendant insurance or condemnation
proceeds. If, on the other hand, Kmart's offer is accepted and the Owner Trust
makes satisfactory arrangements with the Note Trustee, the sale of the affected
Property shall be closed on the next scheduled Payment Date, with the purchase
price (which shall be at least sufficient to redeem the Notes, including any
premium owing thereon) and all Lease payments accrued and owing on that date
paid in cash to the Bond Trustee on behalf of the applicable Owner Trust. In the
event of such sale, title to the affected Property shall be conveyed to Kmart.
All costs and expenses in connection with such sale shall be paid by Kmart. See
"DESCRIPTION OF THE NOTES -- Distributions on the Notes -- Prepayments of
Principal at Par" herein.
EARLY TERMINATION
Kmart may terminate any Lease on any Payment Date on or after the tenth
year of the base term of the Lease (provided that no Lease Event of Default has
occurred and is continuing) if it determines that the Property has become
obsolete or that continued use thereof is no longer economic by providing at
least 12 months' and not more than 18 months' notice to the respective Owner
Trust. In such event, the Property may be (i) transferred to Kmart for an amount
sufficient to retire the related Notes (including the Make-Whole Premium
thereon) (the "Retirement Price"), (ii) sold to a third party, with the excess
of the Retirement Price over the sale price being contributed by Kmart or (iii)
retained by the respective Owner Trust, provided that such Owner Trust makes
satisfactory provisions with the Note Trustee for the redemption of the related
Notes, which provisions shall include the escrowing of cash or cash equivalents
in amounts sufficient to redeem the corresponding Notes at their respective
Retirement Prices, and the Property shall thereupon be released from the liens
of the respective Note Indenture and Mortgage.
An Owner Trust may accept Kmart's purchase offer with respect to the mining
or removal of oil, gas or minerals on a Property as described under "--
Assignment or Sublease; Use" above, if such offer is for an amount sufficient to
redeem the related Notes (including any premium thereon) and the Note Trustee
shall redeem the related Notes at par with a Make-Whole Premium.
EVENTS OF DEFAULT
The following are events of default under each Lease ("Lease Events of
Default"):
(i) the failure by Kmart to make Rental Payments when due continuing
for a period of five days after notice thereof to Kmart;
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(ii) the failure by Kmart to make any other payment under the Lease
when due continuing for a period of 15 days after notice thereof to Kmart;
(iii) the failure by Kmart to maintain insurance as required by the
Lease;
(iv) the failure by Kmart to perform any of its other covenants or
obligations under the Lease or the Master Indemnification Agreement (as
defined in the related Note Indenture) or certain of its covenants or
obligations under the Sale Agreement within 30 days after notice thereof in
each case only to the extent such covenants and obligations relate to the
Property; provided that any non-monetary default that is curable but is not
susceptible to a cure within 30 days shall not be deemed a default if a
cure is commenced within 30 days after such notice and is diligently
pursued thereafter; and provided further that in no event shall such cure
period for a non-monetary default exceed 180 days;
(v) certain events of bankruptcy, insolvency, reorganization pursuant
to bankruptcy or similar laws, receivership, dissolution or liquidation of
Kmart; provided that such events shall not constitute a Lease Event of
Default under a Lease so long as they do not affect the performance of
Lease covenants by Kmart thereunder or another party claiming under Kmart;
and
(vi) any breach of a representation by Kmart in the Lease or the Sale
Agreement relating to the Property or in any certificate expressly required
to be delivered pursuant thereto which (a) shall be incorrect when
discovered and shall have a material adverse effect on the Owner Trust, the
Owner Participant or the Owner Trust's interest in the Property or (b) is a
material breach of a representation in the Sale Agreement relating to
Kmart's financial condition, and that in either case shall not have been
cured within 30 days after receipt of written notice by Kmart from the
Owner Trust, unless the default is curable and Kmart shall be diligently
proceeding to correct such failure; provided that in no event shall such
cure period exceed 180 days.
The occurrence of a Lease Event of Default under any one Lease shall not
affect the obligations of Kmart and the Owner Trusts under any of the other
Leases, it being expressly provided that such Lease obligations are in no way
cross-defaulted.
If a Lease Event of Default has occurred with respect to any Lease and is
continuing beyond any applicable cure periods, the corresponding Owner Trust
(subject to the assignment of its rights under the Lease) may (i) terminate such
Lease and recover damages from Kmart as described below or (ii) re-enter the
Property without terminating such Lease to remove Kmart and its property, all at
Kmart's expense, with Kmart remaining liable for the balance of Rental Payments
accruing to the end of the base term of such Lease (less the amount received by
the appropriate Owner Trustee with respect to reletting the Property net of such
Owner Trustee's expenses in connection therewith). Kmart shall also pay the
Make-Whole Premium, if any, required to be paid by the related Owner Trust under
the related Note Indenture in the event such Owner Trust shall elect to re-enter
the Property without terminating the Lease. If a Lease is terminated upon the
occurrence of a Lease Event of Default thereunder, damages permitted to be
recovered by the related Owner Trust from Kmart include: (i) all Rental Payments
and other payments due under such Lease as of the date on which the Lease shall
be terminated (including any Make-Whole Premium), plus (ii) at the option of the
Owner Trust, any of: (a) the difference between the amount required to redeem
the related Notes and the fair market value of the Property; (b) the difference
between the amount required to redeem the related Notes and the present value of
the fair market rental value of the Property, discounted semiannually at a 6%
annual percentage rate for the remainder of the term of the Lease; (c) the
difference between the present value of all Rental Payments, discounted
semiannually at a 6% annual percentage rate, for the remainder of the base or
applicable renewal term of the Lease (the "Discounted Basic Rents") and the
present value of the fair market rental value of the Property for the remainder
of such term, discounted semi-annually at a 6% annual interest rate; or (d) an
amount equal to the greatest of the fair market value of the Property, the
Discounted Basic Rents and the amount required to redeem the related Notes. Fair
market values are determined by agreement between Kmart and the Owner Trust or
by appraisal. If the Owner Trust receives the sum of the amounts described in
clauses (i) and (ii)(d) above, the Owner Trust will convey the Property to
Kmart. Because the Owner Trusts have assigned certain of their rights under each
Lease to the Note Trustee, only the Bond Trustee, as assignee of the rights of
the Note Trustee, and not the Owner Trusts, may exercise remedies following a
Lease Event of Default. The above-described amounts will accrue interest at the
Default Rate
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from the final payment date specified in the Owner Trust's notice of default and
termination of a Lease to the date of actual payment by Kmart.
In lieu of the acquisition by Kmart of a Property in accordance with the
Lease, Kmart shall be entitled to substitute a property (the "Substitute
Property") for such Property provided that as of the date of such substitution
(i) the fair market value of the Substitute Property is not less than the
greater of the (a) fair market value of the Property and (b) "Termination Value"
of the Property as such term is defined in the related Lease, (ii) the useful
life of the Substitute Property in not less than the useful life of the
Property, (iii) Kmart shall make certain representations and warranties with
respect to the Substitute Property as it had previously made with respect to the
Property, (iv) Kmart shall deliver an environmental assessment report, which
report shall be satisfactory, to the applicable Owner Trustee and the Note
Trustee and (v) the substitution shall not reduce any Rental Payments due under
the applicable Lease. If such substitution occurs, such Substitute Property
shall replace such Property as security for the Notes and Bonds, as described
herein.
CONSEQUENCES OF KMART'S BANKRUPTCY
In the event a bankruptcy proceeding is instituted by or in respect of
Kmart under the Bankruptcy Code, Kmart would have the right, subject to
bankruptcy court approval, to affirm or reject the Leases. If a Lease were
rejected, payments due thereunder would terminate, thereby leaving the Owner
Trusts without cash flow to make payments on the Bonds. In the event a Lease
were rejected, the Owner Trusts (and by virtue of the Bond Indenture and
assignments described herein, the Bond Trustee thereunder) would have a claim
for damages against Kmart but, under Section 502(b)(6) of the Bankruptcy Code,
such claim would be limited to a maximum amount equal to the rent reserved under
such Lease, without acceleration, for the greater of one year or 15 percent (not
to exceed three years) of the remaining term of the Lease (plus rent already due
but unpaid). This limitation would not apply to holders of debt securities that
are direct obligations of Kmart. Therefore, except during the final year of the
Lease terms, if Kmart were the subject of proceedings under the Bankruptcy Code
and a Lease were rejected, the damages that could be claimed for rejection, even
assuming full recovery on such claim, may not alone be sufficient to repay the
Bonds. In addition, it is possible that a bankruptcy court could recharacterize
the transactions described herein as a secured borrowing by Kmart from the Owner
Trusts, in which case the bankruptcy court could permit Kmart to use or dispose
of the Properties without making Lease payments to provide debt service on the
Bonds, subject to providing "adequate protection" (such as a lien on substitute
collateral) to the Owner Trusts. However, in the event of such a
recharacterization, the limitation on damages referred to above would presumably
be inapplicable.
THE ISSUER AND THE OWNER TRUSTS
The Issuer. The Issuer, a special-purpose corporation formed under the laws
of the State of New York, has been formed solely to facilitate the financing
contemplated hereby and does not have, nor is it permitted or expected to have,
any significant assets or sources of funds other than the security for the
Bonds. The Issuer is not owned or controlled by or affiliated with Kmart. The
Bonds represent obligations solely of the Issuer, and the Bonds will not be
insured or guaranteed by Kmart, the Owner Participant, the Owner Trusts, the
Remainder Purchaser, the Note Trustee, the Bond Trustee, their affiliates or any
other person or entity. Consequently, Bond Owners must rely for repayment upon
payments under the Leases. None of the Note Indentures, the Bond Indenture nor
any of the Leases will include financial covenants or "event risk" provisions
that would afford Bond Owners protection in the event of a highly leveraged or
other transaction involving Kmart. Kmart has agreed to indemnify the Issuer for
various liabilities that it may incur in connection with the transaction
contemplated hereby.
The Owner Trusts. The Owner Trusts are special purpose trusts established
pursuant to separate Trust Agreements. The activities of each of the Owner
Trusts are limited by the terms of the related Trust Agreement to purchasing,
owning, leasing and managing the related Properties, issuing the Notes and the
Mortgages and making payments on the Notes and other activities related thereto.
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DESCRIPTION OF THE BONDS
The statements under this caption are summaries of the terms of the Bonds
and the Bond Indenture and do not purport to be complete. The summaries make use
of terms defined in and are qualified in their entirety by reference to all of
the provisions of the Bonds and the Bond Indenture, the forms of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
GENERAL
The Bonds are to be issued pursuant to the Bond Indenture, substantially in
the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The Bonds will consist of seven series: the Series A
Bonds, the Series B Bonds, the Series C Bonds, the Series D Bonds, the Series E
Bonds, the Series F Bonds and the Series G Bonds. The principal amount of each
series of Bonds is set forth on the cover page hereof.
REGISTRATION OF THE BONDS
Each series of Bonds will be offered for purchase in minimum denominations
of $1,000 and integral multiples thereof and will each initially be issued only
in fully registered form in the name of Cede, as the nominee of DTC, except as
provided below. Bonds may be surrendered by the Bondholder thereof for
registration of transfer or exchange for Bonds of the same series at the office
of the Bond Trustee. No service charge will be made for any transfer or exchange
of Bonds, but payment may be required of any tax or other governmental charges
that may be imposed in connection therewith. No person acquiring a beneficial
interest in a Bond will be entitled to receive a bond representing such person's
interest, except as set forth under "-- Definitive Bonds" below. Unless and
until Definitive Bonds are issued under the limited circumstances described
herein, all references to actions by Bondholders herein refer to actions taken
by DTC upon instructions from its Participants (as defined below), and all
references herein to distributions, notices, reports and statements to
Bondholders shall refer to distributions, notices, reports and statements to DTC
or Cede, as the registered Bondholder, as the case may be, for distribution to
the Bond Owners in accordance with DTC procedures. See "-- Registration of the
Bonds" and "-- Definitive Bonds" below.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions between and among Participants through electronic book entries,
thereby eliminating the need for the physical movement of certificates.
Participants include securities brokers and dealers (including the
Underwriters), banks, trust companies and clearing corporations. Indirect access
to the DTC system is also available to banks, brokers, dealers, trust companies
and other institutions that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC will be required to make book-entry transfers of Bonds among
Participants and to receive and transmit distributions of principal of and
interest due on the Bonds through its Same Day Funds Settlement System.
Participants and Indirect Participants with which Bond Owners have accounts with
respect to the Bonds are similarly required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Bond Owners.
Bond Owners that are neither Participants nor Indirect Participants but
that desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Bonds may do so only through Participants and Indirect
Participants. In addition, Bond Owners will receive all distributions of
principal and interest from the Bond Trustee through DTC Participants. Under a
book-entry format, Bond Owners may experience some delay in their receipt of
payments, since such payments will be forwarded by the Bond Trustee to Cede, as
nominee for DTC. DTC will forward such payments to its Participants, which
thereafter will forward them to Indirect Participants or Bond Owners. The
forwarding of such distributions to the Bond Owners will be the
26
<PAGE> 28
responsibility of such Participants. It is anticipated that the only registered
Bondholder will be Cede, as nominee of DTC. Therefore, Bond Owners will not be
recognized by the Bond Trustee as Bondholders, as that term is used herein, and
Bond Owners will be permitted to exercise the rights of Bondholders only
indirectly through DTC and its Participants.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability of
Bond Owners to pledge Bonds to persons or entities that do not participate in
the DTC system, or to otherwise act with respect to such Bonds, may be limited
due to the absence of physical certificates for such Bonds.
DTC has advised the Issuer that it will take action permitted to be taken
by a Bondholder under the Bond Indenture only at the direction of one or more
Participants to whose accounts with DTC the Bonds are credited. DTC has further
advised the Issuer that it will take such actions with respect to any percentage
of Bondholders only at the direction of and on behalf of Participants whose
holdings include undivided interests that satisfy any such percentage. DTC may
take conflicting actions with respect to other undivided interests to the extent
that such actions are taken on behalf of Participants whose holdings evidence
such undivided interests.
Kmart, the Owner Participant, the Owner Trusts, the Remainder Purchaser,
the Note Trustee and the Bond Trustee will have no liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Bonds held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests. In the event of the insolvency of DTC or a Participant or Indirect
Participant in whose name book-entry Bonds are registered, the ability of the
Bond Owners of such book-entry Bonds to obtain timely payment may be impaired.
In addition, in such event, if the limits of applicable insurance coverage by
the Securities Investor Protection Corporation are exceeded or if such coverage
is otherwise unavailable, ultimate payment of amounts distributable with respect
to such book-entry Bonds may be impaired.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from DTC, and neither the Issuer nor Kmart takes any
responsibility for the accuracy thereof.
DEFINITIVE BONDS
The Bonds will be issued in fully registered, certificated form
("Definitive Bonds") to Bond Owners or their nominees, respectively, only if (i)
the Issuer or DTC advises the Bond Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Bonds and the Bond Trustee and the Issuer are unable to locate a
qualified successor, (ii) the Issuer, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Bond Indenture
Event of Default, Bond Owners representing in the aggregate not less than a
majority of the aggregate principal amount of such Bonds (a "Bond Majority in
Interest") advise the Bond Trustee and DTC through Participants, in writing,
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the Bond Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Bond Trustee is required to notify all Bond Owners through
Participants of the availability of Definitive Bonds. Upon surrender by DTC of
the fully registered global bonds representing each series of Bonds and receipt
of instructions for re-registration, the Bond Trustee will reissue the bonds as
Definitive Bonds to Bond Owners.
Distributions of principal of, premium, if any, and interest due on the
Bonds will thereafter be made by the Bond Trustee directly to the holders of
Definitive Bonds in whose names the Definitive Bonds were registered at the
close of business on each Record Date in accordance with the procedures set
forth herein and in the Bond Indenture. Such distributions will be made by check
payable to the order of the Bondholder mailed to the address provided by such
Bondholder or if such Bondholder owns of record one or more Bonds that have
principal denominations aggregating at least $5,000,000 and an account number is
included in the Register, by wire transfer in immediately available funds to a
bank account maintained in the United States.
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<PAGE> 29
The final payment on any Bond, however, will be made only upon presentation and
surrender of such Bond at the Bond Trustee's corporate trust office.
Definitive Bonds will be transferable and exchangeable at the corporate
trust office of the Bond Trustee. No service charge will be imposed for any
registration of transfer or exchange, but the Bond Trustee may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
DISTRIBUTIONS ON THE BONDS
On each Payment Date, an amount at least equal to all payments due on the
Notes on such Payment Date is required to be transferred by Kmart to the Bond
Trustee, pursuant to its obligations under each of the Leases, as amended as of
the Closing Date, to make Rental Payments, as the right to receive such Rental
Payments will have been assigned by the Owner Trustees to the Note Trustee and
from the Note Trustee to the Bond Trustee. Such amounts shall be promptly
distributed by the Bond Trustee on the date of receipt, to the extent available
therefor, to pay in full the principal, interest and any Make-Whole Premium due
on the related Payment Date on the Bonds and, in case such amounts shall be
insufficient to pay in full the whole amount so due and payable, then such
amounts shall be so distributed as payment of principal, interest and any
Make-Whole Premium, pro rata among the Bonds, without any preference or priority
of one such Bond over another, according to the aggregate amount due for
principal, interest and any Make-Whole Premium due on such Bonds on such Payment
Date. If any Payment Date is not a business day, such payment shall be made on
the next succeeding business day, without any accrued interest from such Payment
Date. If on any Payment Date amounts received from Kmart by the Bond Trustee are
insufficient to provide for all payments due to the Bondholders on such Payment
Date, any past-due payments of principal, and interest and any Make-Whole
Premium due on Bonds of any series will be distributed by the Bond Trustee to
Bondholders on the date such amounts are received by the Bond Trustee. To the
extent permitted by applicable law, amounts not paid on the appropriate Payment
Date will accrue interest at a rate 1% above the rate shown on the cover page
hereof for Bonds of such series ("Default Interest").
Payments of Interest. Interest will be payable semi-annually, in
immediately available funds, on the unpaid principal amount of each outstanding
series of Bonds at the applicable interest rate on each Payment Date, commencing
January 1, 1995. Interest shall be calculated on the basis of a 360-day year
consisting of 12 months of 30 days each. Interest (other than Default Interest)
payable on any Payment Date shall accrue on each Bond from and including the
previous Payment Date (or from and including the Closing Date with respect to
the first Payment Date) to but excluding such Payment Date. Default Interest
shall accrue from the Payment Date on which any past-due payment was due.
Optional Prepayments. The Bonds may not be prepaid at the option of the
Issuer.
Scheduled Payments of Principal. Scheduled principal payments on the Series
A Bonds, Series B Bonds, Series C Bonds, Series D Bonds and Series E Bonds will
be payable only on the respective maturity dates of such Bonds. Scheduled
principal payments on the Series F Bonds and Series G Bonds will be payable on
scheduled Payment Dates. A table of the principal amount of the Series F Bonds
and Series G Bonds to be distributed on each Payment Date, as well as the
aggregate principal amount payable on the maturity date of each such series of
Bonds, is set forth below. In the event of any partial prepayment of the Series
F Bonds or Series G Bonds other than by operation of the Sinking Fund, the
scheduled amount of each Sinking Fund payment with respect to the Bonds of the
affected series (including the amount due at the stated maturity of such Bonds)
will be reduced proportionately.
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<PAGE> 30
SINKING FUND PAYMENTS
<TABLE>
<CAPTION>
SERIES F BONDS SERIES G BONDS
-------------- --------------
<S> <C> <C>
January 1, 1995...................................... $ 0 $ 0
July 1, 1995......................................... 0 0
January 1, 1996...................................... 0 0
July 1, 1996......................................... 0 0
January 1, 1997...................................... 0 0
July 1, 1997......................................... 0 0
January 1, 1998...................................... 0 0
July 1, 1998......................................... 0 0
January 1, 1999...................................... 0 0
July 1, 1999......................................... 0 0
January 1, 2000...................................... 0 0
July 1, 2000......................................... 9,960,108 0
January 1, 2001...................................... 0 0
July 1, 2001......................................... 10,899,966 0
January 1, 2002...................................... 0 0
July 1, 2002......................................... 9,824,557 0
January 1, 2003...................................... 0 0
July 1, 2003......................................... 8,650,156 0
January 1, 2004...................................... 0 0
July 1, 2004......................................... 9,446,404 0
January 1, 2005...................................... 0 0
July 1, 2005......................................... 10,315,948 0
January 1, 2006...................................... 0 0
July 1, 2006......................................... 11,265,533 0
January 1, 2007...................................... 0 0
July 1, 2007......................................... 12,302,528 0
January 1, 2008...................................... 0 0
July 1, 2008......................................... 13,434,978 0
January 1, 2009...................................... 0 0
July 1, 2009......................................... 14,671,671 0
January 1, 2010...................................... 0 0
July 1, 2010......................................... 6,738,151 0
January 1, 2011...................................... 0 0
July 1, 2011......................................... 0 0
January 1, 2012...................................... 0 0
July 1, 2012......................................... 0 0
January 1, 2013...................................... 0 0
July 1, 2013......................................... 0 0
January 1, 2014...................................... 0 0
July 1, 2014......................................... 0 0
January 1, 2015...................................... 0 0
July 1, 2015......................................... 0 0
January 1, 2016...................................... 0 0
July 1, 2016......................................... 0 7,120,803
January 1, 2017...................................... 0 0
July 1, 2017......................................... 0 9,060,906
January 1, 2018...................................... 0 0
July 1, 2018......................................... 0 4,744,291
-------------- --------------
$ 117,510,000 $ 20,926,000
=========== ===========
</TABLE>
Prepayments of Principal with a Make-Whole Premium. Each series of Bonds
may be prepaid in part in the event that the corresponding Notes are prepaid as
a result of (i) Kmart's termination of any Lease due to economic obsolescence,
which termination shall not be earlier than January 1, 2004, or (ii) Kmart's
termination of any Lease due to the mining or removal of oil, gas or minerals
from a Property by an unrelated
29
<PAGE> 31
third party. See "DESCRIPTION OF THE NOTES -- Distributions on the Notes --
Prepayments of Principal with a Make-Whole Premium" herein. Such Bonds will be
prepaid on a Payment Date, provided that not less than 30 nor more than 45 days'
notice is given by first-class mail to each Bondholder of a Bond to be prepaid
at its address appearing in the Register at a price equal to the sum of (i) the
principal amount thereof plus (ii) accrued interest, if any, to the date of
prepayment plus (iii) the Make-Whole Premium.
The Make-Whole Premium with respect to the Bonds shall mean the sum of the
Make-Whole Premiums on all related Notes which have been prepaid. The
"Make-Whole Premium", if any, on any Note shall mean an amount equal to the
positive difference, as of the date of determination, between (i) the present
value of all future payments of principal and interest, including any principal
amount due at maturity, discounted semi-annually at an interest rate per annum
equal to (a) the average yield for "This Week", as provided in the Treasury
Constant Maturity Yield Index published by the Board of Governors of the Federal
Reserve System in the Statistical Release designated "H.15 (519), Selected
Interest Rates", or a successor publication, published next preceding two
business days prior to redemption, for instruments having a maturity
corresponding to the remaining average life of such Note (the "TCMYI") plus (b)
50 basis points, and (ii) the outstanding principal amount of such Note to be
prepaid; provided, however, that if there is no TCMYI for instruments having a
maturity corresponding to the average life of such Note, then the TCMYI shall
equal the straight line interpolation between the interest rates on the
respective Treasury issue both greater and lesser, most closely approximating
the average life of the Note (rounded to the fourth decimal place); and provided
further, that if the average life of such Note is less than one year, the
one-year TCMYI shall be used.
Prepayments of Principal at Par. Each series of Bonds may be prepaid in
part on any Payment Date at a price equal to the principal amount thereof,
together with accrued interest to the date of such prepayment, upon receipt by
the Bond Trustee of payments (i) resulting from the prepayment of any portion of
the Notes in the event of a condemnation or casualty affecting all or a
substantial portion of the related Property or (ii) in the event that a portion
of condemnation proceeds is paid to the holders of the Notes following a partial
condemnation of a Property. See "DESCRIPTION OF THE NOTES -- Distributions on
the Notes -- Prepayments of Principal at Par" herein. The principal amount of
any series of Bonds to be so prepaid will be equal to the then-outstanding
aggregate balances of the corresponding Notes relating to the Property, the
Lease of which is being terminated in connection with such casualty or
condemnation.
If Bonds are to be partially prepaid (except by operation of the Sinking
Fund), principal prepayments on a series of Bonds will be distributed pro rata,
without priority of one Bond over another, in the proportion that the aggregate
principal amount of each such Bond bears to the aggregate amount of all
outstanding Bonds of such series.
In the event that there shall have been any partial prepayment of the
Series F Bonds or Series G Bonds (other than by operation of the Sinking Fund),
the amount of each Sinking Fund payment with respect to the affected series of
Bonds subsequent to such prepayment shall be reduced proportionately, and set
forth in a new schedule of Sinking Fund payments attached to the related Note
Indentures provided by the Note Trustee to the Bond Trustee based on information
supplied to the Note Trustee by the Owner Trustee.
Prepayments of Principal Following a Note Indenture Event of Default. The
Bonds may be prepaid in part following a Note Indenture Event of Default, as and
to the extent described under "DESCRIPTION OF THE NOTES -- Remedies" herein.
Such prepayment will be at par, together with interest accrued to the date of
prepayment, plus, under the circumstances described under such section, a
Make-Whole Premium on the principal amount then due.
SECURITY
The Bonds will be secured primarily by (i) the Pledge, (ii) the Note
Assignment and (iii) the Collateral Assignments from the Note Trustee to the
Bond Trustee. Each Series A Note, Series B Note, Series C Note, Series D Note,
Series E Note, Series F Note and Series G Note will have a maturity date and an
interest rate corresponding to the maturity date and interest rate on the Series
A Bonds, Series B Bonds, Series C Bonds, Series D Bonds, Series E Bonds, Series
F Bonds and Series G Bonds, respectively. The aggregate principal
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<PAGE> 32
amount of each series of Notes with respect to all of the Properties will be the
same as the aggregate principal amount of the corresponding series of Bonds. See
"STRUCTURE OF THE TRANSACTION" and "DESCRIPTION OF THE NOTES" herein.
EVENTS OF DEFAULT
If any one or more of the following events of default under the Bond
Indenture ("Bond Indenture Events of Default") shall occur:
(i) non-payment (a) of (1) any payment of interest accrued on any of
the Bonds or (2) any payment of principal due on any of the Bonds,
including any Sinking Fund payment on any of the Series F or Series G
Bonds, within five days after notice that the same is due; or (b) of other
sums which the Issuer is obligated to pay under the Bond Indenture
including any other prepayment (together with any Make-Whole Premium)
within 15 days after notice that the same is due;
(ii) default by the Issuer in the due observance or performance of any
term, covenant or condition on its part to be performed under the Bond
Indenture (other than a default under clause (i) above) that would have a
material adverse effect on the lien of the Bond Indenture or the repayment
of the Bonds, continued unremedied for a period of 30 days after notice
thereof to the Issuer from the Bond Trustee or a Bond Majority in Interest,
except that if any such default cannot with due diligence be cured within a
period of 30 days, such default shall not be deemed to continue if the
Issuer proceeds promptly and with all due diligence to cure the default and
diligently completes the curing thereof;
(iii) any of the representations or warranties made by the Issuer is
found to be untrue in any material respect which would have a material
adverse effect on the lien of the Bond Indenture or the repayment of the
Bonds;
(iv) a Note Indenture Event of Default (as defined herein) shall have
occurred and be continuing;
(v) the Issuer shall commence a voluntary case or other proceeding
seeking liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or it shall consent to any such relief or to the
appointment of or taking of possession by any such official in any
involuntary case or other proceeding commenced against it, or it shall make
a general assignment for the benefit of creditors; or
(vi) a decree or order for relief shall be entered by a court having
jurisdiction over the Issuer in any involuntary case under any bankruptcy,
insolvency or other similar law now or hereafter in effect, or appointing a
trustee, receiver, liquidator, custodian or other similar official of the
Issuer, its interest in the Note Indentures or any substantial part of its
property, or ordering the winding-up or liquidation of its affairs, and
such decree or order shall remain undismissed or unstayed for a period of
90 consecutive days
then (except in the case of a Note Indenture Event of Default referred to in
clause (iv) above of less than all of the Note Indentures, which may not be a
basis to accelerate the Bonds) in any such event, the Bond Trustee may, or, upon
written direction of 25% of the affected Bondholders, the Bond Trustee shall,
upon notice to the Issuer (with a copy to Kmart and the Owner Trustee)
accelerate the maturity of the affected Bonds; provided, however, that in the
case of a Bond Indenture Event of Default set forth in clause (v) or clause (vi)
above, the maturity of the Bonds shall automatically be accelerated without
notice from any party to another. In such case, the unpaid principal amount of
the accelerated Bonds, with accrued interest thereon, shall become immediately
due and payable; provided, however, that two-thirds of the affected Bondholders
may rescind such acceleration of the Bonds if such Bond Indenture Event of
Default is cured.
The determination of a Bond Indenture Event of Default shall be made
separately with respect to each series of Bonds. The occurrence of a Bond
Indenture Event of Default with respect to a series of Bonds by itself shall not
constitute or trigger a Bond Indenture Event of Default with respect to any
other series of Bonds, although the same circumstances may give rise
simultaneously to Bond Indenture Events of Default for more than one series of
Bonds.
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<PAGE> 33
At any time after such acceleration of all of the Bonds and before any sale
of the trust estate created by the Bond Indenture, or any part thereof, shall
have been made pursuant to any sale as provided in the Bond Indenture,
two-thirds of the affected Bondholders may rescind and annul such declaration
and its consequences if: (i) there shall have been paid to or deposited with the
Bond Trustee a sum sufficient to pay (a) all overdue installments of interest on
all Bonds, (b) the principal and any Make-Whole Premium on any Bonds that have
become due otherwise than by reason of such acceleration, and interest thereon
at the respective rates provided in the Bonds for late payments of principal or
any Make-Whole Premium and (c) to the extent that payment of such interest is
lawful, interest upon overdue installments of interest at the rate specified in
the Bonds; and (ii) all Bond Indenture Events of Default, other than the
non-payment of the principal of Notes which have become due solely by such
acceleration, have been cured or waived as provided in the Bond Indenture. No
such rescission shall affect any subsequent Bond Indenture Event of Default or
impair any right with respect to such subsequent Bond Indenture Event of
Default.
The Bond Trustee must notify the Bondholders within 45 days after the
occurrence of any default which could become a Bond Indenture Event of Default
known to it, unless it has determined (except in the case of defaults in payment
of the Bonds) that withholding such notice is in the best interests of the
Bondholders as provided in Section 315(b) of the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The Bond Indenture does not require Kmart
to furnish periodic evidence of compliance with the terms of the Leases.
ENFORCEMENT OF REMEDIES
The Bond Indenture provides that if a Bond Indenture Event of Default shall
have occurred and be continuing, the Bond Trustee may exercise certain rights or
remedies available to it under applicable law, including foreclosing on the lien
of the Bond Indenture as against the Asset Pool that relates to the affected
series of Bonds (subject to the rights of Kmart or any assignee or sublessee if
no Lease Event of Default has occurred); provided, however, that if a Bond
Indenture Event of Default arises solely by reason of one or more events or
circumstances that constitute a Note Indenture Event of Default under fewer than
all of the Note Indentures, neither the Bond Trustee nor the affected
Bondholders shall be entitled to accelerate the maturity of any of the Bonds and
the Bond Trustee and Bondholders shall only be entitled to exercise remedies
with respect to the portion of the Note Trust Estate relating to such Note
Indenture or Note Indentures and the Notes issued therefrom.
If a Lease Event of Default shall have occurred and be continuing, the Bond
Trustee as assignee of the Issuer's rights under the related Note Indenture and
of the related Lease and Mortgage shall be entitled to exercise remedies
afforded to the Note Trustee under the related Note Indenture, as well as the
remedies afforded to the Owner Trust by the related Lease for Lease Events of
Default. See "DESCRIPTION OF THE LEASES -- Events of Default" herein.
No Bond Owner shall have any right to institute any suit, action or
proceeding for the foreclosure of the lien of the Bond Indenture, for the
appointment of a receiver or for the enforcement of any remedy unless a Bond
Majority in Interest has directed the Bond Trustee in writing to institute such
action, suit or proceeding and has offered indemnity as provided in the Bond
Indenture, the Bond Trustee shall have failed to act for 30 days thereafter and
no inconsistent direction shall have been received from a Bond Majority in
Interest during such 30-day period. Nothing contained in the Bond Indenture,
however, impairs the right of any Bond Owner to enforce the payment of the
principal, interest and any Make-Whole Premium due on any Bond at or after the
maturity thereof.
The rights of the Bond Owners under the Bond Indenture are limited in
certain respects. A Bond Indenture Event of Default may exist without a Lease
Event of Default also existing and in such event Kmart may remain in possession
of the Properties and will not be required to pay more than the amounts of rent
required to be paid periodically under the Leases (in the absence of a Lease
Event of Default) even if the Bonds have been accelerated. Also, it is possible
that a court would not apply the measure of damages specified in the Lease in
the event of a Lease Event of Default.
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<PAGE> 34
DISCHARGE OF LIEN
The Bond Indenture will cease to be of further effect upon, among other
things, payment in full of the principal, interest and any Make-Whole Premium
due on all of the Bonds.
AMENDMENTS
Without the consent of any of the Bondholders, each of the Issuer and the
Bond Trustee shall enter into one or more supplemental Bond Indentures (each, a
"Supplemental Bond Indenture"), provided that such Supplemental Bond Indentures
are not inconsistent with the rights of Kmart under any Lease: to evidence the
succession of another corporation to the rights, obligations and interests of
Kmart or the Issuer; to subject additional property to the lien of the Bond
Indenture; to modify, eliminate or add provisions of the Bond Indenture as
necessary to qualify the Bond Indenture (including any Supplemental Bond
Indenture) under the Trust Indenture Act; to cure any ambiguity or to correct
any inconsistency in the Bond Indenture; to evidence the succession of a new
Bond Trustee or Tax Administrator or to add a co-trustee or separate trustee; to
make other amendments or provisions with respect to matters or questions arising
under the Bond Indenture that shall not be inconsistent with the provisions of
the Bond Indenture, provided that such amendment or provision shall not
adversely affect in any material respect the interest of the Bondholders; or to
make such other amendments or provisions as are necessary to protect the REMIC
status of the REMICs.
With the consent of a Bond Majority in Interest, the Issuer may, and the
Bond Trustee shall, enter into Supplemental Bond Indentures for the purpose of
adding provisions or changing the rights and obligations of the Bondholders and
of the Issuer; provided, however, that no such Supplemental Bond Indenture shall
(a) be inconsistent with the rights of Kmart under any Lease or (b) without the
consent of each holder of an outstanding Bond affected thereby: change the
stated maturity of the principal of, or any installment of interest, or the
dates or circumstances of payment of any Make-Whole Premium on any Bond, or
reduce the principal amount thereof or the interest thereon or any amount
payable upon the prepayment thereof, or change the circumstances for prepayment;
impair the right to institute suit for the enforcement of any such payment;
permit the creation of any lien prior to or pari passu with the lien of the Bond
Indenture; terminate the lien of the Bond Indenture or deprive any Bondholder of
the security afforded by the lien of the Bond Indenture; reduce the amounts
payable under the Notes assigned to the Bond Trustee or change the time for the
payment thereof so that such payments are less than the amounts necessary to pay
when due the principal, interest and any Make-Whole Premium on the outstanding
Bonds; reduce the percentage in principal amount of the outstanding Bonds of all
series, the consent of whose holders is required to approve such Supplemental
Bond Indentures or any waiver; or modify any of the provisions concerning
Supplemental Bond Indentures except to further restrict such provisions.
Promptly after the execution by the Issuer and the Bond Trustee of any
Supplemental Bond Indenture, the Bond Trustee shall transmit a written notice,
setting forth in general terms the substance of such Supplemental Bond
Indenture, to all Bondholders.
THE BOND TRUSTEE
The Bank of New York, a New York banking corporation, will act as the Bond
Trustee. Kmart has and may from time to time in the future have banking
relations with the Bond Trustee in the ordinary course of business.
The Bond Indenture provides that in the case of any Bond Indenture Event of
Default, the Bond Trustee will exercise such of the rights and powers vested in
it by the Bond Indenture, and will use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise under the circumstances in
the conduct of his or her own affairs. The Bond Trustee will not be liable for
any error of judgment made in good faith (unless the Bond Trustee is negligent
in ascertaining the pertinent facts) or any action taken or omitted to be taken
by it in good faith in accordance with the direction of a Bond Majority in
Interest. Subject to such provision, the Bond Trustee will be under no
obligation to exercise any of the rights and powers granted it under the Bond
Indenture at the direction of any Bondholder if the Bond Trustee determines in
good faith that the action so directed would involve it in personal liability.
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<PAGE> 35
DESCRIPTION OF THE NOTES
The statements under this caption are summaries of the terms of the Notes
and the Note Indentures, as amended and restated concurrently with the purchase
of the Interim Notes from the Initial Noteholder, and do not purport to be
complete. The summaries make use of terms defined in, and are qualified in their
entirety by reference to, all of the provisions of the Notes and the Note
Indentures, the forms of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Except as otherwise indicated, the
following summaries relate to the Notes and the Note Indenture relating to each
Property in respect of which such Notes are to be issued.
GENERAL
Each Note Indenture is an agreement between an Owner Trust and the Note
Trustee and relates to a single Property. Seven series of Notes, each
corresponding to one of the series of Bonds, have been issued under each Note
Indenture. Each series of Notes will have the same maturity date, interest rate
and principal amount as the Bonds of the related series. The Notes issued
pursuant to each Note Indenture are secured as described below under "--
Security". The Notes, Note Indentures and Mortgages will not have cross-default
or cross-collateralization provisions. So long as the Notes are subject to the
lien of the Bond Indenture, the Bond Trustee shall be entitled to exercise all
the rights, privileges and remedies of the holders of Notes under each Note
Indenture.
Each Owner Trust has leased its corresponding Property to Kmart. Kmart is
obligated under each Lease to make Rental Payments to the related Owner Trust in
amounts that will be at least sufficient to pay when due all payments required
to be made on the Notes. The Notes are not direct obligations of, or guaranteed
by, Kmart. Payments under the Leases in excess of the amounts necessary to make
required payments on the Notes will be paid by the Bond Trustee to the Note
Trustee for distribution pursuant to the appropriate Note Indenture and will not
be available for distributions on the Notes or the Bonds, except that upon a
Note Indenture Event of Default, amounts received by the Bond Trustee shall be
distributed to the Note Trustee, to the extent such amounts are due to it for
the performance of its duties, and then to the Bondholders until they have
received the full amount of principal, interest and any Make-Whole Premium due
on the Notes, prior to distribution to the Note Trustee for distribution
pursuant to the appropriate Note Indenture to the appropriate Owner Trustee.
Excepted Payments (as defined herein) will not be available for distribution to
the Bondholders. See "-- Remedies" herein. Kmart's rental obligations as lessee
under each Lease will be general obligations of Kmart.
DISTRIBUTIONS ON THE NOTES
Interest on the Notes is payable semi-annually, in immediately available
funds, on the unpaid principal amount of each of the Notes at the applicable
interest rate on each Payment Date, commencing January 1, 1995. Interest is
calculated on the basis of a 360-day year consisting of 12 months of 30 days
each. Interest payable on any Payment Date accrues on each Note from and
including the previous Payment Date (or from and including the Closing Date with
respect to the first Payment Date) to but excluding such Payment Date.
Scheduled Payments of Principal. Scheduled principal payments on the Series
A Notes, Series B Notes, Series C Notes, Series D Notes and Series E Notes will
be payable only on the respective maturity dates of such Notes. Scheduled
principal payments on the Series F Notes and Series G Notes will be payable on
scheduled payment dates (the "Scheduled Payment Dates"), as set forth in the
schedule attached to the related Note, and distributed on a pro rata basis. In
the event of any partial prepayment of any series of Notes, the amount of each
payment of such Notes (and the amount due at the stated maturity of such series
of Notes) will be reduced proportionately and the schedules attached to the
affected Notes will be amended.
Prepayments of Principal with a Make-Whole Premium. The related Notes may
be prepaid, in part, in the event that (i) Kmart terminates any Lease due to
economic obsolescence, which termination shall not be earlier than January 1,
2004, or (ii) a Lease is terminated due to an unpermitted use of the related
Property by an unrelated third party involving the mining or removal of oil, gas
or minerals. See "DESCRIPTION OF THE LEASES -- Early Termination" herein. Such
Notes will be prepaid on a Payment Date, provided that
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not less than 30 days' notice is given by first-class mail to each holder of a
Note to be prepaid at its address appearing in the Note register at a price
equal to the sum of (i) the principal amount thereof plus (ii) accrued interest,
if any, to the date of prepayment plus (iii) the Make-Whole Premium with respect
to the Notes.
Prepayments of Principal at Par. The related Notes may be prepaid in whole,
due to a condemnation or casualty described in clause (i), below, and in part,
due to a partial condemnation described in clause (ii), below, on any Payment
Date at a price equal to the principal amount thereof, together with accrued
interest to the date of such prepayment of such prepayment, on not less than 30
days' notice by mail, upon receipt by the Note Trustee of payments (i) resulting
from the termination of a Lease by Kmart in the event of a condemnation or
casualty affecting all or a substantial portion of the related Property in which
case the principal amount of Notes to be prepaid will be equal to the
then-outstanding aggregate balances of the Notes corresponding to the Lease
being terminated or (ii) in the event that a portion of such condemnation
proceeds is paid to the Note Trustee pursuant to the Lease following a partial
condemnation of a Property where such Lease is not terminated, in which case the
principal amount of the Notes to be prepaid will equal the amount of such
condemnation proceeds allocated to the Note Trustee; provided that such amount
is greater than the lesser of (i) $500,000 and (ii) 10% of the purchase price of
the related Property. See "DESCRIPTION OF THE BONDS -- Distributions on the
Bonds -- Prepayments of Principal at Par" above.
Prepayments of Principal Following a Note Indenture Event of Default. The
related Notes may be prepaid following a Note Indenture Event of Default, as and
to the extent described under "-- Remedies" below. Such prepayment will be at
par, together with interest accrued to the date of prepayment, plus, under the
circumstances described under such section, a Make-Whole Premium on the
principal amount then due.
Optional Prepayment. The Notes may not be prepaid at the option of the
Owner Trustee or the Issuer. However, each Note is subject to repurchase by the
related Owner Trustee in the event of a Note Indenture Event of Default with
respect to such Note as described under "Remedies" below.
Any prepayments on the Notes (except through the operation of the Sinking
Fund) shall be made on a pro rata basis without preference or priority of any
Note over any other Note.
SECURITY
The Notes issued by each Owner Trust will be secured primarily by (i) the
related Lease Assignment, and (ii) the Mortgage on the related Property,
including the rights to receive payments under the foregoing (except for
Excepted Payments) and all rights (exclusive of Excepted Rights) of the Owner
Trustee, now existing or hereafter arising, to exercise any election or option
or to make any decision or determination or to give or receive any notice,
consent, waiver or approval or to take any other action under or in respect of
any of the foregoing, as well as all rights, powers and remedies on the part of
the Owner Trustee, now existing or hereafter arising and whether arising under
any of the foregoing or by statute or at law or equity or otherwise, arising out
of any Note Indenture Event of Default. Notes issued under each Note Indenture
will not be secured by any of the Properties securing Notes issued under any
other Note Indenture (including any other property acquired by any of the Owner
Trusts).
"Excepted Payments" include, among other things, certain indemnity payments
by Kmart to the appropriate Owner Trustee or the Owner Participant, any amounts
payable under any Operative Document (as defined in the Note Indentures) to pay
such Owner Trustee's fee or to reimburse such Owner Trustee, the Owner
Participant or their affiliates for performing or complying with any of the
obligations of Kmart under any Operative Document, any payments to the Owner
Participant constituting payment of the purchase price for such Owner
Participant's interest in the Owner Trust, insurance proceeds (or self-insurance
payments or policy deductibles) payable to such Owner Trustee or to the Owner
Participant under liability insurance maintained by Kmart pursuant to the terms
of such Lease, or insurance proceeds payable under policies separately
maintained by the Owner Trustee or the Owner Participant in satisfaction of
Kmart's obligation to maintain such insurance under the Lease, and any payments
of interest to the extent attributable to the foregoing payments.
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"Excepted Rights" shall mean (i) all rights with respect to Excepted
Payments of the person entitled thereto and (ii) all rights and privileges under
the Granting Clause Documents (as defined in the Note Indentures) or Operative
Documents expressly reserved to the appropriate Owner Trustee or the Owner
Participant with the Note Trustee pursuant to clauses (aa), (bb) and (cc) of the
granting clauses of the related Note Indenture for the periods specified in such
Note Indenture.
EVENTS OF DEFAULT
The following are Events of Default under each of the Note Indentures
("Note Indenture Events of Default"):
(i) non-payment (a) of (1) any payment of interest accrued on any of
the Notes or (2) any principal payment (including any Sinking Fund payment)
on any of the Notes within five days after notice that the same is due; or
(b) of other sums that the appropriate Owner Trustee is obligated to pay
thereunder, but excluding any Excepted Payments, within 15 days after
notice that the same is due;
(ii) a Lease Event of Default shall have occurred and be continuing
(other than any such Lease Event of Default arising by reason of nonpayment
of, or failure to perform with respect to, any Excepted Payment when due);
provided that the Note Trustee or holders of Notes owning not less than a
majority in aggregate principal amount of all outstanding Notes under a
Note Indenture (a "Note Majority in Interest") have given to the
appropriate Owner Trustee, by registered or certified mail, a written
notice stating the Note Trustee's or such holders' intention to terminate
the Lease, commence action to foreclose on the Property or exercise any
other comparable remedies under the Lease at least 30 days prior to the
exercise thereof;
(iii) the related Owner Trust shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect, or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or it shall consent to any such relief or
to the appointment of or taking of possession by any such official in any
involuntary case or other proceeding commenced against it, or it shall make
a general assignment for the benefit of creditors;
(iv) a decree or order for relief shall be entered by a court having
jurisdiction over the related Owner Trust in any involuntary case under any
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a trustee, receiver, liquidator, custodian or other similar
official of such Owner Trust, its interest in the Note Trust Estate or any
substantial part of the Owner Trust's property, or ordering the winding-up
or liquidation of such Owner Trust or its affairs, and such decree or order
shall remain undismissed or unstayed for a period of 90 consecutive days;
(v) a default by the related Owner Trustee in the due observance or
performance of any material term, covenant or condition on its part to be
performed under any of the Operative Documents set forth therein (other
than a default under clause (i) or (ii) above) including any failure by the
related Owner Trustee to comply in any material respect with any covenant
contained in subparagraphs (aa), (bb) or (cc) of the granting clause of the
Note Indenture, continued unremedied for a period of 30 days after notice
thereof from or on behalf of the Note Trustee to such Owner Trustee, except
that if any such default cannot with due diligence be cured within a period
of 30 days, such default shall not be deemed to continue if such default is
curable and such Owner Trustee proceeds promptly and with all due diligence
to cure the default and diligently completes the curing thereof within 180
days; and
(vii) any of the representations or warranties made by the related
Owner Trustee in any of the Operative Documents is found to be untrue in
any material respect and any such breach impairs the lien of the Note
Indenture, has a material adverse effect on the repayment of the Notes or
results in a material diminution of the value of the Note Trust Estate.
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REMEDIES
Subject to certain rights of the Owner Trustee to cure certain Note
Indenture Events of Default and to purchase the related Notes after the
occurrence of a Note Indenture Event of Default, as set forth in the Note
Indentures, during the continuance of any Note Indenture Event of Default, the
Note Trustee in its discretion may (or when so directed by a Note Majority in
Interest shall), or a Note Majority in Interest may, in any such case, by notice
in writing to the Owner Participant and the appropriate Owner Trustee (and to
the Note Trustee if given by holders of the outstanding related Notes), declare
the principal of all the outstanding related Notes and the interest accrued
thereon to be due and payable immediately, and thereupon the same shall become
immediately due and payable together, in the case of a Note Indenture Event of
Default that is a Lease Event of Default, with a Make-Whole Premium on the
principal amount then due. In the event that the Owner Trustee elects to
purchase the Notes after the occurrence of a Note Indenture Event of Default,
the purchase price to be paid to the holders of such Notes shall not include a
Make-Whole Premium. Amounts, if any, paid in respect of the acceleration of a
related Note or from the Owner Trustee in respect of the purchase price of a
related Note received by the Bond Trustee as pledgee of the Notes will be
applied by the Bond Trustee to prepay in part the Bonds pro rata in the
proportion that the principal amount of each Bond bears to the aggregate amount
of all Bonds outstanding.
At any time after such acceleration and before any sale of any portion of
the collateral securing the Note Indenture, a Note Majority in Interest may
rescind and annul such declaration and its consequences if: (i) there shall have
been paid to or deposited with the Note Trustee a sum sufficient to pay (a) all
overdue installments of interest on the related Notes, (b) the principal of and
premium, if any, on any related Notes that have become due otherwise than by
such acceleration and interest thereon at the respective rates provided in the
Notes for late payments of principal or premium, and (c) to the extent that
payment of such interest is lawful, interest upon overdue installments of
interest at the rate of 1% per annum over the rate of interest for the related
Notes; and (ii) all Events of Default, other than the non-payment of the
principal of Notes that have become due solely by such acceleration, have been
cured or waived by a Note Majority in Interest. No such rescission shall affect
any subsequent Note Indenture Event of Default or impair any right with respect
to such subsequent Note Indenture Event of Default.
ENFORCEMENT OF REMEDIES
Subject to the limitations set forth in the Note Indentures, if a Note
Indenture Event of Default that constitutes a Lease Event of Default shall have
occurred and be continuing, then in every such case the Note Trustee, as
assignee and mortgagee or secured party thereunder or otherwise, may, to the
extent permitted by applicable law, exercise any or all of the rights and powers
and pursue any or all of the remedies under the related Lease, Mortgage, Note
Indenture and the Granting Clause Documents and, in connection therewith, may
take possession of all or part of the related Note Trust Estate and may exclude
the appropriate Owner Trustee and Kmart (provided that a Lease Event of Default
has occurred and is continuing) and, to the extent permitted by applicable law,
all persons claiming under either of them wholly or partly therefrom; provided,
however, that, notwithstanding any provision herein to the contrary, the Note
Trustee shall not exercise any remedies against the related Note Trust Estate
unless a declaration of acceleration of the Notes has been made. Any provision
of the Lease, the Note Indentures or any other Operative Document to the
contrary notwithstanding, the Note Trustee shall not foreclose the lien of the
Note Indenture or of the Mortgage or otherwise exercise remedies that would
result in the exclusion of the appropriate Owner Trustee from the Note Trust
Estate, the Property or any substantial part of either as a result of any Note
Indenture Event of Default that arises solely by reason of one or more events or
circumstances that constitute a Lease Event of Default, unless the Note Trustee
has taken or is concurrently taking action under the applicable Lease to
dispossess Kmart, to terminate the applicable Lease or to effect any comparable
remedy thereunder.
Upon the occurrence and continuation of any Note Indenture Event of
Default, the Note Trustee may, and upon the request of a Note Majority in
Interest shall, (i) direct payment to it of all monies and enforce any agreement
or undertaking constituting a part of the related Note Trust Estate by any
action, suit, remedy or proceeding authorized or permitted by the related Note
Indenture or by law or by equity, and whether for the specific performance of
any agreement contained in such Note Indenture or for an injunction against the
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violation of any of the terms thereof, (ii) enforce the liens and security
interests (a) granted by such Note Indenture on all or any part of the related
Note Trust Estate and (b) on all collateral securing the Notes by foreclosure, a
sale or action on the Notes or any other remedy available to it under applicable
law (subject to the rights of Kmart under the Lease) and (iii) sell, assign,
transfer and deliver, from time to time to the extent and in the manner
permitted by applicable law, all or any part of the related Note Trust Estate or
any interest therein, on such terms as the Note Trustee, in its discretion as
attorney-in-fact, may determine, or as may be required by applicable law. The
Note Trustee and any of the holders of the Notes may purchase property sold out
of the Note Trust Estate at any of the foregoing sales and may, if permitted by
applicable law, make a credit bid therefor in an amount of up to the aggregate
amount of all sums due under their respective Notes and the Note Indenture
(including, in the case of the Note Trustee, a credit bid therefor in an amount
of up to the aggregate amount due with respect to all of the outstanding Notes).
The Note Trustee may exercise any other right or remedy that may be
available to it under applicable law or proceed by appropriate court action to
enforce the terms of the Note Indentures or to recover damages for the breach
thereof. So long as the Issuer is the registered holder of any Note, none of the
Note Trustee, the Owner Trustee, or the Owner Participant will be authorized or
empowered to acquire title to any portion of the Note Trust Estate or to take
any action with respect to all or any portion of the Note Trust Estate if such
acquisition or action would cause any of the REMICs to fail to qualify as a
"real estate mortgage investment conduit" for federal income tax purposes.
Upon the request of a Note Majority in Interest, the Note Trustee shall
waive any past defaults that could result in a Note Indenture Event of Default
and their consequences and upon any such waiver such defaults shall cease to
exist, and any Note Indenture Events of Default arising therefrom shall be
deemed to have been cured, but no such waiver shall extend to any subsequent or
other default or impair any right with respect to such subsequent or other
default; provided, however, that in the absence of written instructions from the
holders of all related Notes then outstanding, the Note Trustee shall not waive
any such default in the payment of the principal, interest, any Make-Whole
Premium or other amounts due under, any related Note then outstanding, or in
respect of a covenant or provision thereof that cannot be modified or amended
without the consent of each holder of a related Note.
In the event of any default by Kmart in the payment of any installment of
basic rent the appropriate Owner Trustee or the Owner Participant, without the
consent of the Note Trustee or any holder of the Notes, may pay to the Note
Trustee a sum equal to the amount of all (but not less than all) principal and
interest as shall then be due and payable on the Notes secured by the related
Property, together with any interest on account of such payment being overdue.
However, the prior sentence shall not apply to any default by Kmart in the
payment of any installment of basic rent due under the Lease, if default by
Kmart in the payment of three or more consecutive installments of basic rent, or
in the payment of a total of six or more installments of basic rent, shall have
been cured by the appropriate Owner Trustee or the Owner Participant pursuant to
the foregoing sentence. In the event that such Owner Trustee or the Owner
Participant shall pay such amounts to the Note Trustee in satisfaction of
Kmart's obligation, no Note Indenture Event of Default has occurred and is
continuing and in the event that Kmart subsequently pays such amounts to the
Note Trustee, the Note Trustee will release such amounts received from Kmart to
the Owner Trustee or the Owner Participant. In the event of any default by Kmart
in the performance of any obligation under the corresponding Lease (other than
the obligation to make Rental Payments) or any other Operative Document, the
appropriate Owner Trustee or the Owner Participant, without the consent of the
Note Trustee or any holder of the Notes, may exercise rights under the
corresponding Lease to perform such obligation on behalf of Kmart. Solely for
the purpose of determining whether there exists a Note Indenture Event of
Default, (i) any such payment by such Owner Trustee or the Owner Participant
shall be deemed to remedy any default by Kmart in the payment of Rental Payments
theretofore due and payable and to remedy any default by such Owner Trustee in
the payment of any amount due and payable under the related Notes and (ii) any
such performance by such Owner Trustee or the Owner Participant of any
obligation of Kmart under such Lease or other related Operative Document shall
be deemed to remedy any default by Kmart in the performance of such obligation
and to remedy any related default by the Owner Trustee under the related Note
Indenture.
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DISCHARGE OF LIEN
Each Note Indenture will cease to be of further effect when, among other
things, (i) the principal, interest and any Make-Whole Premium on all related
Notes has been paid, (ii) all related Notes have been delivered to the Note
Trustee for cancellation, or (iii) the relevant Owner Trust has deposited with
the Note Trustee in trust an amount sufficient to pay such Notes, including
principal, interest and any Make-Whole Premium to the date of such maturity or
redemption, together with all other sums then due and payable thereunder.
LIMITATION OF LIABILITY
The Notes are not direct obligations of, or guaranteed by, Kmart. None of
the Owner Trusts, the Owner Trustees, the Owner Participant or the Note Trustee,
or any affiliate thereof, shall be personally liable to any holder of a Note or
to the Note Trustee for any amounts payable under the Notes or for any liability
under such Note Indenture. All payments of principal, interest and any
Make-Whole Premium on the Notes issued with respect to any Property (other than
payments made in connection with a purchase of Notes by the Owner Participant)
will be made only from the assets subject to the lien of the Note Indenture or
the income and proceeds received by the Note Trustee therefrom (including Rental
Payments payable by Kmart under the related Lease).
AMENDMENTS
With the consent of a Note Majority in Interest, by directive delivered to
the Owner Trustee, Kmart and the Note Trustee, the Owner Trustee may, and the
Note Trustee shall, enter into one or more supplemental Note Indentures (each, a
"Supplemental Note Indenture") for the purpose of adding provisions or changing
the rights and obligations of the holders of the related Notes and of the Owner
Trustee under the Note Indenture; provided, however, that no such Supplemental
Note Indenture shall (i) be inconsistent with the rights of Kmart under the
Lease or (ii) without the consent of the holder of each outstanding Note
affected thereby: change the stated maturity or any date for payment of the
principal of, or any installment of interest on, or the dates or circumstances
of payment of the Make-Whole Premium, if any, on, any Note; reduce the principal
amount, interest on or any amount payable upon the prepayment of any Note, or
change the circumstances for prepayment thereof; impair the right to institute
suit for the enforcement of any such payment; permit the creation of any lien
prior to or pari passu with the lien of the Note Indenture; terminate the lien
of the Note Indenture; deprive any holder of any Note of the security afforded
by the lien of the Note Indenture; terminate the Lease; reduce the amounts
payable under the Lease or change the time for the payment thereof so that such
payments are less than the amounts necessary to pay when due the principal,
interest and any Make-Whole Premium on the outstanding Notes; reduce the
percentage in principal amount of the outstanding Notes of all series, the
consent of whose holders is required for any such Supplemental Note Indenture,
or the consent of whose holders is required for any waiver; modify any of the
provisions with respect to Supplemental Note Indentures, except to further
restrict such provisions; or cause any Note to fail to be a "qualified mortgage"
within the meaning of Section 860G(a)(3) of the Code with respect to the related
REMIC. Promptly after the execution of any such Supplemental Note Indenture, the
Note Trustee shall transmit a written notice to each holder of a related Note
setting forth in general terms the substance of such Supplemental Note
Indenture.
Without the consent of any of the holders of the related Notes, each of the
Owner Trustee and the Note Trustee shall enter into one or more Supplemental
Note Indentures, provided such Supplemental Note Indenture (i) is not
inconsistent with the rights of Kmart under the Lease or (ii) except with the
consent of the holders of all related Notes then outstanding if as a result
thereof the amounts payable to the Owner Trustee under the Lease and assigned to
the Note Trustee hereunder shall not be sufficient to pay when due the principal
of, premium, if any, and interest on all outstanding Notes, for the following
purposes: to evidence the succession of another corporation to the rights,
interests and obligations of Kmart or to evidence the succession of another
corporation to the rights, interests and obligations of the Owner Trustee under
the related Note Indenture and the related Notes; to subject additional property
to the lien of the Note Indenture; to modify, eliminate or add to the provisions
of the Note Indenture to such extent as shall be necessary to
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qualify the Note Indenture (including any Supplemental Note Indenture) under the
Trust Indenture Act of 1939; to cure any ambiguity or correct any inconsistency
in such Note Indenture; to evidence the succession of a new Note Trustee
thereunder or add a co-trustee or separate trustee; to make any other amendments
or provisions with respect to matters or questions arising under the Note
Indenture which shall not be inconsistent with the provisions of the Note
Indenture, provided that such amendment or provision shall not adversely affect
in any material respect the interest of the holders of the related Notes; or to
make such other amendments or provisions as are necessary to protect the REMIC
status of the REMICs.
THE NOTE TRUSTEE
The Bank of New York, a New York banking corporation, will act as Note
Trustee. Kmart has and may from time to time in the future have banking
relations with the Note Trustee in the ordinary course of business.
The Note Indenture provides that in the case of any Note Indenture Event of
Default, the Note Trustee will exercise such of the rights and powers vested in
it by the Note Indenture, and will use the same degree of care and skill in its
exercise thereof as a prudent person would exercise under the circumstances in
the conduct of his or her own affairs. The Note Trustee will not be liable for
any error of judgment made in good faith (unless the Note Trustee is negligent
in ascertaining the pertinent facts) or any action taken or omitted to be taken
by it in good faith in accordance with the direction of a Note Majority in
Interest. Subject to such provision, the Note Trustee will be under no
obligation to exercise any of the rights and powers granted it under the Note
Indenture at the request of any holder of the Notes if the Note Trustee
determines in good faith that such action would involve it in personal
liability.
The Note Trustee may rely upon, and shall be protected in acting or
refraining from acting in reliance upon, any paper or document delivered to it
as being genuine and as having been signed or presented by the proper party or
parties. The Note Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Note Indenture at the request or direction
of any of the holders of the Notes unless such holders shall have offered to the
Note Trustee reasonable security or indemnity (including, without limitation,
the advancement of monies for out-of-pocket costs) against the costs, expenses
and liabilities which might be incurred by it in compliance with such request or
direction. The Note Trustee shall not be bound to make any investigation into
the facts or matters stated in any document but may, in its discretion, make
such further inquiry or investigation into such facts or matters as it may see
fit. If the Note Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the relevant books, records and
premises of the appropriate Owner Trustee, personally or by agent or attorney.
The Note Trustee may execute any of the trusts or powers under the Note
Indenture or perform any duties thereunder either directly or indirectly or by
or through agents or attorneys, and the Note Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney appointed
by it with due care.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Offered Bonds. The discussion does not purport to deal with the federal income
tax consequences to all categories of investors, some of which may be subject to
special rules. The discussion focuses primarily on investors who will hold the
Offered Bonds as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code, but much of the discussion is
applicable to other investors as well. Investors should note that, although
final regulations recently were released under the REMIC provisions of the Code
(the "REMIC Regulations") by the United States Treasury Department (the
"Treasury"), no currently effective regulations or other administrative guidance
has been issued with respect to certain provisions of the Code that are or may
be applicable to the Offered Bonds. Furthermore, the REMIC Regulations do not
address many of the issues that arise in connection with the formation and
operation of a REMIC. In addition, substantial uncertainty exists with respect
to the application to the Offered Bonds of the guidance provided by the Treasury
on original issue discount ("OID"). Hence, definitive guidance cannot be
provided with respect to many aspects of the tax treatment of the Offered Bonds.
Moreover, the summary is based on current law, and there can be no assurance
that the Internal Revenue Service (the "IRS") will not take positions that would
be materially adverse to investors. Finally, the summary does not purport to
address the anticipated state or local income tax consequences to investors of
owning and disposing of the Offered Bonds. Consequently, investors should
consult their own tax advisors in determining the federal, state or local,
foreign, and any other tax consequences to them of the purchase, ownership, and
disposition of the Offered Bonds.
For purposes of this discussion under "Certain Federal Income Tax
Considerations," the term "Bonds" refers to the Offered Bonds only. The Issuer
also is issuing the Series AR, BR, CR, DR, ER, FR, and GR Bonds (the "Residual
Bonds"), which represent certain interests in the Asset Pools to which they
relate but which do not have stated principal balances or interest entitlements.
The Residual Bonds are not offered hereby. The term "Bonds" as used in the
following discussion does not include the Residual Bonds.
REMIC QUALIFICATION
Elections will be made to treat each of seven separate Asset Pools as
separate real estate mortgage investment conduits ("REMICs") for federal income
tax purposes (the "Pool A REMIC," the "Pool B REMIC," the "Pool C REMIC," the
"Pool D REMIC," the "Pool E REMIC," the "Pool F REMIC," and the "Pool G REMIC").
Each Asset Pool, and thus each REMIC, will consist principally of the Notes of
the same alphabetical designation. Thus, for example, the Pool A REMIC will be
formed from the Asset Pool consisting principally of the Series A Notes. Hunton
& Williams, special tax counsel, will deliver its opinion on the Closing Date,
subject to the assumptions and representations set forth therein, that the Asset
Pools will qualify as REMICs and that the Bonds of the Series designated as A,
B, C, D, E, F or G will constitute "regular interests" in their respective
REMICs for federal income tax purposes.
In order for an Asset Pool to be eligible for REMIC status, substantially
all of the assets of the Asset Pool must consist of "qualified mortgages" and
"permitted investments" as of the close of the third month beginning after the
closing date and at all times thereafter (the "Asset Qualification Test"). A
REMIC will be deemed to satisfy the Asset Qualification Test if no more than a
de minimis amount of its assets (i.e., assets with an aggregate adjusted basis
that is less than one percent of the aggregate adjusted basis of all the REMIC's
assets) are assets other than qualified mortgages and permitted investments. A
qualified mortgage is any obligation that is principally secured by an interest
in real property and that is either transferred to the REMIC on the closing date
or purchased by the REMIC pursuant to a fixed price contract within a three-
month period thereafter. Because the Notes are principally secured by the
related Properties and will be acquired by the REMICs on the Closing Date, they
will be considered "qualified mortgages" for purposes of the REMIC Provisions of
the Code.
Permitted investments include cash-flow investments, foreclosure property,
and qualified reserve assets. Cash-flow investments are investments of amounts
received with respect to qualified mortgages for a temporary period (not to
exceed 13 months) before distribution to holders of regular or residual
interests in
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the REMIC. The cash flow and investment procedures to be followed under the Bond
Indenture with respect to each REMIC will be structured to meet the requirements
for cash-flow investments. Foreclosure property generally is property acquired
by a REMIC in connection with the default or imminent default of a qualified
mortgage. Foreclosure property may not be held for more than two years, unless
it is established to the satisfaction of the Treasury that an extension of the
two-year period is necessary for the orderly liquidation of the foreclosure
property. The Treasury may grant one or more extensions, but any such extension
will not extend the grace period beyond the date that is six years after the
date such foreclosure property is acquired. Qualified reserve assets are
intangible investment assets (other than REMIC residual interests) that are part
of a reasonably required reserve (a "Qualified Reserve Fund") maintained by the
REMIC to provide for full payment of expenses of the REMIC or amounts due on the
regular interests in the event of defaults or delinquencies on qualified
mortgages, lower than expected returns on cash-flow investments, or interest
shortfalls on qualified mortgages caused by prepayments of those mortgages. Each
Asset Pool may contain a reserve fund for payment of the expenses of the related
REMIC (although the assets of such funds cannot be used for the payment of
principal of and interest on the Bonds). Any such reserve fund will be designed
to be a Qualified Reserve Fund.
In addition to the foregoing asset qualification requirements, the various
interests in a REMIC also must satisfy certain conditions. Each of the interests
in a REMIC must be issued on the Closing Date (or within a specified 10-day
period) and belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions are made pro rata. A REMIC interest qualifies as a regular
interest if (i) it is issued on the startup day with fixed terms, (ii) it is
designated as a regular interest, (iii) it entitles its holder to a specified
principal amount and (iv) if it pays interest, which such interest either (a)
constitutes a specified non-varying portion of the interest on one or more of
the REMICs' qualified mortgages, (b) is payable at a fixed rate with respect to
the principal amount of the regular interest or (c) to the extent permitted
under the REMIC Regulations, is payable at a variable rate with respect to such
principal amount. Interest is payable at a single fixed rate on the Bonds.
Although the Make-Whole Premium potentially is payable with respect to the
Bonds, the REMIC Regulations provide that the payment on REMIC interests of
customary prepayment penalties received by the REMIC on its mortgage loans does
not prevent such interests from meeting the definition of REMIC regular
interests. Based on inquiries into the customary practices in the lending market
for long-term, fixed-rate commercial mortgage loans, the Issuer believes that
the Make-Whole Premium is a customary prepayment penalty.
Each series of Offered Bonds will constitute a single class of "regular
interests" in the REMIC of the same alphabetical designation, and each series of
the Residual Bonds relates to a single REMIC. Thus, each of the REMICs will have
a single class of regular interests and a single class of residual interests.
STATUS OF REGULAR BONDS FOR VARIOUS PURPOSES
Bonds held by a Thrift Institution will constitute "qualifying real
property loans" within the meaning of Code Section 593(d)(1) to the extent and
in the same proportion that the assets of the related REMIC would be so treated.
Bonds held by a REIT will constitute "real estate assets" within the meaning of
Code Section 856(c)(5)(A), and interest on the Bonds will be considered
"interests on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) to the extent
that and in the same proportion that, for both purposes, the assets and income
of the assets of the related REMIC qualify for each of the foregoing treatments.
If 95 percent or more of the assets of a REMIC constitute qualifying assets for
Thrift Institutions and REITs, the related Bonds will qualify for the
corresponding status in their entirety. It is anticipated that 95 percent or
more of the assets of the REMICs will constitute such qualifying assets. Bonds
held by a RIC will not constitute "Government securities" within the meaning of
Code Section 851(b)(4)(A)(i), nor will they constitute assets set forth in Code
Section 7701(a)(19)(C) for domestic building and loan associations. Bonds held
by certain financial institutions will constitute an "evidence of indebtedness"
within the meaning of Code Section 582(c)(1).
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EFFECT OF REMIC DISQUALIFICATION
If a REMIC failed to comply with one or more of the ongoing requirements of
the Code for REMIC status during one taxable year, the REMIC would not be
treated as a REMIC for such year and thereafter. If the REMIC status of an Asset
Pool were lost, the treatment of the Asset Pool and the related Bonds for
federal income tax purposes would be uncertain. The former REMIC might be
entitled to treatment as a grantor trust under the Code, in which case no
entity-level tax would be imposed on the former REMIC. However, there can be no
assurance that, in the event of REMIC disqualification, each Asset Pool or the
assets of the Issuer would not be treated as a taxable mortgage pool under Code
Section 7701(i) or an association taxable as a corporation, in which case part
or all of the income derived from the Notes likely would be subject to corporate
income tax before any distributions could be made to Bond Owners. The Code
authorizes the Treasury to issue regulations that address situations where a
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of a REMIC would occur
absent regulatory relief. Such regulations have not yet been issued. Investors
should be aware that any relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC's income for the
period of time in which the requirements for REMIC status are not satisfied.
REMIC-LEVEL TAXES
Income from the "prohibited transactions" of a REMIC are taxed directly to
the REMIC at a 100% rate. Net income from one prohibited transaction may not be
offset by losses from other prohibited transactions. Prohibited transactions
generally include: (i) the disposition of qualified mortgages other than
pursuant to (a) the repurchase of a defective mortgage, (b) the substitution for
a defective mortgage within two years of the Closing Date, (c) a substitution
for any qualified mortgage within three months of the Closing Date, (d) the
foreclosure, default, or imminent default of a qualified mortgage, (e) the
bankruptcy or insolvency of the REMIC or (f) a qualified liquidation of the
REMIC; (ii) the receipt of income from assets that are not the type of mortgages
or investments that a REMIC is permitted to hold; (iii) the receipt of
compensation for services by the REMIC; and (iv) the receipt of gain from
disposition of cash-flow investments other than pursuant to a qualified
liquidation of the REMIC. A disposition of a qualified mortgage or cash-flow
investment will not give rise to a prohibited transaction, however, if the
disposition is required to prevent default on a regular interest resulting from
a default on one or more of the REMIC's qualified mortgages. The REMIC
Regulations also provide that the modification of a mortgage loan generally will
not be treated as a disposition of that loan if it is occasioned by a default or
a reasonably foreseeable default, an assumption of the mortgage loan, or the
waiver of a due-on-sale or encumbrance clause.
In addition, a REMIC generally is subject to tax at a 100% rate on any
contribution to the REMIC after the Closing Date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the Closing Date, (ii) is made to facilitate a qualified liquidation, (iii)
is a payment in the nature of a guarantee, (iv) constitutes a contribution by
the holders of the Residual Bonds to a Qualified Reserve Fund for the payment of
REMIC expenses or (v) is otherwise permitted by Treasury regulations yet to be
issued. The structure and operation of the REMICs generally will be designed to
avoid the imposition of both the 100% tax on contributions and the 100% tax on
prohibited transactions.
To the extent that a REMIC derives certain types of income from foreclosure
property (generally, income relating to dealer activities of the REMIC), it will
be taxed on such income at the highest corporate income tax rate. It is not
anticipated that any of the REMICs will receive significant amounts of such
income.
CURRENT INCOME ON THE BONDS
General
The Bond Trustee will report annually to the IRS and to Bondholders of
record with respect to income accrued on the Bonds. In doing so, the Bond
Trustee will rely on determinations of income made by the Tax Administrator.
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Accrual of Income
Overview. The amount of income recognized in any period by the original
purchaser of a Bond will equal the amount of interest accrued on such Bond in
accordance with its terms. Bond Owners must use the accrual method of accounting
with respect to their income on the Bonds, even if they otherwise use the cash
method.
Under Code Section 1272(a)(6), which applies to the Bonds, the income
accrual on such Bonds is determined under a constant yield method that reflects
compounding and that takes into account the prepayment rate for the Notes
assumed in pricing the Bonds (the "Pricing Prepayment Assumption"). As a
technical matter, the income on a Bond may be characterized as OID income rather
than interest income, because of the possibility that the Make-Whole Premium
will be paid on the Bonds. However, the prepayment assumption used in pricing
the Bonds reflects the expectation that no prepayments would occur on the Notes.
Therefore, the Tax Administrator does not intend to take into account any
projected payments arising from a Make-Whole Premium in computing the yield on a
Bond. Consequently, the yield that the Tax Administrator will use in reporting
the taxable income on a Bond will equal its stated rate of interest. If a
Make-Whole Premium becomes payable, the Bond Owner must include such premium in
its taxable income on the date on which the fact and amount of such Make-Whole
Premium is determinable.
The Treasury recently issued new final regulations relating to OID (the
"Final Regulations"), replacing a set of proposed regulations issued in 1992.
The Final Regulations are effective for instruments issued on or after April 4,
1994. The Final Regulations do not provide guidance directly applicable to
instruments, such as the Bonds, that are governed by Code section 1272(a)(6).
Nonetheless, under the Final Regulations, the Bonds (i) could be considered as
issued with OID equal to the difference between the issue price of such Bonds
and the total amount of payments (including both principal and interest)
expected to be received thereon and (ii), as a technical matter, would be
subject to the rules applicable to instruments providing for contingent
payments.
The Final Regulations did not replace existing proposed regulations dating
from 1986 that relate to the treatment of contingent payments (the "Original
Contingent Payment Rules"). The Treasury has released new proposed regulations
relating to the accrual of income on debt instruments that provide for one or
more contingent payments (the "Unofficial Contingent Payment Regulations").
Although the Unofficial Contingent Payment Regulations were intended to replace
the Original Contingent Payment Rules, the Unofficial Contingent Payment
Regulations were withheld from publication pursuant to a request issued by
President Clinton to allow for review by appropriate officials appointed by the
Clinton administration. Because the Unofficial Contingent Payment Regulations
were withdrawn in January 1993 and to date have not yet been formally issued,
there can be no assurance that the Unofficial Contingent Payment Regulations
will be issued in their original form. However, assuming that the Bonds are sold
at par, the income of an original purchaser of a Bond in any period should be
the same under both the Unofficial Contingent Payment Regulations and the
Original Contingent Payment Rules.
Subsequent Owners. Under current law, a subsequent purchaser could acquire
a Bond with market discount or amortizable premium. For purposes of determining
market discount or amortizable premium, the Original Contingent Payment Rules
provide that the Make-Whole Premium be separated from the remainder of the Bond
(the "Non-Contingent Component"). If a subsequent purchaser were to acquire a
Bond for less than its outstanding principal balance, it would be treated as
having acquired the Non-Contingent Component with market discount. Market
discount would accrue currently at a constant yield based on the Pricing
Prepayment Assumption, but would be included in such purchaser's income in a
particular period only to the extent that such purchaser receives principal
payments in such period. If a subsequent purchaser were to acquire a Bond for a
price greater than its outstanding principal balance, it would be deemed to have
acquired the Non-Contingent Component with amortizable premium, which it could
use to offset its interest income over the life of the Bond. Such premium would
accrue under the constant yield method, based on the Pricing Prepayment
Assumption. Under the Original Contingent Payment Rules, a subsequent purchaser
of a Bond would include any Make-Whole Premium in its taxable income when the
fact and amount of the Make-Whole Premium became determinable, regardless of
whether it had acquired the Bond with market discount or amortizable premium.
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<PAGE> 46
Under the Unofficial Contingent Payment Regulations, a subsequent Bond
Owner would be treated, for purposes of computing its income thereon, as if it
were an initial purchaser, and neither the market discount nor the amortizable
premium rules would apply. However, because the Unofficial Contingent Payment
Regulations would be inconsistent with current law with respect to the treatment
of market discount and amortizable premium, it is not anticipated that such
Regulations, if finalized, would apply retroactively.
In view of the complexities and current uncertainties as to income
inclusions with respect to the Bonds, particularly with respect to the
contingent payment accounting rules that might apply, each investor should
consult its own tax advisor to determine the appropriate amount and method of
income inclusion on such Bonds for federal income tax purposes.
GAIN OR LOSS ON DISPOSITION
If a Bond is sold, the Bond Owner thereof will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the Bond. The adjusted basis of a Bond generally will equal its cost to the
Bond Owner, increased by any OID or market discount previously includible in
such Bond Owner's gross income with respect to the Bond (including any interest
income technically characterized as OID), and reduced by the portion of the
basis of the Bond allocable to payments on the Bond previously received by such
Bond Owner. Under current law, any gain on the sale of a Bond would be ordinary
income to the extent of accrued but unrecognized market discount but otherwise
would be capital gain to a Bond Owner who holds such Bond as a capital asset.
Any gain on the sale or disposition of a Bond generally would be treated as
ordinary interest income under the Unofficial Contingent Payment Regulations,
but, since such regulations would be inconsistent with current law with respect
to the characterization of gain, such Regulations, if finalized, would not be
expected to apply retroactively to the Bonds. Any loss on the disposition of a
Bond generally would be a capital loss to a Bond Owner who holds such Bond as a
capital asset. However, any gain or loss on the disposition of a Bond by a Bond
Owner that is a bank, thrift, or similar institution described in Code Section
582 would be treated as ordinary gain or loss.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
Bond Owners that are individuals, estates, or trusts, including those that
own such Bonds indirectly through certain pass-through entities, will be subject
to limitations with respect to certain itemized deductions described in Code
Section 67, to the extent that such deductions, in the aggregate, do not exceed
two percent of the holder's adjusted gross income. Because each of the REMICs
will be considered as a "single-class REMIC" under temporary Treasury
regulations, each Bond Owner will be allocated a share of the related REMIC's
"allocable investment expenses", which will be subject to those limitations.
Those expenses will consist principally of the fees paid to the Bond Trustee and
the Tax Administrator (insofar as such fees are attributable to the related
REMIC) but also may include extraordinary expenses of the related REMIC if such
expenses arise. The Bond Trustee or the Tax Administrator will provide each Bond
Owner with an annual statement indicating such Bond Owner's proportionate share
of the expenses of the Bond Trustee and the Tax Administrator under the Bond
Indenture. To the extent that the income reported to the Bond Owner was grossed
up for such expenses, the Bond Owner may deduct its share of such expenses
subject to the limitations described in this paragraph. To the extent that the
income reported to the Bond Owner was net of such expenses, the Bond Owner will
be required to increase its taxable income by expenses disallowed under such
limitations. Furthermore, itemized deductions of individual Bond Owners will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate return
for taxable year 1991 and adjusted for inflation each year thereafter) or (ii)
80% of such itemized deductions otherwise allowable. As a result, such Bond
Owners may have aggregate taxable income in excess of the aggregate amount of
interest payments received on their Regular Bonds. Investors who are
individuals, trusts, or estates should consult their own advisors as to the
suitability of an investment in the Regular Bonds.
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ADMINISTRATIVE MATTERS
The Tax Administrator will prepare the required federal, state, and local
income tax and information returns for the REMICs, which will be filed by the
Issuer. The REMICs will be subject to the procedural and administrative rules of
the Code applicable to partnerships, including the determination of any
adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit by the IRS in a unified administrative proceeding. The Tax
Administrator will hold a Residual Bond in each REMIC and will act as the
REMIC's "tax matters person" to represent that REMIC as a whole for certain
administrative and judicial purposes. If the Tax Administrator is unable to
fulfill its duties as tax matters person and fails to designate a successor, the
holder of the largest Percentage Interest of the Residual Bonds relating to a
particular REMIC shall become the successor tax matters person of such REMIC.
TAXATION OF CERTAIN FOREIGN INVESTORS
Income on Bonds of Bond Owners who are "non-U.S. persons" (as defined
below) generally will be considered "portfolio interest" and, therefore,
generally will not be subject to 30% United States withholding tax, provided
that such foreign person (i) is not a "10-percent shareholder" in the Issuer
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) that is related to the Issuer
and (ii) provides the Bond Trustee or the person who otherwise would be required
to withhold tax from such income (the "Withholding Agent") with an Internal
Revenue Service Form W-8 or a substitute statement, signed under penalties of
perjury, identifying the beneficial owner and stating, among other things, that
the beneficial owner of the Bond is a non-U.S. person (a "Foreign Person
Certification"). If a Foreign Person Certification is not provided, a 30%
withholding tax will apply unless it is reduced or eliminated pursuant to an
applicable tax treaty or unless the income on the Regular Bond is effectively
connected with the conduct of a trade or business within the United States by
such non-U.S. person. In the case of an applicable tax treaty, the Bond Owner
must provide the Withholding Agent with an Internal Revenue Service Form 1001
and will be subject to United States federal income tax withholding except as
provided by such treaty. In the case where the income on a Bond is effectively
connected with the conduct of a United States trade or business, the Bond Owner
must provide the Withholding Agent with an Internal Revenue Service Form 4224
and will be subject to United States federal income tax at regular rates. For
the purposes of this discussion, the term "non-U.S. person" means any person
other than a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to United States federal income tax regardless of the source of its
income.
Recently enacted tax legislation denies portfolio interest treatment to
certain types of contingent interest. That legislation should not apply to
Make-Whole Premiums received by a non-U.S. person, based upon an exception for
contingent payments the amount of which is determined with reference to the
current yield on publicly traded property. However, the scope of the new
legislation is not entirely clear. Investors who are non-U.S. persons should
consult their own tax advisors regarding the specific tax consequences to them
of potential Make-Whole Premium payments with respect to a Bond.
BACKUP WITHHOLDING
Under federal income tax law, a Bond Owner may be subject to "backup
withholding" under certain circumstances. Backup withholding may apply to a Bond
Owner that is a United States person if the Bond Owner, among other things, (i)
fails to furnish its social security number or other taxpayer identification
number ("TIN") to the Withholding Agent, (ii) furnishes the Withholding Agent
with an incorrect TIN, (iii) fails to report properly interest and dividends or
(iv) under certain circumstances, fails to provide the Withholding Agent with a
certified statement, signed under penalties of perjury, that the TIN provided to
the Withholding Agent is correct and that the Bond Owner is not subject to
backup withholding. Backup withholding may apply, under certain circumstances,
to a Bond Owner that is a foreign person if the Bond Owner fails to provide the
Withholding Agent with a Foreign Person Certification. Backup withholding
applies to "reportable payments", which include, in the case of the Bonds, all
payments to the extent of accrued OID, as well as distributions of proceeds from
a sale of the Bonds. The backup withholding rate is 31%. Backup withholding,
however, does not apply to payments on a Bond made to certain exempt recipients,
such as
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tax-exempt organizations, and to certain non-U.S. persons. Bond Owners should
consult their tax advisors for additional information concerning the potential
application of backup withholding to payments received by them with respect to a
Bond.
DUE TO THE COMPLEXITY OF THESE RULES AND THE CURRENT UNCERTAINTY AS TO THE
MANNER OF THEIR APPLICATION TO THE BONDS, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE BONDS.
ERISA CONSIDERATIONS
ERISA imposes certain restrictions on employee benefit plans subject
thereto ("Plans"), and on persons who are parties in interest or disqualified
persons with respect to such Plans, that may apply to a Plan's proposed
investment in the Bonds. Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under Code Section 410(d)),
are not subject to the restrictions of ERISA, and assets of such plans may be
invested in the Bonds without regard to the ERISA considerations described
below, subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under Code Section 401(a) and
exempt from taxation under Code Section 501(a) is subject to the prohibited
transaction rules set forth in Code Section 503.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
Any Plan fiduciary that proposes to cause a Plan to acquire any of the
Bonds should consult with its counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of such Bonds.
The U.S. Department of Labor has granted to Morgan Stanley & Co.
Incorporated and Bear, Stearns & Co. Inc. (collectively the "Underwriter")
administrative exemptions (Prohibited Transaction Exemption 90-24; Exemption
Application No. D-8019, 55 Fed. Reg. 20,548 (1990)(Morgan Stanley); Prohibited
Transaction Exemption 90-30, Exemption Application No. D-8207, 55 Fed. Reg.
21,461 (1990)(Bear, Stearns)) (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Code Section
4975 with respect to the initial purchase, the holding and the subsequent resale
by Plans of certificates denominated as debt instruments representing interests
in a REMIC trust such as the Asset Groups (as defined and established in the
Bond Indenture), that are issued by and are debt obligations of REMICs
consisting of certain receivables, loans and other obligations ("Collateral")
that meet the conditions and requirements of the Exemption. The Exemption covers
collateral such as the Notes.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(i) the acquisition of the Bonds by a Plan is on terms (including the
price for the Bonds) that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party;
(ii) the rights and interests evidenced by the Bonds acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Bonds;
(iii) the Bonds acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from any of S&P, Moody's, D&P or Fitch Investors Service, Inc.
("Fitch");
(iv) the Bond Trustee must not be an affiliate of any member of the
Restricted Group (as defined below);
(v) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Bonds represents not more than
reasonable compensation for underwriting the Bonds; the sum of all payments
made to and retained by the Issuer pursuant to the Note Assignment
represents
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not more than the fair market value of such collateral; and the sum of all
payments made to and retained by the Note Trustee and Bond Trustee
represent not more than reasonable compensation for such persons' services
under the respective indenture and reimbursements of their respective
reasonable expenses in connection therewith; and
(vi) the Plan investing in the Bonds is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act.
It is a condition to the issuance of the Bonds offered hereby that
they be rated at least "A3" by Moody's, "BBB+" by S&P and "A-" by D&P. The
ratings by Moody's and D&P would be in one of the three highest generic
rating categories by such respective rating agencies, while the rating by
S&P would be lower than one of the three highest rating categories of such
rating agency.
Each REMIC must also meet the following requirements:
(i) the REMIC's assets must consist solely of assets of the type that
have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of Bonds; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Bonds.
Moreover, the Exemption may provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least 50 percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least 50 percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the Collateral contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
25 percent of all of the certificates of that class outstanding at the time of
the acquisition; and (iv) immediately after the acquisition, no more than 25
percent of the assets of the Plan with respect to which such person is a
fiduciary are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. Such relief under
the Exemption is not available for Plans sponsored by the Issuer, the
Underwriter, the Bond Trustee, the Note Trustee, any obligor with respect to
Notes pledged to any of the REMICs constituting more than five percent of the
aggregate unamortized principal balance of the assets of any of the REMICs, or
any affiliate of such parties (the "Restricted Group").
Kmart believes that the conditions of the Exemption within its control will
be satisfied with respect to the purchase of the Bonds by Plans. Prospective
Plan investors should consult with their legal advisors concerning the impact of
ERISA and the Code, the applicability of the Exemption or any other regulatory
or administrative exemption from the prohibited transaction provisions of ERISA
and the Code (including, but not limited to, the classification of the Bonds as
debt and not equity for purposes of regulations under ERISA defining the term
"plan assets"), and the potential consequences in their specific circumstances,
prior to making an investment in the Bonds. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Bonds is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
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UNDERWRITING
Under the terms of and subject to the conditions contained in the
Underwriting Agreement, Morgan Stanley & Co. Incorporated and Bear, Stearns &
Co. Inc. (the "Underwriters") have severally agreed to purchase from the Issuer
the percentage of the Bonds and the aggregate principal amount of the Bonds, in
each case as set forth opposite its name below.
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE TOTAL AGGREGATE
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT
UNDERWRITER EACH SERIES OF BONDS
---------------------------------------------- ------------------- ----------------
<S> <C> <C>
Morgan Stanley & Co. Incorporated............. 50% $ 87,750,000
Bear, Stearns & Co. Inc. ..................... 50 87,750,000
--- ----------------
Total.................................... 100% $175,500,000
============== =============
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Bonds is subject to, among other things,
the approval of certain legal matters by counsel and certain other conditions.
The Underwriters are obligated to take and pay for all of the Bonds to be
purchased by them if any are taken.
The Underwriters propose initially to offer all or part of the Bonds
directly to the public at the public offering price per Bond designation set
forth on the cover page of this Prospectus and may offer a portion of the Bonds
to dealers at a price which represents a concession not in excess of the amounts
set forth below for the respective designations of Bonds. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of the amounts
set forth below for the respective designations of Bonds to certain other
dealers. After the initial public offering, the public offering price and such
concessions may be changed.
<TABLE>
<CAPTION>
BOND CONCESSION REALLOWANCE
DESIGNATION TO DEALERS CONCESSION
----------------------------------------------- ---------- -----------
<S> <C> <C>
Series A....................................... 1.00% 0.50%
Series B....................................... 1.50 0.75
Series C....................................... 2.00 1.00
Series D....................................... 2.50 1.25
Series E....................................... 3.00 1.50
Series F....................................... 4.00 2.50
Series G....................................... 5.00 2.50
</TABLE>
The Owner Participant has made available an amount equal to 2.0% of the
purchase price paid by the Owner Trusts to acquire their respective interests in
the Properties, a portion of which was used to pay certain transaction expenses
in connection with the Interim Financing and the remainder of which shall be
used to reimburse the Issuer and Kmart for underwriting discounts and
commissions and certain other transaction expenses in connection with the
offering of the Bonds. Kmart has agreed to pay First Fidelity Mortgage
Corporation ("First") and Winthrop Financial Associates ("Winthrop") a fee for
financial advisory services in an aggregate amount equal to 1.5% of the purchase
price paid by the Owner Trusts to acquire their respective interests in the
Properties. To the extent certain transaction expenses, including underwriting
discounts and commissions, exceed the amount reimbursable by the Owner
Participant, such excess will be paid by Kmart and may be offset against the
financial advisory fees payable to First and Winthrop.
Kmart has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Kmart does not intend to apply for listing of the Bonds on a national
securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Bonds, as permitted by applicable laws
and regulations. No Underwriter is obligated, however, to make a market in the
Bonds and any
49
<PAGE> 51
such market may be discontinued at any time at the sole discretion of such
Underwriter. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Bonds.
LEGAL OPINIONS
Hunton & Williams, New York, New York has acted as special tax counsel to
Kmart, solely with respect to the discussion set forth in "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein. Certain legal matters will be passed upon for
Kmart by Dickinson, Wright, Moon, Van Dusen & Freeman, Detroit, Michigan and for
the Underwriters by Brown & Wood, New York, New York. Brown & Wood also has
acted as special counsel to the Issuer, solely with respect to the validity of
the Bonds offered hereby.
RATINGS
It is a condition to the issuance of the Bonds offered hereby that they be
rated at least "A3" by Moody's Investors Service, Inc., "BBB+" by Standard and
Poor's Ratings Group and "A-" by Duff and Phelps Credit Rating Co. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of similar
ratings on different types of securities. The ratings take into account the
structural and legal aspects associated with the Bonds, the characteristics of
the Leases, and the credit quality of Kmart. The ratings on the Bonds do not
address the payment to the Bondholders of any Make-Whole Premium or any payment
to the Bondholders of interest at the Default Rate.
Moody's, S&P and D&P have assigned the ratings of "A3", "BBB+" and "A-",
respectively, to the senior unsecured debt of Kmart. There can be no assurance
that the ratings set forth above may not be changed by the respective rating
agency at any time.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the Annual Report on Form 10-K of Kmart for the year ended January
26, 1994, have been so incorporated in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of said firm as
experts in auditing and accounting. The appraisals regarding the Properties
referenced in the Prospectus were prepared by Marshall and Stevens Incorporated,
independent appraisers.
50
<PAGE> 52
INDEX OF PRINCIPAL TERMS
Set forth below is a list of defined terms used in this Prospectus and the
pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
TERM PAGE(S)
- ------------------------------------------------------------------------------- -------------
<S> <C>
Asset Pools.................................................................... 8
Asset Qualification Test....................................................... 41
Bankruptcy Code................................................................ 22
Bond Indenture................................................................. 4
Bond Indenture Events of Default............................................... 31
Bond Majority in Interest...................................................... 27
Bond Owner..................................................................... 8
Bond Trustee................................................................... 4
Bondholders.................................................................... 4
Bonds.......................................................................... Cover, 4
Borders........................................................................ 10
Cede........................................................................... 3, 8
Closing Date................................................................... 4
Code........................................................................... 9
Collateral..................................................................... 47
Collateral Assignment.......................................................... 6
Commission..................................................................... 3
Company........................................................................ 10
D&P............................................................................ 9
Default Interest............................................................... 28
Default Rate................................................................... 20
Definitive Bonds............................................................... 27
Discounted Basic Rents......................................................... 24
DTC............................................................................ 8
ERISA.......................................................................... 9
Estate for Years Interests..................................................... 7
Excepted Payments.............................................................. 35
Excepted Rights................................................................ 36
Exchange Act................................................................... 3
Exemption...................................................................... 47
Final Regulations.............................................................. 44
First.......................................................................... 49
Fitch.......................................................................... 47
Foreign Person Certification................................................... 46
Indirect Participants.......................................................... 26
Initial Noteholder............................................................. 8
Interim Financing.............................................................. 8
Interim Notes.................................................................. 8
IRS............................................................................ 41
Issuer......................................................................... Cover, 4
Kmart.......................................................................... Cover, 10
Lease Events of Default........................................................ 23
Leasehold Estates.............................................................. 7
Lease.......................................................................... 7
Lease Assignment............................................................... 7
Make-Whole Premium............................................................. 30
Moody's........................................................................ 9
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
TERM PAGE(S)
- ------------------------------------------------------------------------------- -------------
<S> <C>
Mortgage....................................................................... 7
Net Worth Standard............................................................. 22
Non-Contingent Component....................................................... 44
Note Assignment................................................................ 6
Note Indenture Events of Default............................................... 36
Note Indenture................................................................. 6
Note Majority in Interest...................................................... 36
Note Trustee................................................................... 7
Note Trust Estate.............................................................. 7
Notes.......................................................................... 6
OID............................................................................ 41
Offered Bonds.................................................................. 8
Options to Lease............................................................... 15
Original Contingent Payment Rules.............................................. 44
Owner Participant.............................................................. 6
Owner Trustee.................................................................. 6
Owner Trusts................................................................... 6
PACE........................................................................... 11
Participants................................................................... 26
PayLess........................................................................ 11
Payment Date................................................................... 4
Permitted Liens................................................................ 21
Plans.......................................................................... 47
Pledge......................................................................... 6
Pricing Prepayment Assumption.................................................. 44
Proceeds....................................................................... 8
Properties..................................................................... Cover, 7
Property....................................................................... Cover
Pool A REMIC................................................................... 41
Pool B REMIC................................................................... 41
Pool C REMIC................................................................... 41
Pool D REMIC................................................................... 41
Pool E REMIC................................................................... 41
Pool F REMIC................................................................... 41
Pool G REMIC................................................................... 41
Qualified Reserve Fund......................................................... 42
Record Date.................................................................... 4
Registration Statement......................................................... 3
Remainder Purchaser............................................................ 8
REMIC Regulations.............................................................. 41
REMICs......................................................................... Cover, 8, 41
Rental Payments................................................................ 5
Residual Bonds................................................................. 41
Restricted Group............................................................... 48
Retirement Price............................................................... 23
S&P............................................................................ 9
Sale Agreement................................................................. 21
Sale-Leaseback Transactions.................................................... 6
Scheduled Payment Dates........................................................ 34
Securities Act................................................................. 3
Series A Bonds................................................................. 4
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
TERM PAGE(S)
- ------------------------------------------------------------------------------- -------------
<S> <C>
Series B Bonds................................................................. 4
Series C Bonds................................................................. 4
Series D Bonds................................................................. 4
Series E Bonds................................................................. 4
Series F Bonds................................................................. 4
Series G Bonds................................................................. 4
Series A Notes................................................................. 6
Series B Notes................................................................. 6
Series C Notes................................................................. 6
Series D Notes................................................................. 6
Series E Notes................................................................. 6
Series F Notes................................................................. 6
Series G Notes................................................................. 6
Sinking Fund................................................................... 4
Substitute Property............................................................ 25
Supplemental Bond Indenture.................................................... 33
Supplemental Note Indenture.................................................... 39
Tax Administrator.............................................................. 9
TCMYI.......................................................................... 30
Termination Value.............................................................. 25
TIN............................................................................ 46
TPH............................................................................ 11
Treasury....................................................................... 41
Trust Agreement................................................................ 6
Trust Indenture Act............................................................ 32
Underwriters................................................................... 49
Unofficial Contingent Payment Regulations...................................... 44
Walden......................................................................... 10
Winthrop....................................................................... 49
Withholding Agent.............................................................. 46
</TABLE>
53
<PAGE> 55
[KMART LOGO]
<PAGE> 56
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.*
The following expenses are expected to be incurred in connection with this
Registration Statement:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 56,228.00
Printing Fee................................................... 159,000.00*
Blue Sky Fees and Expenses..................................... 25,000.00*
Accounting Fees................................................ 30,000.00*
Rating Agency Fees............................................. 225,000.00*
Legal Fees..................................................... 1,633,000.00*
Trustee's Fees and Expenses.................................... 55,000.00*
Financial Advisory Fees........................................ 1,000,000.00*
Miscellaneous.................................................. 50,000.00*
-------------
Total..................................................... $3,233,228.00*
============
</TABLE>
- -------------------------
* All of the above items except the registration fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's By-Laws and the Michigan Business Corporation Act permit
the Registrant's officers and directors to be indemnified under certain
circumstances for expenses and, in some instances, for judgments, fines or
amounts paid in settlement of civil, criminal, administrative and investigative
suits or proceedings, including those involving alleged violations of the
Securities Act of 1933 (the "Act"). In addition, the Registrant maintains
directors' and officers' liability insurance which, under certain circumstances,
would cover alleged violations of the Act. Insofar as indemnification for
liabilities arising under the Act may be permitted to officers and directors
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
Therefore, in the event that a claim for such indemnification is asserted by any
officer or director the Registrant (except insofar as such claim seeks
reimbursement by the Registrant of expenses paid or incurred by an officer or
director in the successful defense of any action, suit or proceeding) will,
unless the matter has theretofore been adjudicated by precedent deemed by the
Registrant to be controlling, submit to a court of appropriate jurisdiction the
question of whether or not indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of FGHK, Inc.*+
3.2 By-Laws of FGHK, Inc.*+
4.1 Form of Collateral Trust Indenture.*
4.2 Form of First Supplemental and Restated Trust Indenture, Assignment of Lease and
Rents and Security Agreement.*
4.3 Form of Secured Lease Bonds, Series A, B and C -- included as part of Exhibit 4.1.*
4.4 Form of Notes, Series A, B and C -- included as part of Exhibit 4.2.*
4.5 Mortgage.*
4.6 Form of Beneficial Interest Assignment.*
4.7 Form of Assignment Agreement.*
</TABLE>
II-1
<PAGE> 57
<TABLE>
<S> <C>
4.8 Assignment of Rights.*
4.9 Form of First Amendment to Assignment of Rights.*
5.1 Opinion of Brown & Wood as to the legality of the securities being registered.*
8.1 Opinion of Hunton & Williams as to tax matters.*
12 Statement of computation of Earnings to Fixed Charges.*
23.1 Consent of Price Waterhouse.*
23.2 Consent of Hunton & Williams -- included in Exhibit 8.1.*
23.3 Consent of Brown & Wood -- included in Exhibit 5.1.*
23.4 Consent of Dickinson, Wright, Moon, Van Dusen & Freeman.*
23.5 Consent of Marshall & Stevens Incorporated.*
24 Power of Attorney.*
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Bond
Trustee.*
99.1 Lease.*
99.2 Form of First Amendment to Lease.*
99.3 Ground Lease between Homart Community Centers, Inc., a Delaware corporation, and
Kmart Corporation dated as of July 16, 1992, with respect to property located in San
Diego, California.*
99.4 Ground Lease between Ventura Pacific Capital Group VI, a California limited
partnership, and Kmart Corporation dated as of October 7, 1992, with respect to
property located in Moorpark, California.*
99.5 Master Indemnification Agreement.*
99.6 First Amendment to Master Indemnification Agreement.*
</TABLE>
- -------------------------
* Previously filed and incorporated herein by reference.
+ Corporate name change to Kmart Funding Corporation is pending.
ITEM 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(l) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
B. FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY REFERENCE
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE> 58
C. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Debt Securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 59
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. 6 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. 6 to the Registration Statement has been signed below by the following
persons in the capacities indicated on August 19, 1994.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------- ---------------------------
<C> <S>
/S/ JOSEPH E. ANTONINI* Chairman of the Board,
- --------------------------- President (Principal
(JOSEPH E. ANTONINI) Executive Officer) and
Director
/S/ THOMAS F. MURASKY* Executive Vice President
- --------------------------- (Principal Financial and
(THOMAS F. MURASKY) Accounting Officer)
/S/ LILYAN H. AFFINITO* Director
- ---------------------------
(LILYAN H. AFFINITO)
Director
- ---------------------------
(JOSEPH A. CALIFANO, JR.)
/S/ WILLIE C. DAVIS* Director
- ---------------------------
(WILLIE C. DAVIS)
/S/ ENRIQUE C. FALLA* Director
- ---------------------------
(ENRIQUE C. FALLA)
/S/ JOSEPH P. FLANNERY* Director
- ---------------------------
(JOSEPH P. FLANNERY)
/S/ DAVID B. HARPER* Director
- ---------------------------
(DAVID B. HARPER)
/S/ F. JAMES MCDONALD* Director
- ---------------------------
(F. JAMES MCDONALD)
/S/ RICHARD S. MILLER* Director
- ---------------------------
(RICHARD S. MILLER)
/S/ J. RICHARD MUNRO* Director
- ---------------------------
(J. RICHARD MUNRO)
/S/ DONALD S. PERKINS* Director
- ---------------------------
(DONALD S. PERKINS)
/S/ GLORIA M. SHATTO* Director
- ---------------------------
(GLORIA M. SHATTO)
/S/ JOSEPH R. THOMAS* Director
- ---------------------------
(JOSEPH R. THOMAS)
*By: /S/ NANCIE W. LADUKE
NANCIE W. LADUKE
Attorney-in-fact
</TABLE>
II-4
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------- --------------------------------------------------------------------------- ----------
<S> <C>
1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of FGHK, Inc.*+
3.2 By-Laws of FGHK, Inc.*+
4.1 Form of Collateral Trust Indenture.*
4.2 Form of First Supplemental and Restated Trust Indenture, Assignment of
Lease and Rents and Security Agreement.*
4.3 Form of Secured Lease Bonds, Series A, B and C -- included as part of
Exhibit 4.1.
4.4 Form of Notes, Series A, B and C -- included as part of Exhibit 4.2.*
4.5 Mortgage.*
4.6 Form of Beneficial Interest Assignment.*
4.7 Form of Assignment Agreement.*
4.8 Assignment of Rights.*
4.9 Form of First Amendment to Assignment of Rights.*
5.1 Opinion of Brown & Wood as to the legality of the securities being
registered.*
8.1 Opinion of Hunton & Williams as to tax matters.*
12 Statement of computation of Earnings to Fixed Charges.*
23.1 Consent of Price Waterhouse.
23.2 Consent of Hunton & Williams -- included in Exhibit 8.1.*
23.3 Consent of Brown & Wood -- included in Exhibit 5.1.1.*
23.4 Consent of Dickinson, Wright, Moon, Van Dusen & Freeman.*
23.5 Consent of Marshall & Stevens Incorporated.*
24 Power of Attorney.*
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of
the Bond Trustee.*
99.1 Lease.*
99.2 Form of First Amendment to Lease.*
99.3 Ground Lease between Homart Community Centers, Inc., a Delaware
corporation, and Kmart Corporation dated as of July 16, 1992, with respect
to property located in San Diego, California.*
99.4 Ground Lease between Ventura Pacific Capital Group VI, a California limited
partnership, and Kmart Corporation dated as of October 7, 1992, with
respect to property located in Moorpark, California.*
99.5 Master Indemnification Agreement.*
99.6 First Amendment to Master Indemnification Agreement.*
</TABLE>
- -------------------------
* Previously filed and incorporated herein by reference.
+ Corporate name change to Kmart Funding Corporation is pending.
<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. 6 to the Registration Statement on Form
S-3 of our report dated March 15, 1994, which appears on Annex V page V-21 of
Kmart Corporation's definitive Proxy Statement dated April 28, 1994, which is
incorporated by reference in Kmart Corporation's Annual Report on Form 10-K
for the year ended January 26, 1994. We also consent to the incorporation by
reference of our report on the Financial Statement Schedules, which appears on
page 11 of such Annual Report on Form 10-K. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
Price Waterhouse
Detroit, Michigan 48243
August 19, 1994
