<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1995
REGISTRATION NO. 33-60057
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
KMART CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-0729500
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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:
ERIK J. STONE CYNTHIA A. JOEL S. KLAPERMAN
MOORE SHEARMAN & STERLING 599
DICKINSON, WRIGHT, MOON, LEXINGTON AVENUE NEW
VAN DUSEN & FREEMAN 500 YORK, NEW YORK 10022
WOODWARD AVENUE, SUITE
4000 DETROIT, MICHIGAN
48226
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable following 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. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH SERIES OF AMOUNT OF
SECURITIES TO BE AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM REGISTRATION
REGISTERED REGISTERED OFFERING PRICE AGGREGATE OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pass Through Certifi-
cates................... $210,000,000 100% $210,000,000 $72,414(2)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for purpose of calculating the registration fee.
(2) 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 SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject To Completion)
Issued June 26, 1995 $210,000,000
Kmart Corporation
1995-K Pass Through Trusts
PASS THROUGH CERTIFICATES, 1995-K3 AND 1995-K4
----------
Each Certificate offered hereby will represent a fractional undivided
interest in one of two Kmart Corporation 1995-K Pass Through Trusts (the "Pass
Through Trusts") to be formed pursuant to two separate pass through trust
agreements between Kmart Corporation ("Kmart") and Shawmut Bank Connecticut,
National Association (the "Trustee"), as trustee of each Pass Through Trust.
The property of each Pass Through Trust will consist of mortgage notes (the
"Mortgage Notes") issued on a non-recourse basis by certain owner trustees (the
"Owner Trustees") of four separate owner trusts in connection with 18 separate
leveraged lease transactions to finance not more than 90% of the cost to each
Owner Trustee of its interest in certain land and improvements described herein
(each such interest being a "Property" and collectively, the "Properties")
which will be leased to Kmart.
The Mortgage Notes in respect of each Property will be issued in two series.
Each Pass Through Trust will purchase one series of the Mortgage Notes issued
with respect to each Property such that all of the Mortgage Notes held in each
Pass Through Trust will have an interest rate corresponding to the interest
rate applicable to the Certificates issued by such Pass Through Trust. The
maturity dates of the Mortgage Notes acquired by each Pass Through Trust will
occur on or before the final distribution date applicable to the Certificates
issued by such Pass Through Trust. The Mortgage Notes with respect to each
Property will be secured by a mortgage of the related Owner Trustee's interest
in such Property and by an assignment of certain of such Owner Trustee's rights
under the lease related thereto, including the right to receive rent and
certain other amounts payable by Kmart thereunder. Although neither the
Certificates nor the Mortgage Notes are direct obligations of, or guaranteed
by, Kmart, the amounts unconditionally payable by Kmart under each lease will
be sufficient to pay in full when due all payments required to be made on the
related Mortgage Notes held in the Pass Through Trusts.
Interest paid on the Mortgage Notes held in each Pass Through Trust will be
passed through to the Certificateholders of such Pass Through Trust on January
2 and July 2 of each year, commencing January 2, 1996, at the rate per annum
set forth below applicable to such Pass Through Trust until the final
distribution date for such Pass Through Trust set forth below. Principal
payments on the Mortgage Notes held in Pass Through Trusts 1995-K3 and 1995-K4
will be passed through to the Certificateholders of each such Pass Through
Trust in scheduled amounts on January 2 or July 2, or both, of each year,
commencing on the initial scheduled principal distribution date, and continuing
until the final distribution date, for such Pass Through Trust set forth below.
For circumstances under which distributions to the Certificateholders may be
made prior to the applicable final distribution date, see "Description of the
Certificates--Payments and Distributions".
----------
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
PASS THROUGH PRINCIPAL INTEREST PRINCIPAL FINAL PRICE TO
CERTIFICATES AMOUNT RATE DISTRIBUTION DATE DISTRIBUTION DATE PUBLIC(1)(2)
- ------------ --------- -------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
1995-K3 $ % 100%
1995-K4 100
</TABLE>
- -----
(1) Plus accrued interest, if any, at the applicable interest rate from ,
1995.
(2) The underwriting commission varies by Pass Through Trust and aggregates
$ , which constitutes % of the principal amount of the Certificates.
The underwriting commission and certain other expenses relating to the
offering, estimated at $ , will be paid by Kmart (other than certain
expenses to be paid by the Owner Trustees). All of the proceeds from the
sale of the Certificates will be used to purchase the Mortgage Notes from
the Owner Trustees.
----------
The Certificates 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 Shearman & Sterling, counsel for the Underwriters. It
is expected that delivery of the Certificates in book-entry form will be made
on or about , 1995 through the facilities of The Depository Trust Company,
against payment therefor in immediately available funds.
----------
MORGAN STANLEY & CO. GOLDMAN, SACHS & CO.
Incorporated
June , 1995
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR
ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR THE SOLICITATION OF AN OFFER IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 3
Reports to Certificateholders by the Trustee............................... 3
Incorporation of Certain Documents by Reference............................ 3
Prospectus Summary......................................................... 4
The Company................................................................ 9
Selected Financial Information............................................. 10
Use of Proceeds............................................................ 11
Structure of the Transaction............................................... 11
The Properties............................................................. 12
Diagram of Payments........................................................ 13
Description of the Certificates............................................ 14
Description of the Mortgage Notes.......................................... 26
Description of the Leases.................................................. 35
Certain Federal Income Tax Consequences.................................... 41
Certain Connecticut Taxes.................................................. 44
ERISA Considerations....................................................... 44
Underwriting............................................................... 45
Rating..................................................................... 46
Legal Opinions............................................................. 46
Experts.................................................................... 46
Appendix--Glossary of Certain Terms........................................ A-1
</TABLE>
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING MAY BE EFFECTED IN THE OPEN MARKET OR OTHERWISE, AND
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
AVAILABLE INFORMATION
Kmart Corporation ("Kmart" or the "Company") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661 and Seven 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, D.C.
20549, upon payment of prescribed rates. Kmart's common stock is listed on the
New York Stock Exchange, the Chicago Stock Exchange and the Pacific Stock
Exchange. Reports, proxy statements and other information can be inspected and
copied at the New York Stock Exchange, 20 Broad Street, New York, NY 10005, the
Chicago Stock Exchange, 440 South LaSalle Street, Chicago, IL 60605 and 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 Certificates. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. 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, D.C. 20549, and copies thereof may be
obtained from the Commission upon payment of prescribed rates.
REPORTS TO CERTIFICATEHOLDERS BY THE TRUSTEE
Unless and until Definitive Certificates are issued, Shawmut Bank
Connecticut, National Association, as trustee for the holders of the
Certificates with respect to each Pass Through Trust, will provide to
participants in The Depository Trust Company certain periodic statements
concerning distributions made with respect to such Pass Through Trust. See
"Description of the Certificates--Book-Entry Registration" and "--Reports to
Certificateholders".
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-00327) pursuant
to the Exchange Act are incorporated herein by reference:
1. Kmart's Annual Report on Form 10-K for the fiscal year ended January 25,
1995;
2. Kmart's Quarterly Report on Form 10-Q filed June 6, 1995; and
3. Kmart's Current Reports on Form 8-K filed April 11, 1995, April 27, 1995,
June 14, 1995 and June 26, 1995.
All documents filed by Kmart pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates offered hereby shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of 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 all purposes to the extent that a statement contained in this Prospectus,
or in any other subsequently filed document which is also, or is deemed to be,
incorporated by reference herein modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed to constitute a part of
this Prospectus, except as so modified or superseded.
Kmart will provide without charge to each person to whom this Prospectus has
been delivered, on written or oral request of such person, a copy (without
exhibits, unless such exhibits are specifically incorporated by reference into
such documents) of any or all documents incorporated by reference in this
Prospectus. Requests for such copies 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>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information contained elsewhere in, or incorporated by reference in,
this Prospectus. Certain capitalized terms used in this summary are defined
elsewhere in this Prospectus or in the Glossary of Terms.
THE COMPANY
Kmart is one of the world's largest mass merchandise retailers and operates
stores in each of the 50 states, Puerto Rico, the U.S. Virgin Islands, Guam,
Canada, the Czech Republic and Slovakia and has entered into joint ventures in
Mexico and Singapore. See "The Company".
THE OFFERING
Glossary.................. Included at the end of this Prospectus as an
Appendix is a Glossary of certain of the
significant defined terms used herein.
Pass Through Trusts....... Each of the two Kmart Corporation 1995-K Pass
Through Trusts (the "1995-K3 Trust" and the "1995-
K4 Trust", each, a "Pass Through Trust" and
collectively, the "Pass Through Trusts") is to be
formed pursuant to one of two Pass Through Trust
Agreements (the "Agreements") between Kmart and
Shawmut Bank Connecticut, National Association, as
trustee thereunder (the "Trustee"). Each Pass
Through Trust will be a separate entity.
Trust Property............ The property of each of the Pass Through Trusts
(the "Trust Property") will consist of mortgage
notes (the "Mortgage Notes") issued on a
nonrecourse basis by the Owner Trustees
(collectively, the "Owner Trustees") to finance
not more than 90% of the cost to the applicable
Owner Trustee of acquiring one or more of 18
Properties, which will be leased to Kmart
concurrently with the issuance of the Mortgage
Notes (collectively, the "Sale-Leaseback
Transactions"). Each Pass Through Trust will
acquire pursuant to the related Agreement those
Mortgage Notes having an interest rate
corresponding to the interest rate applicable to
the Certificates that will be issued by such Pass
Through Trust. The maturity dates of the Mortgage
Notes acquired by each Pass Through Trust will
occur on or before the final distribution date
applicable to the Certificates issued by such Pass
Through Trust. The aggregate principal amount of
the Mortgage Notes held in each Pass Through Trust
will be the same as the aggregate principal amount
of the Certificates issued by such Pass Through
Trust. See "Structure of the Transaction" and
"Description of the Certificates--General".
Pass Through Certificates
Offered; Book-Entry
Registration..............
Each Certificate will represent a fractional
undivided interest in the related Pass Through
Trust. The Certificates will be issued in fully
registered form only and will be registered in the
name of Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"). No person
acquiring an interest in the Certificates will
4
<PAGE>
be entitled to receive a definitive certificate
representing such person's interest in the related
Pass Through Trust, except in the event that
definitive certificates are issued under the
limited circumstances described herein. See
"Description of the Certificates--General", "--
Book-Entry Registration" and "--Definitive
Certificates".
Denominations............. The Certificates will be issued only in integral
multiples of $1,000.
Regular Distribution
Dates..................... January 2 and July 2, commencing January 2, 1996.
Special Distribution
Dates..................... The second day of any month.
Record Dates.............. The fifteenth day preceding a Regular Distribution
Date or a Special Distribution Date.
Initial Average Life
Dates..................... The initial average life dates for Certificates
issued by the 1995-K3 Trust and the 1995-K4 Trust
are as follows:
Pass Through
Trust Date
------------ ----
1995-K3
1995-K4
The average life dates for the Certificates will
change after principal payments of the Mortgage
Notes held in the related Pass Through Trust
commence.
Distributions............. All payments of principal, premium, if any, and
interest received by the Trustee on the Mortgage
Notes held in a Pass Through Trust will be
distributed by the Trustee to the holders of
Certificates evidencing interests in such Pass
Through Trust on the Regular Distribution Dates
referred to above, except in certain cases where
such Mortgage Notes have been redeemed or are in
default. Scheduled payments of principal and
interest on the Mortgage Notes held in each Pass
Through Trust are scheduled to be received on such
Regular Distribution Dates, and to be distributed
to the holders of Certificates evidencing
interests in such Pass Through Trust on the
corresponding Regular Distribution Dates. Payments
of principal of, premium, if any, and interest on
the Mortgage Notes held in any Pass Through Trust
resulting from any redemption thereof, or from
actions taken in connection with an Indenture
Default, will be distributed on a Special
Distribution Date after not less than 20 days'
notice from the Trustee to the holders of
Certificates evidencing interests in such Pass
Through Trust. For a discussion of distributions
upon an Indenture Default, see "Description of the
Certificates--Payments and Distributions".
Special Distribution Upon
Unavailability of Trust
Property.................. To the extent that any proceeds from the sale of
Certificates have not been used by the Trustee by
July , 1995 to purchase the Mortgage Notes that
are contemplated to be held in the Pass
5
<PAGE>
Through Trusts, such proceeds shall be distributed
on September 2, 1995 to the Certificateholders on
a pro rata basis, together with accrued interest
thereon, but without premium. See "Description of
the Certificates--Special Distribution Upon
Unavailability of Trust Property".
Method of Distribution.... So long as the Certificates are registered in the
name of Cede, as nominee of DTC, and are held by
DTC, distributions by the Trustee with respect to
a Pass Through Trust will be made in same-day
funds to DTC, which will in turn make
distributions to participants in DTC ("DTC
Participants") holding positions in the
Certificates evidencing interests in such Pass
Through Trust in clearinghouse or next-day funds
and which will at the end of the month of payment
reimburse such DTC Participants for the cost of
obtaining same-day funds. The final distribution
of principal with respect to the Certificates
evidencing interests in a Pass Through Trust will
be made by DTC to DTC Participants in same day
funds. Distributions by DTC Participants to
Certificate Owners will be the responsibility of
such DTC Participants and will be made in
accordance with customary industry practices. See
"Description of the Certificates--Same Day
Settlement and Payment" and "--Book-Entry
Registration".
Interest.................. Interest will be passed through to the holders of
Certificates of each Pass Through Trust on each
January 2 and July 2, commencing January 2, 1996,
at the rate per annum indicated on the cover page
hereof for such Pass Through Trust, on the unpaid
principal of the Mortgage Notes held in such Pass
Through Trust.
Principal................. Principal on the Mortgage Notes held in each Pass
Through Trust will be payable in scheduled
amounts, commencing on the applicable Initial
Scheduled Principal Distribution Date set forth on
the cover page hereof in accordance with the
principal repayment schedule set forth herein
under "Description of the Mortgage Notes--
Principal and Interest Payments".
Prepayment of Mortgage
Notes at a Premium.......
(a) All of the Mortgage Notes issued with respect
to any Property may under certain circumstances be
redeemed at any time at a redemption price equal
to the unpaid principal amount of the Mortgage
Notes to be redeemed plus accrued but unpaid
interest thereon (the "Redemption Price") plus, if
such redemption is made prior to the respective
dates set forth below (each, a "Premium
Termination Date"), a Make-Whole Premium, if any.
<TABLE>
<CAPTION>
Pass Through
Trust Date
------------ ----
<S> <C>
1995-K3
1995-K4
</TABLE>
See "Description of the Mortgage Notes--Redemption"
for a description of the circumstances under which
such redemptions may occur and of the manner of
computing the Make-Whole Premium.
6
<PAGE>
(b) If under any Indenture an Indenture Default
arising from a Lease Event of Default shall have
occurred and be continuing for a period of 180
days or more (but less than 270 days) during which
period the Mortgage Notes outstanding under such
Indenture could, but shall not, have been
accelerated nor shall the Indenture Trustee have
given notice of its intent to accelerate such
Mortgage Notes, the applicable Owner Trustee may
elect to redeem or purchase all of such Mortgage
Notes at a price equal to the Redemption Price
plus any other amounts then due and payable with
respect to such Mortgage Notes, plus, if such
purchase is made prior to the applicable Premium
Termination Date, a Make-Whole Premium, if any.
See "Description of the Mortgage Notes--
Redemption".
Payment of Mortgage Notes
at Par...................
(a) The Mortgage Notes relating to a Property will
be subject to redemption, in whole, upon the
occurrence of an Event of Loss with respect to
such Property and if Kmart has not exercised its
right of substitution, at a price equal to the
Redemption Price plus any amounts then due and
payable with respect to such Mortgage Notes, but
without premium.
(b) If under any Indenture (i) an Indenture Default
arising from a Lease Event of Default shall have
occurred and be continuing for a period of 270
days or more during which time the Mortgage Notes
outstanding under such Indenture have not been
accelerated or (ii) the Indenture Trustee shall
have given notice of its intent to accelerate such
Mortgage Notes, the related Owner Trustee may
elect to redeem or purchase all of such Mortgage
Notes at a price equal to the Redemption Price
plus any other amounts then due and payable with
respect to such Mortgage Notes, but without
premium.
See "Description of the Mortgage Notes--
Redemption".
Security.................. Mortgage Notes will initially be issued by an Owner
Trustee under a separate trust indenture, as
supplemented by a mortgage, deed of trust,
assignment of leases and rents, security
agreement, financing statement and supplemental
indenture (as so supplemented, an "Indenture")
with respect to each Property. The Mortgage Notes
issued pursuant to each Indenture will be secured
by (i) an assignment to the Indenture Trustee of
certain of the related Owner Trustee's rights
under the related Lease, including the right to
receive rentals and certain other amounts payable
thereunder by Kmart, (ii) a first mortgage lien on
the Improvements and Estate for Years (each as
hereinafter defined) acquired by such Owner
Trustee and leased to Kmart, subject to the rights
of Kmart under the related Lease, and (iii) the
related Owner Trustee's rights under the Option
(as hereinafter defined) (collectively, the
"Indenture Estate"). Upon an Indenture Default and
acceleration of the related Mortgage Notes, the
Indenture Trustee may exercise its
7
<PAGE>
rights with respect to the related Indenture
Estate for the equal and ratable benefit of the
Mortgage Notes issued under that Indenture. See
"Description of the Mortgage Notes--Security" and
"--Indenture Defaults, Notice and Waiver".
Although the Mortgage Notes are not direct
obligations of, or guaranteed by, Kmart, the
amounts unconditionally payable by Kmart under
each Lease will be sufficient to pay in full when
due all payments required to be made on the
related Mortgage Notes. See "Description of the
Mortgage Notes--Redemption" and "--Security". None
of the Trustee, the Certificateholders or the
Indenture Trustee will have recourse in respect of
the Mortgage Notes against any Owner Trustee or
Owner Participant. See "Description of the
Mortgage Notes--General".
Use of Proceeds........... The proceeds from the sale of the Certificates will
be used to purchase the Mortgage Notes issued by
the related Owner Trustee in connection with the
financing of not more than 90% of the cost to such
Owner Trustee of acquiring each related Property.
The net proceeds to be received by Kmart from the
Sale-Leaseback Transactions will be used (i) for
general corporate purposes and (ii) in the case of
a Property to be conveyed by a developer to the
related Owner Trustee, primarily to repay loans
made to such developer, which funded the
construction and/or acquisition of such Property.
See "Structure of the Transaction" and "Use of
Proceeds".
Trustees.................. Shawmut Bank Connecticut, National Association,
will act as Trustee for the Certificates
evidencing interests in the Pass Through Trusts.
Shawmut Bank Connecticut, National Association,
will also act as Indenture Trustee under each
Indenture.
Federal Income Tax
Consequences.............
In the opinion of counsel to Kmart, each Pass
Through Trust will be classified as a grantor
trust for federal income tax purposes, and each
holder of an interest in the Certificates will be
treated as the owner of a pro rata undivided
interest in each of the Mortgage Notes and any
other property held in the Pass Through Trust in
which the Certificates held by such holder
evidence an interest and will be required to
report on its federal income tax return its pro
rata share of income from such Mortgage Notes and
other property in accordance with such holder's
method of accounting. See "Certain Federal Income
Tax Consequences".
ERISA Considerations...... The Certificates, with certain exceptions, are
eligible for purchase by employee benefit plans. A
fiduciary considering purchasing Certificates for
or on behalf of an employee benefit plan should
consider the issues discussed in "ERISA
Considerations".
8
<PAGE>
THE COMPANY
Kmart Corporation ("Kmart" or the "Company") is one of the world's largest
mass merchandise retailers. The dominant portion of Kmart's business consists
of U.S. Kmart stores. As of April 26, 1995, Kmart operated 2,240 Kmart discount
stores with locations in each of the 50 United States, Puerto Rico, the U.S.
Virgin Islands and Guam and Kmart international operations consisted primarily
of 128 Kmart stores in Canada and 13 department stores located in the Czech
Republic and Slovakia. Kmart has also entered into joint ventures in Mexico and
Singapore, which, as of April 26, 1995, had opened six stores, four in Mexico
and two in Singapore. Kmart also holds significant equity interests in
OfficeMax, Inc. ("OfficeMax") and The Sports Authority, Inc. ("The Sports
Authority") and in substantially all of the Meldisco subsidiaries of Melville
Corporation, which operates the footwear departments in domestic Kmart stores.
As of April 26, 1995, Kmart specialty retail operations consisted of the
Borders Group and Builders Square subsidiaries. Borders Group is the second
largest U.S. operator of book superstores under the Borders name and the
largest U.S. operator of mall-based bookstores under the Waldenbooks name. As
of April 26, 1995, Borders Group operated 1,144 bookstores in 50 states and the
District of Columbia. See "--Recent Developments" for a discussion of the
recent Borders Group Initial Public Offering ("IPO"). Builders Square operated
172 home improvement stores at April 26, 1995. 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.
Kmart also holds a significant equity interest in Thrifty PayLess Holding
Inc. ("TPH"), an entity which resulted primarily from the combination of
Kmart's former subsidiary, PayLess Drug Stores Northwest, Inc. ("PayLess"),
with Thrifty Drug Stores after PayLess was sold to TPH in the first quarter of
1994. In the fiscal 1993 consolidated financial statements, the operations of
PayLess were presented as part of discontinued operations. However, as Kmart's
investment in TPH will extend beyond the period initially planned, the
operations of PayLess have been reclassified as part of continuing operations
in fiscal 1993 and fiscal 1992. Management will continue to actively seek a
buyer for this investment during the remainder of fiscal 1995 and expects that
such disposition will occur either through a private offering or other
alternative means.
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
In May 1995, Kmart sold 87% of Borders Group, Inc., resulting in net proceeds
of $493 million, which were received by the Company in June 1995. The funds
from this transaction will be used to pay down debt and further the Company's
modernization program. The Company's remaining shares in Borders Group, Inc.
become available for sale by the Company commencing November 20, 1995. It is
the Company's intention to divest all of its interest in Borders Group, Inc.
within one year. The Company expects to realize a one-time loss of
approximately $185 million on the transaction and will report its investment in
Borders Group, Inc. as a discontinued operation in the future.
On June 5, 1995, the Company announced that Floyd Hall, a retailing executive
with extensive experience in the discount store and supermarket businesses, has
been named chairman, president and chief executive officer, effective
immediately. With Hall's arrival at Kmart, Donald S. Perkins has relinquished
his role as chairman but remains a member of the Company's Board of Directors
and chairman of the Board's executive/finance committee. Anthony N. Palizzi,
executive vice president and general counsel, and Ronald J. Floto, executive
vice president and president, Super Kmart Centers, who served as interim
president and chairman of the Company's management executive committee,
respectively, have resumed their previous responsibilities.
9
<PAGE>
SELECTED FINANCIAL INFORMATION
The following is a summary of certain selected consolidated financial
information of the Company. Operating results and affected ratios have been
restated to exclude discontinued operations of PACE Membership Warehouse, Inc.
and Coles Myer, Ltd. All fiscal years prior to 1994 reflect the operations of
PayLess Drug Stores Northwest, Inc., OfficeMax, Inc. and The Sports Authority,
Inc. as part of continuing operations. This summary should be read in
conjunction with the related consolidated financial statements and notes
thereto included or incorporated by reference in the Company's Annual Report
on Form 10-K for the fiscal year ended January 25, 1995 incorporated herein by
reference. See "Incorporation of Certain Documents by Reference". The
information presented below for, and as of the end of, each of the fiscal
years in the five-year period ended January 25, 1995 (except for the ratio of
earnings from continuing retail operations to fixed charges) is derived from
the consolidated financial statements of the Company, which financial
statements have been audited by Price Waterhouse LLP, independent accountants.
In the opinion of the Company, the unaudited financial information presented
for the 13 weeks ended April 26, 1995 and April 27, 1994 contains all
adjustments necessary for a fair statement of the results for the interim
periods. All adjustments were of a normal and recurring nature. Data for the
interim periods are not necessarily indicative of the results for the full
fiscal year.
<TABLE>
<CAPTION>
13 WEEKS ENDED
---------------------
APRIL 27, APRIL 26,
1990 1991 1992 1993(1) 1994 1994 1995
------- ------- ------- ------- ------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Sales.................. $29,775 $30,934 $33,366 $36,694 $34,025 $7,216 $7,797
Cost of merchandise
sold.................... 21,809 22,622 24,516 27,520 25,992 5,384 6,064
Selling, general and
administrative
expenses.............. 6,815 7,036 7,393 8,217 7,701 1,758 1,854
Interest expense--net.. 395 396 428 495 494 125 109
Income (loss) from
continuing retail
operations before income
taxes and equity
income.................. 1,024 1,157 1,321 (590) 294 9 (47)
Net income (loss) from
continuing retail
operations before
extraordinary item and
the effect of
accounting changes...... 688 778 901 (347) 260 16 (28)
Net income (loss)...... 756 859 941 (974) 296 18 (28)
Ratio of earnings from
continuing retail
operations to fixed
charges(2) 2.9 3.0 3.0 -- 1.4 --(3) --(3)
Balance Sheet (at end of
period):
Working capital........ $ 3,519 $ 4,682 $ 5,014 $ 3,793 $ 3,561 $3,712 $3,531
Merchandise
inventories............. 6,891 7,546 8,752 7,252 7,382 7,815 7,840
Total assets........... 13,899 15,999 18,931 17,504 17,029 17,963 17,312
Long-term debt......... 1,701 2,287 3,237 2,227 2,011 2,224 1,965
Capital leases......... 1,598 1,638 1,698 1,720 1,777 1,764 1,754
Shareholders' equity... 5,384 6,891 7,536 6,093 6,032 6,010 5,955
</TABLE>
- --------
(1) 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.
(2) 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 $549 million for the fiscal year ended
January 26, 1994.
(3) Due to the seasonality of the Company's business, the ratio of earnings
from continuing retail operations to fixed charges is computed on a
trailing 52-week basis. The deficiency of income from continuing retail
operations versus fixed charges was $646 million for the 52 weeks ended
April 27, 1994. The ratio computed as described in (2) above for the 52
weeks ended April 26, 1995 was 1.3.
10
<PAGE>
USE OF PROCEEDS
The Certificates are being issued in order to facilitate the financing by
each Owner Trustee of its purchase of one or more of the Properties. Proceeds
from the sale of the Certificates will be used by the Trustee to purchase the
Mortgage Notes issued by the related Owner Trustee in connection with the
financing of not more than 90% of the cost to such Owner Trustee of acquiring
each of its respective Properties. See "Structure of the Transaction".
Net proceeds of $ million to be received by Kmart from the Sale-
Leaseback Transactions will be used for general corporate purposes. In the case
of Properties to be conveyed by developers to the related Owner Trustee, net
proceeds of $ million will be used primarily to repay loans made to such
developers which funded the construction and/or acquisition of such Properties.
STRUCTURE OF THE TRANSACTION
The proceeds from the sale of the Certificates offered hereby will be used by
the Trustee on behalf of the applicable Pass Through Trust to purchase Mortgage
Notes issued by Wilmington Trust Company, acting not in its individual capacity
but solely as owner trustee (an "Owner Trustee") under four separate Owner
Trust Agreements for the benefit of the applicable institutional investor (the
"Owner Participant") to finance not more than 90% of the cost to such Owner
Trustee of acquiring (i) fee title to the buildings and improvements (the
"Improvements") comprising, and (ii) a 30-year estate for years interest in the
land (the "Estate for Years") underlying, 18 Kmart store locations.
Simultaneously with the conveyance of the Improvements and the Estate for Years
with respect to each Property to the applicable Owner Trustee, the related
remainder interest subject to the Estate for Years shall be conveyed to First
Security Bank of Utah, N.A., acting not in its individual capacity but solely
as trustee (the "Remainderman Trustee") of four separate trusts formed for the
benefit of an institutional investor (the "Remainderman Participant"). The
Remainderman Trustee will, in turn, convey to the related Owner Trustee an
option (the "Option") to purchase or ground lease the related Land upon the
expiration of the Estate for Years. The Improvements and Estate for Years with
respect to each Kmart store location are referred to herein collectively as a
"Property". Eleven Properties will be acquired by the applicable Owner Trustee
directly from Kmart and seven Properties will be acquired from independent
developers with whom Kmart has entered into contracts obligating such
developers to convey the applicable Properties. Each of the four Owner Trustees
will acquire one or more Properties (each, a "Property Group"). Any portion of
the proceeds from the sale of Certificates not used by the Trustee to purchase
Mortgage Notes on or prior to July , 1995 will be distributed on September 2,
1995 to the applicable Certificateholders, together with interest, but without
premium. See "Description of the Certificates--Special Distribution Upon
Unavailability of Trust Property".
The Mortgage Notes with respect to each Property will be issued under a
separate trust indenture between Shawmut Bank Connecticut, National
Association, as trustee thereunder (in such capacity, herein referred to as the
"Indenture Trustee"), and the related Owner Trustee (each, a "Base Indenture"),
as supplemented by a mortgage, deed of trust, assignment of leases and rents,
security agreement, financing statement and supplemental indenture between the
Indenture Trustee and such Owner Trustee (each, a "Supplemental Indenture", and
each Base Indenture, as supplemented by the related Supplemental Indenture, an
"Indenture"). With respect to each Property, the applicable Owner Participant
will provide from sources other than the Mortgage Notes not less than 10% of
the cost to the related Owner Trustee of acquiring such Property. No Owner
Participant, however, will be personally liable for any amount payable under
the related Indenture or the Mortgage Notes issued thereunder. Simultaneously
with the acquisition of each Property, the related Owner Trustee will lease
such Property to Kmart pursuant to a separate lease agreement (each, a
"Lease").
11
<PAGE>
THE PROPERTIES
The Properties consist of 18 Kmart store locations including 11 combination
general merchandise and grocery Super Kmart Centers. Certain information
regarding each of the Properties is set forth in the following table:
<TABLE>
<CAPTION>
FACILITY
SIZE LOT SIZE
KMART STORE LOCATIONS (SQ. FT.) (ACRES) OPENING DATE
- --------------------- --------- -------- ------------
<S> <C> <C> <C>
Juneau, AK...................................... 124,491 10.8 4/24/94
W. Palmdale, CA................................. 115,376 9.8 11/20/94
Mountain Home, ID............................... 94,841 12.5 10/2/94
Dorchester, MA.................................. 120,204 9.1 11/15/93
Branson, MO..................................... 121,890 8.9 11/13/94
Batavia, NY..................................... 116,100 10.3 11/20/94
Waynesboro, VA.................................. 94,841 27.1 10/23/94
</TABLE>
<TABLE>
<CAPTION>
FACILITY
SIZE LOT SIZE
SUPER KMART CENTER LOCATIONS (SQ. FT.) (ACRES) OPENING DATE
- ---------------------------- --------- -------- ------------
<S> <C> <C> <C>
Anaheim Hills, CA............................... 173,364 18.0 11/20/94
La Habre, CA.................................... 172,231 17.8 11/20/94
Sanger, CA...................................... 169,986 16.8 11/20/94
Lafayette, LA................................... 194,215 20.5 7/31/94
Lincoln Park, MI................................ 193,446 18.3 10/23/94
Hattiesburg, MS................................. 169,813 22.3 6/19/94
Carson City, NV................................. 169,999 18.5 11/20/94
Winston-Salem, NC............................... 172,231 22.8 11/20/94
New Philadelphia, OH............................ 172,231 43.5 11/13/94
N. Charleston, SC............................... 172,231 19.6 11/6/94
Humble, TX...................................... 172,231 22.5 11/13/94
</TABLE>
12
<PAGE>
DIAGRAM OF PAYMENTS
The following diagram illustrates certain aspects of the payment flows among
Kmart, each Owner Trustee, each Owner Participant, the Indenture Trustee, the
Trustee and the Certificateholders.
Kmart will lease each Property from the corresponding Owner Trustee under a
separate Lease. Two Mortgage Notes will initially be issued under each
Indenture by the corresponding Owner Trustee. Rent will be payable under each
Lease to the corresponding Owner Trustee. However, as a result of the
assignment of certain of such Owner Trustee's rights under such Lease to the
Indenture Trustee, Kmart will make rental payments thereunder directly to the
Indenture Trustee. From such rental payments, the Indenture Trustee will, on
behalf of each Owner Trustee, make payments on the Mortgage Notes held in each
Pass Through Trust to the related Trustee and will remit the balance to each
respective Owner Trustee for distribution to the corresponding Owner
Participant. Each Trustee will distribute payments received on the Mortgage
Notes held in the related Pass Through Trust to the related Certificateholders.
LOGO
13
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates offered hereby will be issued pursuant to two separate
Agreements to be entered into between Kmart and the Trustee. Each Agreement
will contain substantially the same terms, except that the interest rates,
scheduled payments of principal and maturity dates applicable to the Mortgage
Notes held in each Pass Through Trust, the aggregate principal amount of
Mortgage Notes held in each Pass Through Trust and the final distribution date
applicable to each Pass Through Trust will differ. The statements under this
caption are a summary of the terms of the Certificates and the Agreements and
do not purport to be complete. The summary makes use of terms defined in and is
qualified in its entirety by reference to all of the provisions of the
Agreements and the Certificates, 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 summary relates to each of the Agreements,
the Pass Through Trusts formed thereby and the Certificates issued by each Pass
Through Trust. Citations to the relevant sections of the Agreements appear
below in parentheses. References to the Trustee or the Agreement, with respect
to any Certificates, mean, respectively, the Trustee under the related
Agreement or the Agreement under which such Certificates are issued.
GENERAL
The Certificates will be issued in fully registered form only. Each
Certificate will represent a fractional undivided interest in the Pass Through
Trust created by the Agreement pursuant to which such Certificate was issued.
The property of each Pass Through Trust will include the Mortgage Notes held in
such Pass Through Trust, all monies at any time paid thereon and all monies due
and to become due thereunder and funds from time to time deposited with the
Trustee in the accounts established pursuant to the related Agreement. Each
Certificate will correspond to a pro rata share of the outstanding principal
amount of the Mortgage Notes held in the related Pass Through Trust and will be
issued in integral multiples of $1,000. (Agreements, Sections 2.01 and 3.01)
The Certificates will be registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC"). No person acquiring an
interest in the Certificates (a "Certificate Owner") will be entitled to
receive a certificate representing such person's interest in the Certificates,
except as set forth below under "--Definitive Certificates". Unless and until
Definitive Certificates are issued under the limited circumstances described
herein, all references to actions by Certificateholders shall refer to actions
taken by DTC upon instructions from DTC Participants (as defined below), and
all references herein to distributions, notices, reports and statements to
Certificateholders shall refer, as the case may be, to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of the
Certificates, or to DTC Participants for distribution to Certificate Owners in
accordance with DTC procedures. (Agreements, Section 3.09) See "--Book-Entry
Registration".
Interest paid on the Mortgage Notes held in a Pass Through Trust will be
passed through to holders of Certificates evidencing interests in such Pass
Through Trust at the applicable rate per annum set forth on the cover page of
this Prospectus, which will be calculated on the basis of a 360-day year of
twelve 30-day months.
Each Certificate will represent a fractional undivided interest in the
related Pass Through Trust and will not have any rights, benefits or interest
in respect of the other Pass Through Trust or in the property held by the other
such Pass Through Trust. All payments and distributions on the Certificates
will be made only from the property of the Pass Through Trust in which such
Certificates evidence an interest. (Agreements, Section 3.08) The Certificates
do not represent an interest in or obligation of Kmart, the Trustee, any Owner
Trustee in its individual capacity, any Owner Participant, or any of their
respective affiliates. Each Certificateholder by its acceptance of a
Certificate agrees to look solely to the income and proceeds from the Trust
Property to the extent available for distribution as provided in the
Agreements.
None of the Agreements, the Indentures or the Leases includes financial
covenants or "event risk" provisions that would afford Certificateholders
protection in the event of a highly leveraged or other transaction involving
Kmart. The Certificateholders will have the benefit of a lien on the Property
and the
14
<PAGE>
other property in each Indenture Estate securing the Mortgage Notes held in the
related Pass Through Trust, as discussed under "Description of the Mortgage
Notes--Security".
BOOK-ENTRY REGISTRATION
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" pursuant to Section 17A of the Exchange Act. DTC holds securities for
its participants ("DTC Participants") and facilitates the clearance and
settlement of securities transactions between DTC Participants through
electronic book-entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers
(including Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.), banks
(including the Trustee in its individual capacity), trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a DTC Participant, either directly or
indirectly ("Indirect Participants").
Certificate Owners that are not DTC Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Certificates may do so only through DTC Participants and Indirect
Participants. In addition, Certificate Owners will receive all distributions of
principal and interest from the Trustee through DTC Participants or Indirect
Participants, as the case may be. Under a book-entry format, Certificate Owners
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede, as nominee for DTC. DTC will forward
such payments to DTC Participants, which thereafter will forward them to
Indirect Participants or Certificate Owners, as the case may be, in accordance
with customary industry practices. The forwarding of such distributions to the
Certificate Owners will be the responsibility of such DTC Participants. The
only "Certificateholder" of a Pass Through Trust will be Cede, as nominee of
DTC. Certificate Owners will not be recognized by the Trustee as
Certificateholders, as such term is used in the Agreements, and Certificate
Owners will be permitted to exercise the rights of Certificateholders only
indirectly through DTC and DTC Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Certificates among DTC Participants on whose behalf it acts with respect to the
Certificates and to receive and transmit distributions of principal of,
premium, if any, and interest on the Certificates. DTC Participants and
Indirect Participants with which Certificate Owners have accounts with respect
to the Certificates similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Certificate
Owners. Accordingly, although Certificate Owners will not possess Certificates,
the Rules provide a mechanism by which Certificate Owners will receive payments
and will be able to transfer their interests.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect Participants, the ability of a Certificate Owner to pledge
Certificates to persons or entities that do not participate in the DTC system
or to otherwise act with respect to such Certificates may be limited due to the
lack of a physical certificate for such Certificates.
DTC will take any action permitted to be taken by a Certificateholder under
the Agreements only at the direction of one or more DTC Participants to whose
accounts with DTC the Certificates are credited. Additionally, DTC will take
such actions with respect to any percentage of Certificateholders of each Pass
Through Trust only at the direction of and on behalf of DTC 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 DTC Participants whose holdings
include such undivided interests.
Neither Kmart nor the Trustee will have any liability for any aspect of the
records relating to payments made on account of beneficial ownership interests
in the Certificates held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
15
<PAGE>
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that Kmart believes to be reliable, but Kmart
has not independently verified such information.
DEFINITIVE CERTIFICATES
The Certificates will be issued in fully registered certificated form
("Definitive Certificates") to Certificate Owners or their nominees, rather
than to DTC or its nominee, only if (i) Kmart advises the Trustee in writing
that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Certificates and the Trustee
or Kmart is unable to appoint a qualified successor, (ii) Kmart, at its option,
elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default, Certificate Owners of Certificates
evidencing fractional undivided interests aggregating not less than a majority
in interest in a Pass Through Trust advise the Trustee and DTC through DTC
Participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Certificate Owners' best
interest. (Agreements, Section 3.09)
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Certificate Owners
through DTC Participants of the availability of Definitive Certificates. Upon
surrender by DTC of the global certificates representing the Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Certificates as Definitive Certificates to Certificate Owners. (Agreements,
Section 3.09)
Distributions of principal of, premium, if any, and interest on the
Certificates will thereafter be made by the Trustee directly in accordance with
the procedures set forth in the Agreements to each Certificateholder of record
on the Record Date. Such distributions will be made by check mailed to the
address of such holder as it appears on the register maintained by the Trustee.
The final payment on any Certificate, however, will be made only upon
presentation and surrender of such Certificate at the office or agency
specified in the notice of final distribution to Certificateholders.
(Agreements, Sections 4.02 and 11.01)
Definitive Certificates will be freely transferable and exchangeable at the
office of the Trustee upon compliance with the requirements set forth in the
related Agreement. No service charge will be imposed for any registration of
transfer or exchange, but payment of a sum sufficient to cover any tax or other
governmental charge shall be required. (Agreements, Section 3.04)
SAME-DAY SETTLEMENT AND PAYMENT
So long as the Certificates are registered in the name of Cede, as nominee of
DTC, all payments made by Kmart to the Indenture Trustee under the Leases will
be in immediately available funds and, to the extent such payments are
allocable to the Mortgage Notes, will be passed through to DTC in immediately
available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the
Certificates will trade in DTC's Same-Day Funds Settlement System until
maturity, and secondary market trading activity in the Certificates will
therefore be required by DTC to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in same-day
funds on trading activity in the Certificates.
PAYMENTS AND DISTRIBUTIONS
All Scheduled Payments (as defined below) of principal and interest on the
Mortgage Notes held in each Pass Through Trust received by the Trustee will be
distributed by the Trustee to holders of Certificates evidencing interests in
such Pass Through Trust on the date such receipt of payment is confirmed,
except in certain cases when some or all of such Mortgage Notes are in default.
See "--Events of Default and Certain Rights Upon an Event of Default". Payments
of interest on the unpaid principal amount of the Mortgage Notes held in each
Pass Through Trust are scheduled to be received by the Trustee on January 2 and
July 2
16
<PAGE>
of each year, commencing January 2, 1996, at the applicable rate per annum for
such Pass Through Trust, until the final distribution date for such Pass
Through Trust. Payments of principal on the Mortgage Notes held in each Pass
Through Trust are scheduled to be received in specified amounts by the Trustee
commencing on the date specified on the front cover page of this Prospectus for
such Pass Through Trust (each such date, an "Initial Scheduled Principal
Distribution Date"), until the final distribution date for such Pass Through
Trust (such scheduled payments of interest and principal on the Mortgage Notes
held by a Pass Through Trust are herein referred to as "Scheduled Payments",
and January 2 and July 2 of each year, commencing January 2, 1996, are herein
referred to as "Regular Distribution Dates"). The Trustee of each Pass Through
Trust will distribute on each Regular Distribution Date to the holders of
Certificates evidencing interests in a Pass Through Trust all Scheduled
Payments the receipt of which is confirmed by the Trustee on such Regular
Distribution Date. Each such distribution of Scheduled Payments will be made by
the Trustee to the holders of record of the Certificates evidencing interests
in the Pass Through Trust holding the Mortgage Notes to which such Scheduled
Payments relate on the fifteenth day preceding the applicable Regular
Distribution Date, subject to certain exceptions. (Agreements, Sections 4.01
and 4.02) If a Scheduled Payment is not received by the Trustee on a Regular
Distribution Date but is received within five days thereafter, it will be
distributed on the date received to such holders of record. If it is received
after such five-day period, it will be treated as a Special Payment (as defined
below) and distributed as described below.
Each Certificateholder will be entitled to receive a pro rata share of any
distribution in respect of Scheduled Payments of principal and interest made on
the Mortgage Notes held in the Pass Through Trust in which the Certificate held
by such holder evidences an interest. The Regular Distribution Dates on which,
and the amounts in which, Scheduled Payments of principal on the Mortgage Notes
held in each Pass Through Trust are payable are set forth below under
"Description of the Mortgage Notes--Principal and Interest Payments".
Payments of principal, premium, if any, and interest received by the Trustee
on account of a redemption, if any, of the Mortgage Notes held in a Pass
Through Trust, payments received by the Trustee following a default in respect
of the Mortgage Notes held in a Pass Through Trust (including payments received
by the Trust on account of the purchase by the Owner Trustee of such Mortgage
Notes or payments received on account of the sale of such Mortgage Notes by the
Trustee) and any Scheduled Payments not paid within five days of a Regular
Distribution Date ("Special Payments"), will be distributed on the second day
of a month (each, a "Special Distribution Date"). The Trustee will mail notice
to the holders of record of the Certificates evidencing interests in the
related Pass Through Trust not less than 20 days prior to the Special
Distribution Date on which any Special Payment is scheduled to be distributed
by the Trustee in the event the Mortgage Notes are to be redeemed prior to
their maturity and, in all other instances, as soon as practicable after the
Trustee has received the Special Payment. The notice will specify the
anticipated Special Distribution Date, the amount of such anticipated Special
Payment, the reason for the Special Payment and the total amount to be
distributed if such Special Distribution Date is the same date as a Regular
Distribution Date. Each distribution of a Special Payment, other than a final
distribution, on a Special Distribution Date for a Pass Through Trust will be
made by the Trustee to the holders of record of the Certificates evidencing
interests in such Pass Through Trust on the fifteenth day preceding such
Special Distribution Date. (Agreements, Section 4.02) See "Description of the
Mortgage Notes--Redemption" and "--Events of Default and Certain Rights Upon an
Event of Default".
After redemption or default in respect of some or all of the Mortgage Notes
or other Special Payment, a Certificateholder should refer to the information
with respect to the applicable Pool Balance and the Pool Factor reported
periodically by the Trustee to determine the remaining amortization of the
Mortgage Notes. See "--Pool Factors" and "--Reports to Certificateholders".
Each Agreement requires that the Trustee establish and maintain, for the
benefit of the holders of Certificates evidencing interests in the Pass Through
Trust created by such Agreement, one or more non-interest bearing accounts
(with respect to each such Pass Through Trust, the "Certificate Account") for
the deposit of payments representing Scheduled Payments on the Mortgage Notes
held in such Trust.
17
<PAGE>
(Agreements, Section 4.01) Each Agreement also requires that the Trustee
establish and maintain, for the benefit of the holders of Certificates
evidencing interests in the Pass Through Trust created by such Agreement, one
or more non-interest bearing accounts (with respect to each such Pass Through
Trust, the "Special Payments Account") for the deposit of payments representing
Special Payments. Pursuant to the terms of each Agreement, the Trustee is
required to deposit any Scheduled Payments on the Mortgage Notes held in the
applicable Pass Through Trust received by it in the Certificate Account for
such Pass Through Trust and to deposit any Special Payments so received by it
in the Special Payments Account for such Pass Through Trust. (Agreements,
Section 4.01) All amounts so deposited will be distributed by the Trustee on a
Regular Distribution Date or a Special Distribution Date, as the case may be,
to the holders of Certificates evidencing interests in such Pass Through Trust.
(Agreements, Section 4.02)
At such time, if any, as Definitive Certificates are issued, distributions by
the Trustee to Certificateholders, other than a final distribution, will be
made by check mailed to each Certificateholder of record on the applicable
record date at its address appearing on the register. (Agreements, Section
4.02) The final distribution with respect to the Certificates evidencing
interests in a Pass Through Trust, however, will be made only upon presentation
and surrender of such Certificate at the office or agency of the Trustee
specified in the notice given by the Trustee of such final distribution. The
Trustee will mail such notice of the final distribution to the
Certificateholders, specifying the date set for such final distribution and the
amount of such distribution. (Agreements, Section 11.01) See "--Termination of
the Pass Through Trusts".
If any Regular Distribution Date or Special Distribution Date is not a
Business Day, distributions scheduled to be made on such Regular Distribution
Date or Special Distribution Date may be made on the next succeeding Business
Day without any additional interest due to the delay. (Agreements, Section
12.10)
POOL FACTORS
Unless there has been an early redemption, or a default, in respect of one or
more Mortgage Notes held in a Pass Through Trust, as described under
"Description of the Mortgage Notes--Redemption" and "--Events of Default and
Certain Rights Upon an Event of Default", the Pool Factor for each Pass Through
Trust will decline in proportion to the Scheduled Payments of principal on the
Mortgage Notes held in such Pass Through Trust as described under "Description
of the Mortgage Notes--Principal and Interest Payments". In the event of such
redemption or default, the Pool Factor and the Pool Balance of each Pass
Through Trust affected thereby will be recomputed after giving effect thereto
and notice thereof will be mailed to the holders of Certificates evidencing
interests in such Pass Through Trust. Each Pass Through Trust will have a
separate Pool Factor.
The "Pool Balance" for each Pass Through Trust will indicate, as of any date,
the aggregate unpaid principal amount of the Mortgage Notes held in such Pass
Through Trust on such date plus any amounts in respect of principal on such
Mortgage Notes held by the Trustee and not yet distributed, plus any proceeds
from the sale of the Certificates issued by such Pass Through Trust that have
not yet been used to purchase Mortgage Notes. The Pool Balance for each Pass
Through Trust as of any Regular Distribution Date or Special Distribution Date
will be computed after giving effect to the payment of principal, if any, on
the Mortgage Notes held in such Pass Through Trust and the distribution thereof
to be made on that date.
The "Pool Factor" for each Pass Through Trust as of any Regular Distribution
Date or Special Distribution Date will be the quotient (rounded to the seventh
decimal place) computed by dividing the then outstanding Pool Balance by the
aggregate original principal amount of the Mortgage Notes held in such Pass
Through Trust. The Pool Factor for each Pass Through Trust will initially be
1.0000000; thereafter, the Pool Factor for each Pass Through Trust will decline
to reflect reductions in the Pool Balance resulting from distributions in
respect of principal on the Certificates. The amount of a Certificateholder's
pro rata share of the Pool Balance of the Pass Through Trust in which the
Certificates held by such Certificateholder evidence an interest can be
determined by multiplying the original denomination of the holder's Certificate
by the Pool Factor for such Pass Through Trust as of the applicable Regular
Distribution Date or Special Distribution
18
<PAGE>
Date. The Pool Factor and the Pool Balance for a Pass Through Trust will be
mailed to record holders of Certificates evidencing interests in such Pass
Through Trust on each Regular Distribution Date and Special Distribution Date.
As of the date of issuance of the Certificates and assuming that all proceeds
are used to purchase Mortgage Notes on or before July , 1995, and that no
early redemption, delinquency or default in respect of any Mortgage Notes
occurs, the Scheduled Payments of principal on such Mortgage Notes, and the
resulting Pool Factors for the Pass Through Trusts after giving effect to each
such payment, are set forth below.
<TABLE>
<CAPTION>
1995-K3 TRUST 1995-K4 TRUST
REGULAR SCHEDULED PRINCIPAL 1995-K3 TRUST SCHEDULED PRINCIPAL 1995-K4 TRUST
DISTRIBUTION DATE PAYMENTS POOL FACTOR PAYMENTS POOL FACTOR
- ----------------- ------------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C>
$ $
</TABLE>
To the extent that the Mortgage Notes held in a Pass Through Trust are
redeemed or a delinquency or default in respect thereof occurs, the timing
(and, in the case of defaults, the amount) of distributions in respect of
principal on the Certificates evidencing an interest in such Pass Through Trust
will differ from that set forth above.
REPORTS TO CERTIFICATEHOLDERS
On each Regular Distribution Date and Special Distribution Date for a Pass
Through Trust, the Trustee will include with each distribution of a Scheduled
Payment or Special Payment to holders of record of the Certificates evidencing
interests in such Pass Through Trust a statement, giving effect to such
distribution to be made on such Regular Distribution Date or Special
Distribution Date, setting forth the following information (per $1,000
aggregate principal amount, as to (i) and (ii) below):
(i) the amount of such distribution allocable to principal and the amount
allocable to premium, if any;
(ii) the amount of such distribution allocable to interest; and
(iii) the Pool Balance and the Pool Factor for such Pass Through Trust.
(Agreements, Section 4.03(a))
So long as the Certificates are registered in the name of Cede, as nominee
for DTC, on the Record Date prior to each Regular Distribution Date and Special
Distribution Date for a Pass Through Trust, the Trustee will request from DTC a
securities position listing setting forth the names of all DTC Participants
reflected
19
<PAGE>
on DTC's books as holding positions in the Certificates evidencing interests in
such Pass Through Trust on such Record Date. On each Regular Distribution Date
and Special Distribution Date for a Pass Through Trust, the Trustee will mail
to each such DTC Participant the statement described above, and will make
available additional copies as requested by such DTC Participant, to be
available for forwarding to the related Certificate Owners. (Agreements,
Section 3.09)
In addition, after the end of each calendar year, the Trustee will prepare
for each holder of record of Certificates evidencing interests in such Pass
Through Trust at any time during the preceding calendar year a report
containing the sum of the amounts determined pursuant to clauses (i) and (ii)
above with respect to such Pass Through Trust for such calendar year or, in the
event such person was a Certificateholder of record during a portion of such
calendar year, for the applicable portion of such calendar year, and such other
items as are readily available to the Trustee and which a Certificateholder
shall reasonably request as necessary for the purpose of such
Certificateholder's preparation of its federal income tax returns. (Agreements,
Section 4.03(b)) Such report and such other items shall be prepared on the
basis of information supplied to the Trustee by the DTC Participants, and shall
be delivered by the Trustee to such DTC Participants to be available for
forwarding by such DTC Participants to Certificate Owners in the manner
described above.
At such time, if any, as Definitive Certificates are issued, the Trustee will
prepare and deliver the information described above to each holder of record of
Certificates evidencing interests in such Pass Through Trust as the name of
such Certificateholder appears on the records of the Trustee.
Kmart is required to furnish annually to the Trustee a certificate as to its
compliance with the conditions and covenants under the Agreements during the
preceding year. (Agreements, Section 5.03)
VOTING OF MORTGAGE NOTES
The Trustee, as holder of the Mortgage Notes held in such Pass Through Trust,
will have the right to vote and give consents and waivers in respect of such
Mortgage Notes under the Indentures. Each Agreement sets forth the
circumstances in which the Trustee shall direct any action or cast any vote as
the holder of the Mortgage Notes held in the applicable Pass Through Trust at
its own discretion and the circumstances in which the Trustee shall seek
instructions from the holders of the Certificates evidencing interests in such
Pass Through Trust. Under each Agreement, prior to an Event of Default (as
defined below), the principal amount of the Mortgage Notes held in the related
Pass Through Trust directing any action or being voted for or against any
proposal shall be in proportion to the principal amount of Certificates held by
the holders of Certificates evidencing interests in such Pass Through Trust
taking the corresponding position. (Agreements, Sections 6.04 and 10.01)
EVENTS OF DEFAULT AND CERTAIN RIGHTS UPON AN EVENT OF DEFAULT
An event of default under an Agreement (an "Event of Default") is defined as
the occurrence and continuance of an event of default under one or more of the
Indentures (an "Indenture Default"). See "Description of the Mortgage Notes--
Indenture Defaults, Notice and Waiver" for a description of the Indenture
Defaults. Since each Pass Through Trust will hold Mortgage Notes issued
pursuant to each of the Indentures, a continuing Indenture Default under any
one Indenture will result in an Event of Default under each of the Agreements
and therefore will affect each of the Pass Through Trusts. The Indentures and
the related Mortgage Notes issued thereunder do not contain cross-default
provisions, and events resulting in an Indenture Default under any of such
Indentures will not necessarily result in an Indenture Default occurring under
any other Indenture. See "Description of the Mortgage Notes--General". If an
Indenture Default occurs under fewer than all of the Indentures, the Mortgage
Notes issued pursuant to the Indenture or Indentures with respect to which an
Indenture Default has not occurred will continue to be held in the Pass Through
Trusts and payments of principal, premium, if any, and interest on such
Mortgage Notes will continue to be distributed to the holders of the
Certificates as received.
20
<PAGE>
The related Owner Trustee (except during any period during which Kmart is an
Owner Participant or otherwise controls such Owner Trustee) will have the
right, under certain circumstances, to cure Indenture Defaults that result
from the occurrence of a Lease Event of Default under the related Lease of a
Property. If an Owner Trustee chooses to exercise such cure right, the
Indenture Default, and consequently the Event of Default under each Agreement,
will be deemed to be cured. (Supplemental Indentures, Section 2.12(a)) See
"Description of the Mortgage Notes--Indenture Defaults, Notice and Waiver".
The Indenture Trustee's right to exercise remedies under each Indenture is
subject to certain limitations. See "Description of the Mortgage Notes--
Remedies".
Each Agreement provides that, so long as an Indenture Default under any
Indenture shall have occurred and be continuing, the Trustee may vote all of
the Mortgage Notes issued under such Indenture that are held in the Pass
Through Trust and, upon the direction of the holders of Certificates
evidencing fractional undivided interests aggregating not less than a majority
in interest of such Pass Through Trust, shall vote a corresponding percentage
of such Mortgage Notes in favor of directing the Indenture Trustee to declare
the unpaid principal amount of both Mortgage Notes issued under such Indenture
and any accrued and unpaid interest thereon to be due and payable. Each
Agreement in addition provides that, if an Indenture Default under any
Indenture shall have occurred and be continuing, the Trustee may, and upon the
direction of the holders of Certificates evidencing fractional undivided
interests aggregating not less than a majority in interest of the related Pass
Through Trust shall, vote a corresponding percentage of the Mortgage Notes
issued under such Indenture that are held in such Pass Through Trust in favor
of directing the Indenture Trustee as to the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
of exercising any trust or power conferred on the Indenture Trustee under such
Indenture, provided that if an Event of Default under any Indenture shall have
occurred and be continuing, such direction by the Certificateholders shall not
obligate the Trustee to vote more than a corresponding majority of the related
Mortgage Notes in favor of directing any action by the Indenture Trustee with
respect to such Indenture Default. (Agreements, Sections 6.01 and 6.04)
Each Indenture provides that, if an Indenture Default shall occur and be
continuing thereunder, the Indenture Trustee may, or upon the instructions of
the holders of 25% in principal amount of the Mortgage Notes outstanding under
such Indenture shall, declare the unpaid principal amount of the Mortgage
Notes issued under such Indenture to be immediately due and payable, together
with any accrued and unpaid interest thereon. Each Indenture further provides
that, if an Indenture Default shall occur and be continuing thereunder, the
holders of a majority in aggregate outstanding principal amount of the
Mortgage Notes issued under such Indenture may direct the Indenture Trustee
with respect to the exercise of remedies thereunder. See "Description of the
Mortgage Notes--Remedies". Accordingly, the ability of the holders of the
Certificates evidencing interests in a Pass Through Trust to cause the
Indenture Trustee to accelerate the Mortgage Notes issued under an Indenture
or to direct the exercise of remedies by the Indenture Trustee under an
Indenture will depend, in part, upon the proportion of the aggregate
outstanding principal amount of the Mortgage Notes issued under such Indenture
held in such Pass Through Trust to the aggregate outstanding principal amount
of all Mortgage Notes issued under such Indenture. Each Pass Through Trust
will hold Mortgage Notes with different interest rates, maturity dates,
initial principal amounts and amortization schedules than the Mortgage Notes
held in the other Pass Through Trust, and therefore the holders of
Certificates evidencing interests in a Pass Through Trust may have interests
that diverge from or conflict with those of the holders of Certificates
evidencing interests in the other Pass Through Trust. In addition, so long as
the same institution acts as Trustee of each Pass Through Trust, in the
absence of instructions from the Certificateholders of any such Pass Through
Trust, the Trustee for such Pass Through Trust could for the same reason be
faced with a potential conflict of interest upon an Indenture Default.
As an additional remedy, if an Indenture Default under an Indenture shall
have occurred and be continuing, each Agreement provides that the Trustee may,
and upon the direction of the holders of Certificates evidencing fractional
undivided interests aggregating not less than a majority in interest of the
related Pass Through Trust shall, sell all or part of the Mortgage Notes
issued under such Indenture that are held in such Pass Through Trust for cash.
(Agreements, Sections 6.01 and 6.02) Any proceeds received by the
21
<PAGE>
Trustee upon any such sale shall be deposited in the related Special Payments
Account and shall be distributed on the next succeeding Special Distribution
Date to holders of Certificates evidencing interests in such Pass Through
Trust. (Agreements, Section 4.02) The market for Mortgage Notes in default may
be very limited and there can be no assurance that they could be sold for a
reasonable price. If the Trustee sells any Mortgage Note held in a Pass Through
Trust with respect to which an Indenture Default exists for less than its
outstanding principal amount and accrued interest thereon, the amount of
distributions made to holders of the Certificates evidencing interests in such
Pass Through Trust will be less than would otherwise be the case.
Any amount distributed to the Trustee by the Indenture Trustee under any
Indenture on account of the Mortgage Notes held in a Pass Through Trust
following an Indenture Default under such Indenture will be deposited in the
Special Payments Account and distributed to the related Certificateholders on
the next succeeding Special Distribution Date. In addition, if following an
Indenture Default under any Indenture, the related Owner Trustee exercises its
option to redeem the outstanding Mortgage Notes issued under such Indenture as
described below under "Description of the Mortgage Notes--Redemption". The
price paid by such Owner Trustee to the Trustee for the Mortgage Notes issued
under such Indenture and held in a Pass Through Trust will be deposited in the
Special Payments Account for such Pass Through Trust and distributed to the
related Certificateholders on a Special Distribution Date.
Any funds representing payments received with respect to any defaulted
Mortgage Notes held in a Pass Through Trust, or the proceeds from the sale by
the Trustee of any such Mortgage Notes received by the Trustee, will be
deposited in the Special Payments Account for such Pass Through Trust and
(except when received on a Special Distribution Date as to which notice has
been timely given), to the extent practicable, invested and reinvested by the
Trustee in Permitted Investments maturing no later than the next succeeding
Special Distribution Date pending the distribution of such funds on such
Special Distribution Date. Permitted Investments are defined in the Agreements
as obligations of the United States. (Agreements, Sections 4.01 and 4.04)
Each Agreement provides that the Trustee shall, within 90 days after the
occurrence of a default in respect of the Pass Through Trust, give notice,
transmitted by mail, to the holders of the Certificates evidencing interests in
such Pass Through Trust of all uncured or unwaived defaults under such
Agreement known to it; provided that, except in the case of a default in the
payment of principal, premium, if any, or interest on the Mortgage Notes held
in such Pass Through Trust, the Trustee need not give such notice if the
Trustee makes a good faith determination that it is in the interests of the
holders of the Certificates to withhold such notice. The term "default", for
the purpose of the provision described in this paragraph only, shall mean the
occurrence of any event which is, or after notice or lapse of time, or both,
would become an Event of Default. (Agreements, Section 7.02)
Each Agreement contains a provision entitling the Trustee to be indemnified
by the holders of the Certificates evidencing interests in the related Pass
Through Trust before proceeding to exercise any right or power under such
Agreement at the request of such Certificateholders. (Agreements, Section 7.03)
In certain cases, the holders of Certificates evidencing fractional undivided
interests aggregating not less than a majority in interest of a Pass Through
Trust may, on behalf of the holders of all Certificates evidencing interests in
such Pass Through Trust, waive any past Event of Default under the related
Agreement and thereby annul any direction given by such holders to the
Indenture Trustee with respect thereto (provided that any such waiver will be
effective only if the corresponding Indenture Event of Default has been waived
under the related Indenture by the requisite holders of the Mortgage Notes
outstanding thereunder), except (i) a default in the deposit of any Scheduled
Payment or Special Payment or in the distribution of any such payment, (ii) a
default in payment of the principal, premium, if any, or interest on any of the
Mortgage Notes held in such Pass Through Trust or (iii) a default in respect of
any covenant or provision of the related Agreement that cannot be modified or
amended without the consent of each holder of a Certificate evidencing an
interest in such Pass Through Trust affected thereby. (Agreements, Section
6.05) See "--Modifications of
22
<PAGE>
the Agreements". Each Indenture provides that, with certain exceptions, the
holders of not less than a majority in aggregate outstanding principal amount
of the Mortgage Notes issued thereunder may, on behalf of all such holders,
waive any past Indenture Default thereunder. (Base Indentures, Section 8.3) In
the event of a waiver under an Agreement as described above, the principal
amount of the Mortgage Notes issued under the applicable Indenture held in the
related Pass Through Trust shall be counted as having voted for a waiver of
such past Indenture Default. For a discussion of waivers of Indenture Defaults
under the Indentures, see "Description of the Mortgage Notes--Indenture
Defaults, Notice and Waiver".
MODIFICATIONS OF THE AGREEMENTS
Each Agreement contains provisions permitting Kmart and the Trustee to enter
into a supplement to the Agreement, without the consent of the holders of any
of the Certificates evidencing an interest in the Pass Through Trust created
thereby, among other things, (i) to evidence the succession of another
corporation to Kmart and the assumption by such corporation of Kmart's
obligations under such Agreement, (ii) to add to the covenants of Kmart for the
benefit of the holders of such Certificates, or (iii) to cure any ambiguity, to
correct or supplement any defective or inconsistent provision of such Agreement
or any supplement, or to make any other provisions with respect to matters or
questions arising under such Agreement or any supplement, provided such action
shall not adversely affect the interests of the holders of such Certificates.
(Agreements, Section 9.01)
Each Agreement also contains provisions permitting Kmart and the Trustee,
with the consent of the holders of Certificates evidencing fractional undivided
interests aggregating not less than a majority in interest of the Pass Through
Trust created thereby, and the consent of the related Owner Trustee (such
consent not to be unreasonably withheld), to execute supplements thereto adding
any provisions to or changing or eliminating any of the provisions of the
Agreement or modifying the rights of the Certificateholders thereunder, except
that no such supplement may, without the consent of the holder of each
Certificate so affected, (a) reduce in any manner the amount of, or delay the
timing of, any receipt by the Trustee of payments on the Mortgage Notes held in
such Pass Through Trust, or distributions in respect of any Certificate related
to such Pass Through Trust, or make distributions payable in coin or currency
other than that provided for in such Certificates, or impair the right of any
Certificateholder of such Pass Through Trust to institute suit for the
enforcement of any such payment when due, (b) permit the disposition of any
Mortgage Note held in such Pass Through Trust, except as provided in such
Agreement, or otherwise deprive any Certificateholder of the benefit of the
ownership of the Mortgage Notes in such Pass Through Trust, (c) reduce the
percentage of the aggregate fractional undivided interests of the Pass Through
Trust provided for in such Agreement, the consent of the holders of
Certificates evidencing which is required for any such supplement or for any
waiver provided for in such Agreement or (d) modify certain provisions of the
Agreement regarding supplemental agreements with the consent of
Certificateholders or waiver of past defaults, except to increase any
percentage specified therein or to provide that certain other provisions cannot
be modified or waived without the consent of each Certificateholder affected
thereby. (Agreements, Section 9.02)
MODIFICATION OF LEASES AND OTHER DOCUMENTS
In the event that the Trustee, as the holder of the Mortgage Notes held in a
Pass Through Trust, receives a request for its consent to any amendment,
modification, waiver or supplement under the related Indenture, any Lease or
any other related document relating to such Mortgage Notes, the Trustee shall
mail a notice of such proposed amendment, modification, waiver or supplement to
each record holder of a Certificate evidencing an interest in such Pass Through
Trust as of the date of such notice. The Trustee shall request instructions
from such Certificateholders as to whether or not to consent to such amendment,
modification or waiver, and shall vote or consent, subject to the applicable
vote or consent requirements of the related Indenture or Indentures, with
respect to the Mortgage Notes held in such Pass Through Trust in the same
proportion as the Certificates were actually voted by the holders thereof.
Notwithstanding the foregoing, if
23
<PAGE>
an Event of Default under the related Agreement shall have occurred and be
continuing, the Trustee, subject to the voting instructions referred to under
"--Event of Default and Certain Rights Upon an Event of Default", may in its
own discretion consent to such amendment, modification or waiver, and may so
notify the Indenture Trustee under the Indenture to which such consent relates.
(Agreements, Section 10.01)
TERMINATION OF THE PASS THROUGH TRUSTS
The obligations of Kmart and the Trustee created by an Agreement will
terminate upon the distribution to holders of Certificates evidencing interests
in the Pass Through Trust created by such Agreement of all amounts required to
be distributed to them pursuant to the Agreement and the disposition of all
property held in such Pass Through Trust. The Trustee will mail to each holder
of record of a Certificate evidencing an interest in such Pass Through Trust
notice of the termination thereof, the amount of the proposed final payment and
the proposed date for the distribution of such final payment. The final
distribution to any holder of a Certificate will be made only upon surrender of
such holder's Certificates at the office or agency of the Trustee specified in
such notice of termination. (Agreements, Section 11.01)
DELAYED PURCHASE
In the event that all of the proceeds from the sale of the Certificates are
not used on the closing date of this offering to purchase the Mortgage Notes
contemplated to be held in the related Pass Through Trust, such Mortgage Notes
may be purchased by the Trustee at any time on or prior to July , 1995. In
such event, the Trustee will hold the proceeds from the sale of such
Certificates not used to purchase Mortgage Notes in an escrow account pending
the purchase of the Mortgage Notes not so purchased. Such proceeds will be
invested in Specified Investments at the direction and risk of, and for the
account of, Kmart. Earnings on Specified Investments in the escrow account for
each Pass Through Trust will be paid to Kmart periodically, and Kmart will be
responsible for any losses. (Agreements, Section 2.01(b))
On January 2, 1996, Kmart will pay to the Trustee an amount equal to the
interest that would have accrued on any Mortgage Notes purchased after the date
of the issuance of such Certificates from the date of the issuance of such
Certificates to, but excluding, the date of the purchase of such Mortgage Notes
by the Trustee. (Agreements, Section 2.01(b))
SPECIAL DISTRIBUTION UPON UNAVAILABILITY OF TRUST PROPERTY
To the extent, due to a casualty to, or other event causing the
unavailability of, a Property, that the full amount of the proceeds from the
sale of any Certificates held in the escrow account referred to above is not
used to purchase Mortgage Notes on or prior to July , 1995, an amount equal
to the unused proceeds will be distributed by the Trustee to the
Certificateholders of record of such Pass Through Trust on a pro rata basis on
September 2, 1995 together with interest thereon at a rate equal to the rate
applicable to such Certificates, but without premium, and Kmart will pay to the
Trustee on such date an amount equal to such interest. (Agreements, Section
2.01(b))
THE TRUSTEE
Shawmut Bank Connecticut, National Association, is the Trustee for each Pass
Through Trust. The Trustee and any of its affiliates may hold Certificates in
their own names. (Agreements, Section 7.05) With certain exceptions, the
Trustee makes no representations as to the validity or sufficiency of the
Agreements, the Certificates, the Mortgage Notes, the Indentures, the Leases,
the Participation Agreements or other related documents. (Agreements, Section
7.04) Shawmut Bank Connecticut, National Association, is also the Indenture
Trustee under each of the Indentures under which the Mortgage Notes with
respect to each
24
<PAGE>
Property are issued. In addition, Shawmut Bank Connecticut, National
Association, serves as owner trustee in other leveraged lease financings
involving Kmart and has customary banking relationships with Kmart.
The Trustee may resign with respect to any or all of the Pass Through Trusts
at any time, in which event Kmart will be obligated to appoint a successor
trustee. If a Trustee ceases to be eligible to continue as Trustee under an
Agreement or becomes incapable of acting as Trustee or becomes insolvent, Kmart
may remove such Trustee, or any holder for at least six months of Certificates
evidencing an interest in the Pass Through Trust created thereby may, on behalf
of itself and all others similarly situated, petition any court of competent
jurisdiction for the removal of such Trustee and the appointment of a successor
trustee. In addition, the holders of Certificates evidencing fractional
undivided interests aggregating not less than a majority in interest of such
Pass Through Trust may at any time remove the Trustee without cause by
delivering an instrument in writing to Kmart, the Trustee, the Owner Trustees
and the Indenture Trustee. Any resignation or removal of the Trustee of a Pass
Through Trust and appointment of a successor trustee for such Pass Through
Trust will not become effective until acceptance of the appointment by the
successor trustee. (Agreements, Sections 7.09 and 7.10) Pursuant to such
resignation and successor trustee provisions, it is possible that a different
trustee could be appointed to act as the successor trustee with respect to each
Pass Through Trust. All references in this Prospectus to the Trustee are to the
trustee acting in such capacity under each of the Pass Through Trusts and
should be read to take into account the possibility that each of the Pass
Through Trusts could have a different successor trustee in the event of such a
resignation or removal.
Each Agreement provides that Kmart will pay the Trustee's fees and expenses.
Each Agreement further provides that the Trustee will be entitled to
indemnification by Kmart for, and will be held harmless against, any loss,
liability or expense incurred by the Trustee (other than through its own
willful misconduct, negligence or by reason of a breach of any of its
representations or warranties set forth in such Agreement), except to the
extent that such loss, liability or expense is for or with respect to taxes, in
which case the Trustee may be entitled to be reimbursed by the Pass Through
Trust. (Agreements, Section 7.07)
25
<PAGE>
DESCRIPTION OF THE MORTGAGE NOTES
The statements under this caption are summaries of the terms of the Mortgage
Notes and the Indentures 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 Mortgage Notes, the Base Indentures and the
Supplemental Indentures, the forms of which have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. Unless otherwise
indicated, the following summaries relate to the Mortgage Notes and the
Indenture relating to each Property in respect of which such Mortgage Notes are
to be issued. Citations to the relevant sections of the Base Indentures,
Supplemental Indentures and the Leases appear below in parentheses.
GENERAL
Two Mortgage Notes will initially be issued under each Indenture and each
Indenture will relate to a single Property. Each Indenture will be between the
applicable Owner Trustee and the Indenture Trustee. Mortgage Notes issued
pursuant to each Indenture will be secured by, among other things, a lien on
only the Property to which such Indenture relates and will not have cross-
default or cross-collateralization provisions.
Each Owner Trustee will lease its Properties to Kmart. Kmart will be
obligated under each Lease to make or cause to be made rental and other
payments to the related Owner Trustee in amounts that will be at least
sufficient to pay when due all payments required to be made on the related
Mortgage Notes, except in certain cases of optional redemption which require
such Owner Trustee to deposit an amount sufficient to pay the Redemption Price
and Make-Whole Premium with the Indenture Trustee. (Leases, Article 3(d)) The
Mortgage Notes will not, however, be direct obligations of, or guaranteed by,
Kmart (except to the extent that Kmart may assume the obligations of such Owner
Trustee thereunder). Kmart's rental obligations under each Lease will be
general obligations of Kmart. Payments under each Lease in excess of the
amounts necessary to make required payments on the related Mortgage Notes will
be paid by the Indenture Trustee to the related Owner Trustee for distribution
to the corresponding Owner Participant and will not be available for
distributions on the Certificates, except in certain cases upon an Indenture
Default. (Base Indentures, Sections 4.1 and 8.4(b))
PRINCIPAL AND INTEREST PAYMENTS
The aggregate principal amount of the Mortgage Notes issued with respect to
each Property will not exceed 90% of the purchase price to the related Owner
Trustee of acquiring such Property.
The aggregate principal amount of the Mortgage Notes issued with respect to
each Property, as such Mortgage Notes are to be held in each of the Pass
Through Trusts, are as follows:
<TABLE>
<CAPTION>
1995-K3 TRUST 1995-K4 TRUST
% % MORTGAGE NOTES
PROPERTY GROUP 1 MORTGAGE NOTES MORTGAGE NOTES TOTAL
- ---------------- --------------- --------------- --------------
<S> <C> <C> <C>
W. Palmdale, CA.................. $ $ $
Anaheim Hills, CA................
La Habre, CA.....................
Sanger, CA.......................
Winston-Salem, NC................
-------- -------- --------
Total.......................... $ $ $
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995-K3 TRUST 1995-K4 TRUST
% % MORTGAGE NOTES
PROPERTY GROUP 2 MORTGAGE NOTES MORTGAGE NOTES TOTAL
- ---------------- --------------- --------------- --------------
<S> <C> <C> <C>
Lincoln Park, MI................. $ $ $
Carson City, NV..................
-------- -------- --------
Total.......................... $ $ $
======== ======== ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
1995-K3 TRUST 1995-K4 TRUST
% % MORTGAGE NOTES
PROPERTY GROUP 3 MORTGAGE NOTES MORTGAGE NOTES TOTAL
- ---------------- --------------- --------------- --------------
<S> <C> <C> <C>
Mountain Home, ID................ $ $ $
Dorchester, MA...................
Hattiesburg, MS..................
Branson, MO......................
Batavia, NY......................
Waynesboro, VA...................
Lafayette, LA....................
New Philadelphia, OH.............
N. Charleston, SC................
Humble, TX.......................
-------- -------- --------
Total.......................... $ $ $
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995-K3 TRUST 1995-K4 TRUST
% % MORTGAGE NOTES
PROPERTY GROUP 4 MORTGAGE NOTES MORTGAGE NOTES TOTAL
- ---------------- --------------- --------------- --------------
<S> <C> <C> <C>
Juneau, AK....................... $ $ $
</TABLE>
The Scheduled Payments of principal of the Mortgage Notes held in the Pass
Through Trusts are as follows:
1995-K3 TRUST
% MORTGAGE NOTES
<TABLE>
<CAPTION>
TOTAL FOR TOTAL FOR TOTAL FOR TOTAL FOR
PROPERTY PROPERTY PROPERTY PROPERTY AGGREGATE
PAYMENT DATES GROUP 1 GROUP 2 GROUP 3 GROUP 4 TOTAL
- ------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
----------- ----------- ----------- ----------- -----------
Total............... $ $ $ $ $
=========== =========== =========== =========== ===========
</TABLE>
27
<PAGE>
1995-K4 TRUST
% MORTGAGE NOTES
<TABLE>
<CAPTION>
TOTAL FOR TOTAL FOR TOTAL FOR TOTAL FOR
PROPERTY PROPERTY PROPERTY PROPERTY AGGREGATE
PAYMENT DATES GROUP 1 GROUP 2 GROUP 3 GROUP 4 TOTAL
- ------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
----------- ----------- ----------- ----------- -----------
Total............... $ $ $ $ $
=========== =========== =========== =========== ===========
</TABLE>
Interest will be payable on each Mortgage Note at the rate borne by such
Mortgage Note on the unpaid principal amount thereof on January 2 and July 2 in
each year, commencing January 2, 1996. Such interest will be computed on the
basis of a 360-day year of twelve 30-day months. (Base Indentures, Section 2.7)
If any date scheduled for any payment of principal, premium, if any, or
interest on the Mortgage Notes is not a Business Day, such payment may be made
on the next succeeding Business Day without any additional interest.
(Supplemental Indentures, Section 1.6)
REDEMPTION
All of the Mortgage Notes issued with respect to any Property are subject to
redemption prior to maturity, without the consent of the Trustee, in whole at
any time at the option of the related Owner Trustee in connection with a
voluntary refunding. The Mortgage Notes issued with respect to any Property are
also subject to redemption, in whole, in the event that (a) on or after the
seventh anniversary of the commencement of the term of the related Lease, Kmart
determines that such Property is obsolete, no longer economic for Kmart's use
or surplus to Kmart's needs (the "Termination Right") and Kmart has not
elected, or has not satisfied the conditions, to assume, on a full recourse
basis, the Owner Trustee's obligations with respect to such Mortgage Notes and
has not elected to exercise its Substitution Right (as defined in "Description
of the Leases--Substitution") or (b) the related Owner Participant becomes a
competitor of Kmart (the "Competitor Option") and, as a result thereof, either
(i) the Property is sold to a third party or (ii) Kmart acquires the Property
or the Owner Participant's interest therein and either has not elected, or has
not satisfied the conditions, to assume, on a full recourse basis, the Owner
Trustee's obligations with respect to such Mortgage Notes. See "Description of
the Mortgage Notes--Assumption of Obligations by Kmart" and "Description of the
Leases--Obsolescence Termination" and "--Substitution". The price of each
Mortgage Note to be redeemed in each such case shall be equal to the unpaid
principal amount of the Mortgage Notes to be redeemed plus accrued but unpaid
interest thereon (the "Redemption Price") plus, if such redemption is made
prior to the applicable Premium Termination Date, a Make-Whole Premium, if any.
(Base Indentures, Sections 6.1 and 7.1; Leases, Articles 39 and 41;
Participation Agreements, Section 3)
The Make-Whole Premium, if any, on the Mortgage Notes will be determined by
an independent investment banking institution of national standing (the
"Investment Banker") selected by Kmart. The Investment Banker will first
determine the Treasury Rate with respect to any redemption of Mortgage Notes.
The Treasury Rate means, with respect to each Mortgage Note to be redeemed, a
per annum rate (expressed as a semiannual equivalent and as a decimal and, in
the case of United States Treasury bills, converted to a bond equivalent yield)
determined to be the per annum rate equal to the semiannual yield to maturity
of United States Treasury securities maturing on the Average Life Date (as
defined below) of such Mortgage
28
<PAGE>
Note, as determined by interpolation between the most recent weekly average
yields to maturity for two series of United States Treasury securities (A) one
maturing as close as possible to, but earlier than, the Average Life Date of
such Mortgage Note and (B) the other maturing as close as possible to, but
later than, the Average Life Date of such Mortgage Note, in each case as
published in the most recent H.15(519) (or, if a weekly average yield to
maturity for United States Treasury securities maturing on the Average Life
Date of such Mortgage Note is reported in the most recent H.15(519), as
published in H.15(519)). H.15(519) means "Statistical Release H.15(519),
Selected Interest Rates", or any successor publication, published by the Board
of Governors of the Federal Reserve System. The most recent H.15(519) means the
latest H.15(519) which is published prior to the close of business on the third
business day prior to the applicable Redemption Date. The Average Life Date for
any Mortgage Note to be redeemed shall be the date which follows the Redemption
Date, by a period equal to the Remaining Weighted Average Life of such Mortgage
Note. The Remaining Weighted Average Life of such Mortgage Note, with respect
to the redemption of such Mortgage Note, is the number of days equal to the
quotient obtained by dividing (A) the sum of the products obtained by
multiplying (1) the amount of each remaining principal payment on such Mortgage
Note by (2) the number of days from and including the Redemption Date, to but
excluding the scheduled payment date of such principal payment by (B) the
unpaid principal amount of such Mortgage Note.
To determine the Make-Whole Premium for any Mortgage Note, the Investment
Banker then will determine, as of the third business day prior to the
Redemption Date, the sum of the present values of all of the remaining
scheduled payments of principal and interest to maturity on such Mortgage Note
computed on a semiannual basis by discounting such payments (assuming a 360-day
year consisting of twelve 30-day months) using such Treasury Rate. If the sum
of these present values of the remaining payments as computed above exceeds the
aggregate unpaid principal amount of the Mortgage Note to be redeemed plus any
accrued but unpaid interest thereon, the difference will be payable as a
premium upon redemption of such Mortgage Note. If the sum is equal to or less
than such principal amount plus accrued interest, there will be no premium
payable with respect to such Mortgage Note.
The Mortgage Notes issued with respect to a Property shall, if Kmart does not
exercise its Substitution Right, be redeemed following the occurrence of an
Event of Loss with respect to such Property, at a price equal to the Redemption
Price. See "Description of the Leases--Condemnation and Casualty" and "--
Substitution". (Base Indentures, Section 6.1; Leases, Articles 39 and 41)
The Mortgage Notes issued with respect to each Property are subject to
redemption or purchase by the related Owner Trustee (except during any period
during which Kmart is an Owner Participant or otherwise controls such Owner
Trustee), in whole, but not in part, if under the related Indenture an
Indenture Default arising from a Lease Event of Default shall have occurred and
(i) the Indenture Trustee shall have given notice of its intent to accelerate
such Mortgage Notes or (ii) such Indenture Default shall have continued for a
period of 180 days or more during which such Mortgage Notes could, but shall
not, have been accelerated at a price equal to the Redemption Price plus all
other amounts then due and payable to the holders of such Mortgage Notes plus,
in the case of redemption or purchase pursuant to clause (ii), if such Lease
Event of Default shall have continued for less than 270 days and such
redemption is made prior to the applicable Premium Termination Date, a Make-
Whole Premium, if any. (Base Indentures, Section 8.4(c))
Any redemption of the Mortgage Notes shall occur on the respective date of
redemption (the "Redemption Date") fixed in accordance with the related
Indenture. The Redemption Date shall be the date designated in the notice of
redemption given by the related Owner Trustee (or by Kmart pursuant to the
related Lease) to the Indenture Trustee. Any such notice must be given not less
than 30 days prior to the Redemption Date. (Base Indentures, Sections 6.2 and
6.3)
SECURITY
Two Mortgage Notes will initially be issued under each Indenture, and will be
secured by, among other things, (i) an assignment to the Indenture Trustee of
certain of the related Owner Trustee's rights under the
29
<PAGE>
Lease with respect to the Property subject to such Indenture, including the
right to receive rentals and certain other amounts payable thereunder by Kmart
(but excluding Excepted Payments), (ii) a first mortgage lien on the
Improvements and Estate for Years acquired by such Owner Trustee and leased to
Kmart, subject to the rights of Kmart under the related Lease, and (iii) the
related Owner Trustee's rights under the Option. The Mortgage Notes issued
under an Indenture will not be secured by any of the Properties securing
Mortgage Notes issued under any other Indenture and will not have cross-default
provisions, with the result that the existence of an Indenture Default under an
Indenture will not cause an Indenture Default under any other Indenture. Unless
and until an Indenture Default has occurred and is continuing, payments under
the Lease with respect to such Property in excess of the amount required to pay
amounts owed in respect of the related Owner Trustee's Mortgage Notes will be
paid to such Owner Trustee for distribution to the related Owner Participant
and, accordingly, no such excess payments distributed prior to an Indenture
Default will be available to satisfy any deficiency in the amount available to
pay the related Mortgage Notes in full. (Base Indentures, Sections 4.1;
Supplemental Indentures, Granting Clause and Section 2.12(b))
Unless and until an Indenture Default has occurred and is continuing and the
related Mortgage Notes have been declared due and payable, the Indenture
Trustee may not exercise any of the rights of the Owner Trustee under the
related Lease, except the right to receive payments of rentals due thereunder
(other than Excepted Payments). (Supplemental Indentures, Granting Clause)
Funds, if any, held from time to time by the Indenture Trustee with respect
to any Property, including funds held as the result of an Event of Loss with
respect to such Property or termination of the Lease related thereto, will be
invested and reinvested in certain Permitted Investments selected by the
Indenture Trustee. The Indenture Trustee will not be obligated to pay the
amount of any loss resulting from any such investment directed by it. (Base
Indentures, Section 9.4)
LIMITATION OF LIABILITY
The Mortgage Notes are not direct obligations of, or guaranteed by, Kmart
(except to the extent that it assumes the obligations of an Owner Trustee under
any of the Mortgage Notes under the circumstances described under "--Assumption
of Obligations by Kmart") or the Owner Trustees. None of the Owner Trustees,
the Owner Participants or the Indenture Trustee, nor any affiliate thereof,
shall be personally liable to any holder of a Mortgage Note or to the Indenture
Trustee for any amounts payable under the Mortgage Notes or for any liability
under such Indenture. All payments of principal, premium, if any, and interest
on the Mortgage Notes issued with respect to any Property will be made only
from the assets subject to the lien of the related Indenture and the income and
proceeds received by the Indenture Trustee therefrom (including Basic Rent and
certain amounts of Additional Rent payable by Kmart under the related Lease).
(Base Indentures, Section 2.11) None of the Owner Trustees, the Owner
Participants or the Indenture Trustee shall be personally liable for or in
respect of this Prospectus.
INDENTURE DEFAULTS, NOTICE AND WAIVER
Indenture Defaults under each Indenture include: (a) the occurrence and
continuance of any Lease Event of Default under the related Lease (other than a
Lease Event of Default related to Excepted Payments), (b) failure by the
related Owner Trustee to pay when due any principal, Make-Whole Premium, if
any, or interest on any Mortgage Note issued thereunder and continuance of that
failure for 10 days, (c) failure by the related Owner Trustee to comply with
any covenant contained in such Indenture or the related Participation Agreement
(to the extent related to the Property subject to the lien of such Indenture),
which continues unremedied for a period of 30 days (or such longer period but
in no event more than 180 days) if the Owner Trustee is diligently proceeding
to correct such failure at the end of the original 30-day period and reasonably
expects to correct such failure within the additional 150-day period) after
notice to such Owner Trustee by the Indenture Trustee or to such Owner Trustee
and the Indenture Trustee by the holders of at least 25% of the outstanding
principal amount of Mortgage Notes issued under such Indenture, (d) any
representation or warranty made by the related Owner Trustee or Owner
Participant in such Indenture or the related
30
<PAGE>
Participation Agreement (to the extent related to the Property subject to the
lien of such Indenture) shall prove at any time to have been inaccurate in any
material respect as of the date made, and any material adverse impact of such
inaccuracy shall continue unremedied for a period of 30 days (or such longer
period (but in no event more than 60 days) if such falseness or inaccuracy is
susceptible to being remedied within a reasonable period of time if such Owner
Trustee or Owner Participant, as applicable, is diligently proceeding to
correct such failure at the end of the original 30-day period and reasonably
expects to correct such failure within the additional 30-day period) after
notice to such Owner Trustee by the Indenture Trustee or to such Owner Trustee
and the Indenture Trustee by the holders of at least 25% of the outstanding
principal amount of Mortgage Notes issued under such Indenture, and (e) the
occurrence of certain events of bankruptcy, reorganization or insolvency of
the related Owner Trustee. (Base Indentures, Section 8.1)
In the event Kmart fails to make any semiannual basic rental payment when
due under any Lease and such failure shall not constitute the fourth or
subsequent consecutive or the seventh or subsequent cumulative such failure,
then the related Owner Trustee or Owner Participant may furnish to the
Indenture Trustee an amount equal to but not less than all principal and
interest as shall then be due on the related Mortgage Notes, together with any
overdue interest, in which event the Indenture Trustee and the holders of
outstanding Mortgage Notes issued under such Indenture may not exercise any
remedies otherwise available under such Indenture or the Lease securing the
Mortgage Notes issued thereunder as the result of such failure to make such
rental payment. An Owner Trustee may also cure any other default by Kmart in
the performance of its obligations under the related Lease. The cure rights
described above will not apply during any period during which Kmart is an
Owner Participant or otherwise controls the related Owner Trustee. (Base
Indentures, Section 8.4; Leases, Article 42)
Each Indenture provides that the Indenture Trustee must, within 30 days
after any event resulting in the occurrence of an Indenture Default or any
event that would, with notice or the passage of time or both, be an Indenture
Default, known by it, give notice thereof to the holders of the Mortgage Notes
issued thereunder. (Base Indentures, Section 5.10)
The holders of not less than a majority in aggregate unpaid principal amount
of the outstanding Mortgage Notes issued under any Indenture may direct the
Indenture Trustee thereunder, on behalf of all holders, to waive any past
default under such Indenture except a default in the payment of the principal,
premium, if any, or interest on or other amounts due under any such Mortgage
Note or a default in respect of any covenant or provision of such Indenture
that cannot be modified or amended without the consent of each holder of a
Mortgage Note. (Base Indentures, Section 8.3)
REMEDIES
Upon the occurrence of an Indenture Default resulting from the bankruptcy,
insolvency or reorganization of the related Owner Trustee, or a Lease Event of
Default resulting from the bankruptcy, insolvency or reorganization of Kmart,
the unpaid principal amount of the Mortgage Notes issued under such Indenture,
together with interest accrued but unpaid thereon without premium, and all
other amounts due thereunder and under such Indenture, shall become due and
payable. Upon the occurrence of any other Indenture Default, the Indenture
Trustee may, or when instructed by the holders of at least 25% of the
aggregate outstanding principal amount of the Mortgage Notes issued under such
Indenture shall, declare the principal of all the Mortgage Notes outstanding
under such Indenture, together with the interest accrued but unpaid thereon,
but without premium, and all other amounts due thereunder and under such
Indenture, immediately due and payable. (Base Indentures, Section 8.2)
The holders of a majority in aggregate principal amount of outstanding
Mortgage Notes under an Indenture may rescind any declaration of acceleration
by the Indenture Trustee, whether made on its own accord or as directed by
holders of such Mortgage Notes, at any time prior to the sale of all or part
of the related Indenture Estate if (i) there has been paid or deposited with
the Indenture Trustee an amount sufficient to pay (a) all overdue installments
of interest on all such Mortgage Notes, (b) the principal of and premium,
31
<PAGE>
if any, on any Mortgage Notes that has become due otherwise than by such
declaration, and interest thereon as provided therein, and (c) to the extent
permitted by law, interest on overdue installments of interest and (ii) all
Indenture Defaults under such Indenture, other than the non-payment of
principal that has become due solely because of such acceleration, have been
cured or waived. Such rescission will be binding upon all holders of the
Mortgage Notes, but no such rescission will affect any subsequent default or
impair any right or remedy consequent thereon. (Base Indentures, Section
8.2(c))
If an Indenture Default has occurred and is continuing, the Indenture Trustee
may, and upon the written request of the holders of not less than a majority in
aggregate unpaid principal amount of the related outstanding Mortgage Notes
shall, subject to the condition described below and the related Owner Trustee's
rights to cure such Indenture Default or to redeem or purchase such Mortgage
Notes, exercise certain rights and remedies available to it under the related
Lease, such Indenture and applicable law, including the right to (a) take
possession of the related Indenture Estate, either directly or through an agent
or court appointed receiver, and exclude such Owner Trustee and Kmart, (b)
foreclose on the Indenture Estate and (c) enforce any security interests in
personal property; provided that the Indenture Trustee may not exercise any
remedy against the Indenture Estate seeking to deprive such Owner Trustee of
its interests therein unless a declaration of acceleration of such Mortgage
Notes has been delivered to such Owner Trustee and to Kmart. (Supplemental
Indentures, Section 2.1) See "Description of the Leases--Remedies".
In connection with an Indenture Default that arises solely by reason of a
Lease Event of Default, the Indenture Trustee may not foreclose the lien of
such Indenture or exercise any of its rights and remedies under the related
Indenture that would result in the exclusion of the related Owner Trustee from
the Indenture Estate or any substantial part thereof demised under the related
Lease unless (a) the Indenture Trustee shall have exercised or shall be
concurrently exercising remedies under such Lease involving termination of such
Lease or of Kmart's right to possession thereunder or (b) such Lease Event of
Default shall have continued for a period of at least 270 days and a stay
prohibiting the exercise of such remedies shall be in effect as of the
expiration of such 270-day period. (Supplemental Indentures, Section 2.1(a))
So long as no Lease Event of Default shall have occurred and be continuing,
Kmart is entitled to undisturbed possession of the Property subject to the
related Lease, even if an Indenture Default has occurred and is continuing
under the related Indenture. (Supplemental Indentures, Section 2.7) Because
each Indenture provides for certain Indenture Defaults that are not caused by a
Lease Event of Default under the related Lease, there are circumstances in
which the Mortgage Notes issued with respect to a Property may be accelerated
even if no default exists under the related Lease. In such case,
notwithstanding any acceleration, Kmart would not be obligated to pay more than
the amounts of rent required to be paid periodically under the Lease.
The holders of a majority in aggregate unpaid principal amount of Mortgage
Notes outstanding under any Indenture shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee; provided that such direction does not conflict with applicable law or
with the rights of the Owner Trustee under such Indenture; and provided further
that the Indenture Trustee may take any other action it deems proper that is
not inconsistent with such direction. (Supplemental Indentures, Section 2.4)
If an Indenture Default under any Indenture occurs and is continuing, any
sums held or received by the Indenture Trustee (other than Excepted Payments)
may be applied to reimburse the Indenture Trustee for all amounts then due to
it under such Indenture prior to any payments to holders of the Mortgage Notes
issued under such Indenture. (Base Indentures, Section 4.3)
In the event of a bankruptcy of any Owner Participant, it is possible that,
notwithstanding that such Owner Participant's interest in each Property is
owned by the applicable Owner Trustee in trust, the related Leases, Owner
Trustee and Mortgage Notes might become affected by the bankruptcy proceedings.
In such event, payments under such Leases or on such Mortgage Notes might be
interrupted and the ability of the
32
<PAGE>
Indenture Trustee to exercise its remedies under the related Indentures might
be restricted, although the Indenture Trustee would retain its status as a
secured creditor in respect of the related Leases and Properties.
POSSIBLE RECHARACTERIZATION OF THE LEASES AS LOANS FOR CERTAIN STATE LAW
PURPOSES
For federal and state income tax and accounting purposes, it is the intention
and belief of Kmart that each leveraged lease transaction entered into by Kmart
constitutes a "true lease". In this regard, Kmart has agreed not to take or
omit to take any action during the Lease term inconsistent with "true lease"
classification under state law. Notwithstanding the foregoing, in an action
involving the enforcement of any Lease, a court might determine that the
related leveraged lease transaction entered into by Kmart was actually a loan,
and accordingly that the conveyance by Kmart to the related Owner Trustee
constitutes an equitable mortgage of the related Property. Under such
circumstances, the related Owner Trustee would be considered a secured lender
to Kmart for purposes of enforcing state law landlord remedies, and the
Indenture Trustee would be considered a lender to such Owner Trustee holding an
assignment of the security. Consequently, to enforce Kmart's payment
obligations under such Lease, the related Owner Trustee or the Indenture
Trustee would be required to comply with the procedural requirements of, and
would be subject to the legal limitations on recovery, if any, under, the laws
of the state in which the leased property is located that are applicable to a
lender seeking to recover the principal of a loan secured by real property. It
is unclear whether the mortgage interest deemed to be held by the Owner Trustee
in a recharacterized transaction would be deemed to be properly perfected and
thus enforceable against other third party creditors. If the mortgage interest
were deemed perfected, the Owner Trustee (and, by assignment, the Indenture
Trustee) would have a secured claim against Kmart. If such mortgage interest
were not deemed perfected, it could be defeated by other creditors or a trustee
in bankruptcy, in which event the Owner Trustee (and, by assignment, the
Indenture Trustee) would be limited to an unsecured claim against Kmart in an
amount at least equal to the principal of, and accrued interest on, the
outstanding related Mortgage Notes. In either event such secured or unsecured
claim would not be subject to the limitations on lessor damages imposed by
Section 502(b)(6) of the Bankruptcy Code. See "Description of the Leases--
Consequences of Kmart's Bankruptcy".
MODIFICATION OF INDENTURES AND OTHER DOCUMENTS
The parties to the Leases, Participation Agreements, the Agreement and the
other Operative Documents (as defined in the Glossary) may grant consents
under, or modify, waive, amend or supplement certain provisions of such
Operative Documents without the consent of any holder of outstanding Mortgage
Notes, provided that no such modification, amendment, supplement, consent or
waiver shall, without the consent of the holder of each outstanding Mortgage
Note affected thereby, modify, amend or supplement, or give any consent in
respect of or waive any provision of any related Lease in any manner (i) as to
reduce the amounts payable by Kmart under the Leases, or change the time for
the payment thereof, so that such payments are less than the amounts necessary
to pay the principal of, Make-Whole Premium, if any, and interest on the
outstanding Mortgage Notes when due (whether at maturity, upon acceleration or
otherwise) or (ii) as would release Kmart from its obligation in respect of
payment of rent or any other amount payable under the Leases and intended to be
used to pay the principal of, Make-Whole Premium, if any, or interest on the
Mortgage Notes, in any manner inconsistent with clause (i) above. In addition,
without the consent of the Indenture Trustee given at the direction of the
holders of at least a majority of the outstanding related Mortgage Notes, the
Owner Trustee may not (except as it relates to certain indemnity or other
payment to the Owner Trustee or the Owner Participant) agree to any amendment
to, waiver, discharge, supplement or termination of, or grant any consent
under, certain specified provisions of such Operative Documents, including
provisions of the Leases relating to (i) the permitted uses of the Properties;
(ii) certain conditions Kmart must satisfy in order to construct improvements
to any Property; (iii) the rights of Kmart upon the occurrence of an Event of
Loss or adversely affect or delay or decrease the amount of any redemption of
the Mortgage Notes; (iv) the events constituting Lease Events of Default; or
(v) the remedies available to the Owner Trustee upon the occurrence of a Lease
Event of Default, if, in general, such amendment, waiver, discharge,
supplement, termination or consent would materially adversely affects the
rights of the holders of the Mortgage Notes. (Supplemental Indentures, Granting
Clause)
33
<PAGE>
Each Indenture contains provisions permitting the related Owner Trustee and
the Indenture Trustee, with the consent of the holders of not less than a
majority in aggregate principal amount of the related Mortgage Notes, to add,
modify or eliminate any provision of such Indenture, except that, without the
consent of the holder of each Mortgage Note outstanding under such Indenture
affected thereby, no amendment or modification of such Indenture may (a) change
the stated maturity of the principal of, or any installment of interest on, or
the dates or circumstances of payment of Make-Whole Premium, if any, on, any
Mortgage Note, or reduce the principal amount thereof or the interest thereon
or any amount payable upon the redemption thereof, or change the circumstances
for redemption or change the place of payment where, or the coin or currency in
which, any Mortgage Note or the Make-Whole Premium, if any, or the interest
thereon is payable, or impair the right to institute suit for the enforcement
of any such payment of principal or interest on or after the stated maturity
thereof (or, in the case of redemption, on or after the redemption date) or
such payment of Make-Whole Premium, if any, on or after the date such Make-
Whole Premium becomes due and payable or change the dates or the amounts of
payments to be made through installment payments; (b) permit the creation of
any lien prior to the lien of such Indenture with respect to any of the related
Indenture Estate or deprive the holder of any such Mortgage Note of the
security afforded by the lien of such Indenture except as may be required to
release property from the lien of such Indenture as expressly provided in such
Indenture; (c) terminate the related Lease, reduce the amounts payable under
such 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 of, Make-Whole
Premium, if any, and interest on the outstanding Mortgage Notes; (d) reduce the
percentage in principal amount of the outstanding Mortgage Notes, the consent
of the holders of which is required for any such amendment, or the consent of
the holders of which is required for any waiver provided for in such Indenture;
or (e) modify the provisions of such Indenture governing amendments or waivers
thereunder except to increase the percentage of holders of Mortgage Notes
necessary to permit certain actions or to add provisions of such Indenture that
cannot be modified or waived without the consent of each holder of a Mortgage
Note affected thereby. (Base Indentures, Section 11.2)
Each of the Owner Trustees and the Indenture Trustee will agree in the
Participation Agreements (i) to comply with the provisions of the related
Indenture, (ii) not to waive any provision of such Indenture requiring Kmart's
consent thereunder, and (iii) not to amend, supplement, waive or otherwise
modify any provision of such Indenture in such a manner as to adversely affect
the rights or increase the obligations of Kmart or the Owner Participant
without the prior written consent of such party. (Participation Agreements,
Section 17)
DISCHARGE OF LIEN
Each Indenture will cease to be of further effect when, among other things,
(a) the principal of, Make-Whole Premium, if any, and interest on all
outstanding Mortgage Notes have been paid, (b) all Mortgage Notes issued
thereunder have been delivered to the Indenture Trustee for cancellation, or
(c) (i) all Mortgage Notes issued thereunder and not theretofore delivered to
the Indenture Trustee for cancellation will mature or are to be called for
redemption such that they will be due and payable within one year, and (ii)
there shall have been irrevocably deposited with the Indenture Trustee in trust
cash in an amount that will be sufficient to pay, or direct obligations of the
United States of America maturing in such amounts and at such times as will
ensure the availability of cash sufficient to pay, when due, the principal of,
Make-Whole Premium, if any, and interest on all such Mortgage Notes. (Base
Indentures, Section 3.1)
ASSUMPTION OF OBLIGATIONS BY KMART
Upon exercise of the Termination Right or Kmart's acquisition of a Property
or the Owner Participant's interest in a Property following the exercise of the
Competitor Option, Kmart may elect to exchange the Mortgage Notes related to
such Property for secured, full recourse securities of Kmart to be issued under
a restated indenture, provided that, in addition to the satisfaction of other
conditions, prior to such assumption, Kmart shall have delivered to the
Indenture Trustee an opinion of counsel to the effect that such assumption will
not (i) cause any Pass Through Trust holding any such Mortgage Notes to become
an "investment
34
<PAGE>
company" as defined in the Investment Company Act of 1940, as amended, (ii)
cause any holder of any such Mortgage Notes to recognize income, gain or loss
for tax purposes in connection with such assumption or (iii) cause any adverse
tax consequences as to holders of the Mortgage Notes or to the
Certificateholders, and in connection therewith shall execute a restated
indenture (such restated indenture, the "Company Indenture"). See "Description
of the Leases--Obsolescence Termination" and "--The Participation Agreements".
Such Property will thereafter be subject to the lien of the Company Indenture,
and the Company Indenture will be reasonably satisfactory to the Indenture
Trustee and will incorporate certain relevant provisions of the Lease so
terminated, including (among others) provisions relating to maintenance,
possession and use of such Property, liens, insurance and events of default.
(Base Indentures, Section 7.1)
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. Except as otherwise indicated,
the following summaries relate to each of the Leases securing the related
Mortgage Notes. Citations to the relevant sections of the Leases and
Participation Agreements appear below in parentheses.
TERM AND RENT
Each Owner Trustee will lease each Property to Kmart pursuant to a Lease for
an interim term and a subsequent base term commencing January 2, 1996 which
together total 25 years. (Leases, Article 2) Rents are required to be paid by
Kmart under the Leases in immediately available funds on each January 2 and
July 2, commencing January 2, 1996 (the "Rent Payment Dates"). On each Rent
Payment Date, the aggregate amount of rents payable under each Lease will be at
least equal to the aggregate scheduled amount of principal and interest due on
the outstanding Mortgage Notes issued under the related Indenture on such date.
(Leases, Article 3(d)) Kmart's obligation to pay rent is absolute and
unconditional, and, with certain limited exceptions, payments of rent under the
Leases are to be made without notice, demand, counterclaim, setoff, deduction,
defense, abatement, or reduction. (Leases, Article 4)
NET LEASES; MAINTENANCE
The obligations of Kmart under each Lease are those of a lessee under a "net
lease". Accordingly, Kmart will be obligated under each Lease to pay the real
estate taxes attributable to the related Property as well as the Land related
thereto as well as all other costs and expenses of operating and maintaining
the related Property. (Leases, Articles 6, 9 and 11)
Each Lease requires Kmart to maintain the related Property in good repair and
condition, ordinary wear and tear excepted, consistent with the standard of
maintenance employed by Kmart as of the date of the Lease with respect to
similar properties owned or leased by Kmart and located in the general
geographic area where the Property is located, and in compliance with
applicable laws and health and safety standards. (Leases, Article 9)
USE; NO CONTINUOUS OPERATION
Each Property may be used for any lawful purpose; provided that no use of any
Property may be made that would: (i) be a public nuisance; (ii) cause such
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 commercially unreasonable to obtain the issuance of any
insurance policy required for such Property by the related Lease; or (v)
increase the related Owner Trust's risk of environmental liability. (Leases,
Article 17)
35
<PAGE>
Kmart is not obligated under any Lease to operate a business at the related
Property, except as required by law or by other agreement binding on such
Property. (Leases, Article 5)
ALTERATIONS AND ADDITIONAL CONSTRUCTION
So long as no Material Default or Lease Event of Default (each as defined
under "--Events of Default") under a Lease shall have occurred and be
continuing, Kmart may, at its own expense, make alterations and additions to
the related Improvements and erect or construct additional buildings or
structures on the related Property ("Alterations"), provided that such
Alterations shall not diminish the fair market value or remaining useful life
of such Property or increase the risk of environmental liability with respect
to such Property and that such Property shall not, as a result of the
Alterations, be characterized as "limited use property". In connection with any
alterations, additions or erection of additional improvements, Kmart shall
perform and complete all work in a first-class, workmanlike manner in
compliance with applicable laws. Kmart shall also have the right, with the
applicable Owner Trustee's consent, to demolish the Improvements with respect
to a particular Property in their entirety, which consent shall not be
unreasonably withheld if such Improvements are replaced within 18 months with a
building of at least equivalent fair market value and remaining useful life and
that at the time of such demolition (i) the long-term senior unsecured debt
securities of Kmart shall be rated investment grade by at least two nationally
recognized statistical rating organizations and (ii) Kmart shall then meet the
Net Worth Standard (as defined in "--Insurance"). All Alterations shall be and
remain the property of the related Owner Trustee subject to all of the terms
and provisions of the related Lease. (Leases, Article 10) All trade fixtures
and furniture installed at the expense of Kmart shall remain the property of
Kmart, not subject to the lien of the related Indenture. (Leases, Article 27)
Each Owner Trustee names Kmart as its attorney-in-fact, subject to certain
limitations and conditions, to grant easements, release existing easements,
make dedications, execute annexation petitions and amend covenants and
restrictions in respect of any Property that do not impair the usefulness of
such Property for the purposes contemplated and permitted by the related Lease,
or reduce the fair market value or remaining useful life of such Property and
shall not cause such Property to be characterized as "limited use property" for
certain federal income tax purposes. (Leases, Article 13)
LIENS
Under each Lease, Kmart, as lessee, covenants that it shall not, during the
term of such Lease, directly or indirectly create, incur, assume, suffer or
permit any lien or encumbrance 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 the term of such Lease, other than certain
permitted liens. Kmart shall promptly, but no later than 30 days after the
attachment thereof, at its own expense, discharge, eliminate or bond in a
manner satisfactory to the related Owner Trustee any lien that is not a
permitted lien. (Leases, Article 19)
ASSIGNMENT OR SUBLEASING
Under each Lease, upon the satisfaction of certain conditions and so long as
no Lease Event of Default or Material Default thereunder shall have occurred
and be continuing, Kmart may assign its right, title and interest to and under
such Lease to any person, provided that any assignment shall be expressly
subordinate to the related Lease. Notwithstanding any such assignment, Kmart
will remain primarily liable for the performance of its obligations under such
Lease. (Leases, Article 17)
With respect to each Property, upon the satisfaction of certain conditions
and so long as no Lease Event of Default or Material Default with respect
thereto shall have occurred and be continuing, Kmart has the right to sublease
all or any portion of such Property to any person, provided that any sublease
shall be expressly subordinate to the related Lease. No sublease may extend
beyond the end of the term of the applicable Lease. Notwithstanding any such
sublease, Kmart will remain primarily liable for the performance of its
obligations under the related Lease. (Leases, Article 17)
36
<PAGE>
INSURANCE
Under each Lease, Kmart is required, at its own cost and expense, to carry
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 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,
and such additional coverages as may be required under any of the Operative
Documents. In no event shall the deductible amount under such casualty
insurance policies exceed $250,000. In any event, Kmart shall maintain
insurance on the Properties as maintained by Kmart with respect to similar
properties owned or leased by Kmart and located in the general geographic area
where the related Property is located. Notwithstanding the foregoing, Kmart may
elect to self-insure any Property against casualty, workers' compensation and
liability risks; provided that Kmart maintains a consolidated tangible net
worth of at least $1,000,000,000 calculated in accordance with generally
accepted accounting principles, subject to certain adjustments (the "Net Worth
Standard"). (Leases, Articles 7 and 14)
CONDEMNATION AND CASUALTY
In the event of a total or substantial casualty to the Improvements
comprising a portion of any Property, Kmart may elect to terminate the related
Lease. In the event of a permanent or temporary condemnation of a Property or
such portion thereof that either, in Kmart's judgement, renders the Property
unsuitable for its intended use or materially impairs the points of ingress and
egress to the Property (any such event, or any total or substantial casualty
described in the preceding sentence, an "Event of Loss"), Kmart is obligated to
terminate the related Lease. If Kmart elects or is obligated to terminate the
related Lease, it shall be obligated to make a rejectable offer to purchase the
related Property for an amount at least equal to the outstanding principal and
accrued but unpaid interest on the related Mortgage Notes. The applicable Owner
Trustee may not reject such offer unless it deposits with the Indenture Trustee
amounts sufficient to pay the outstanding principal of the related Mortgage
Notes. (Leases, Articles 14, 15 and 40)
If following a casualty or condemnation to any Property, Kmart does not or is
not entitled to terminate the related Lease, Kmart will be obligated to restore
such Property at its own expense as nearly as practicable to the condition that
existed immediately prior to such casualty or condemnation. Kmart is obligated
to complete such restoration prior to the expiration of the term of the related
Lease or as soon as possible following the termination of such Lease. If Kmart
meets 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 and no Material Default or Lease Event of Default has occurred and is
continuing, any such insurance proceeds or condemnation awards shall be payable
to Kmart for restoration and repair of the Property. If Kmart does not meet 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, if the related Indenture is
outstanding, be deposited with the Indenture Trustee and shall be disbursed to
Kmart upon progress of completion of restoration, repair, replacement or
rebuilding, subject to certain provisions set forth in the related Lease. In
the event that condemnation proceeds exceed the actual cost of restoration, the
Indenture Trustee shall have the right to retain the excess proceeds and apply
the same in accordance with the related Indenture. (Leases, Articles 14, 15 and
16)
OBSOLESCENCE TERMINATION
At any time following the seventh anniversary of the commencement of the
interim term of the Lease and provided that no Lease Event of Default or
Material Default has occurred and is continuing, Kmart may terminate any Lease
if it determines that the related Property has become obsolete, is no longer
economic for Kmart's use or surplus to Kmart's needs. In such event, such
Property may be (i) transferred to Kmart for an amount sufficient to redeem the
related Mortgage Notes (including the Make-Whole Premium, if any, thereon),
(ii) sold to a third party, with any difference between the amount specified in
clause (i) and the net
37
<PAGE>
sale price being paid by Kmart or (iii) retained by the related Owner Trustee,
provided that such Owner Trustee shall not be entitled to retain the Property
unless it deposits with the Indenture Trustee cash or cash equivalents in an
amount sufficient for the redemption of the related Mortgage Notes (exclusive
of accrued interest thereon and the Make-Whole Premium, if any) which amounts
will be paid by Kmart on the applicable redemption date). The foregoing
notwithstanding, under certain circumstances, Kmart may elect to exchange the
related Mortgage Notes for secured, full recourse securities of Kmart to be
issued under a restated indenture upon the exercise of the Termination Right
with respect to such Property and the transfer of such Property to Kmart, in
which case such Mortgage Notes would not be redeemed. See "Description of the
Mortgage Notes--Assumption of Obligations by Kmart". (Base Indentures, Section
7.1; Leases, Article 39) Kmart may also elect under certain circumstances to
substitute another property for the Property subject to the related Lease.
(Leases, Article 41) See "--Substitution".
EVENTS OF DEFAULT
Events of default under each Lease ("Lease Events of Default") include the
following:
(i)the failure by Kmart to pay any installment of Basic Rent or any
amount of Additional Rent constituting Termination Value or amounts in
respect of the Make-Whole Premium, if any, within five days after the same
is due if the Owner Trustee has given Kmart notice of such due date before
such due date, or within ten days of the due date if the Owner Trustee
does not deliver such notice;
(ii)the failure by Kmart to make any payment constituting Additional
Rent (other than amounts of Additional Rent described in clause (i) above)
within 15 days after notice to Kmart of non-payment;
(iii)the failure by Kmart to maintain insurance as required by the Lease
or any other Operative Document;
(iv)the failure by Kmart to perform any of its other covenants or
obligations under the Lease or any of the other Operative Documents (other
than the Tax Indemnification Agreement (as defined in such Lease)) within
30 days after notice thereof; 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; and
(vi)any representation or warranty by Kmart in such Lease or any of the
other Operative Documents (other than the Tax Indemnification Agreement)
or in any certificate expressly required to be delivered pursuant thereto
shall have been false or incorrect when made in any respect material to
the related Owner Trustee or Owner Participant and such falseness or
incorrectness is material to such Owner Trustee or Owner Participant and
continues to be material, and shall not have been cured within 30 days
after receipt of written notice by Kmart from such Owner Trustee, unless
the default is curable and Kmart shall be diligently proceeding to correct
such default; provided that in no event shall such cure period exceed 60
days.
For purposes of each Lease, a "Material Default" shall include an event of
the type described in clause (i) or (v) above that, with the passage of time or
the giving of notice, or both, would become a Lease Event of Default.
To the extent that any failure by Kmart to perform any covenant or obligation
or any breach of a representation or a warranty relates solely to a Property or
Properties other than the Property subject to a particular Lease, such failure
or breach shall not give rise to a Lease Event of Default under such Lease.
(Leases, Article 20)
38
<PAGE>
REMEDIES
If a Lease Event of Default has occurred and is continuing with respect to
any Lease, the related Owner Trustee may declare such Lease to be in default.
Except as provided below, and to the extent permitted by law, the related Owner
Trustee may at any time thereafter exercise one or more of the remedies set
forth in the Lease, including the right to terminate such Lease and repossess
and use or relet the related Property, to sell such Property or any part
thereof, together with any interest of such Owner Trustee in such Property free
and clear of Kmart's rights, and so long as such Property has not been sold, to
require Kmart to pay as liquidated damages, certain unpaid rent plus any one of
the following sums: (a) the difference between a stipulated termination value
identified in the related Lease (the "Termination Value") and the present value
of the fair market rental value of such Property, for the remainder of the term
of such Lease, such present value to be computed using a per annum rate equal
to the weighted average rate of interest per annum borne by the related
Mortgage Notes as of the closing date (the "Debt Rate"), discounted
semiannually from the dates such rent would be paid; (b) the difference between
the present value computed using a per annum rate equal to the Debt Rate of all
rents, discounted semiannually, for the remainder of the base or applicable
renewal term of the Lease (the "Discounted Basic Rents") and the present value
computed using a per annum rate equal to the Debt Rate of the fair market
rental value of such Property for the remainder of such term, discounted
semiannually; (c) an amount equal to such Property, the Discounted Basic Rents
and the Termination Value; or (d) the Termination Value of such property and
the fair market sales value of such Property. If such Property has been sold,
Kmart would be required to pay the difference, if any, between the sale
proceeds and Termination Value. (Leases, Article 21) The Indenture Trustee, as
assignee of the related Owner Trustee under the related Indenture, may exercise
the remedies of such Owner Trustee under the related Lease.
SUBSTITUTION
Under each Lease, so long as no Lease Event of Default or Material Default
shall have occurred and be continuing, Kmart may substitute another property
(the "Substitute Property") for the related Property (the "Substitution
Right"), either following an Event of Loss, or in the event that Kmart becomes
obligated to purchase such Property, following exercise by Kmart of the
Termination Right. Kmart may not substitute a Substitute Property for the
related Property unless it satisfies certain conditions with respect to the
Substitute Property, including but not limited to, (i) the fair market value
and useful life of the Substitute Property are not less than the fair market
value and useful life of the Property immediately prior to the event which gave
rise to the substitution, (ii) Kmart shall deliver an environmental assessment
report, survey and title search report, each of which shall be satisfactory to
the Owner Trustee and the Indenture Trustee and (iii) the substitution shall
not reduce the amount or timing of any rents due under such Lease. Kmart shall
not be entitled to substitute a Property unless (i) the long-term senior
unsecured debt securities of Kmart shall then be rated investment grade by at
least two nationally recognized statistical ratings organizations, and (ii)
Kmart shall then meet the Net Worth Standard. (Leases, Article 41)
THE PARTICIPATION AGREEMENTS
Kmart is required to indemnify each Owner Participant, each Owner Trustee,
the Indenture Trustee, the Remainderman Participant, the Remainderman Trustee
and the Trustee for certain losses and claims and for certain other matters.
(Participation Agreements, Section 23) Subject to certain restrictions, each
Owner Participant may transfer its interest in the Properties. (Participation
Agreements, Section 2)
If any Owner Participant becomes a competitor of Kmart during the term of the
related Leases, Kmart may exercise the Competitor Option (provided that no
Lease Event of Default or Material Default has occurred and is continuing under
such Leases) in which event such Owner Participant will have the right for a
90-day period to sell the related Properties or its interest in the related
Properties to a transferee other than Kmart or its affiliates, and if such
transfer occurs during the 90-day period, the related Mortgage Notes will not
be redeemed. If a transfer by such Owner Participant does not occur during the
90-day period, (i) the
39
<PAGE>
related Properties may be (a) transferred to Kmart for an amount equal to the
Redemption Price, plus, if such transfer is made prior to the applicable
Premium Termination Date, a Make-Whole Premium, if any, plus any other amounts
that Kmart owes to such Owner Participant and Owner Trustee or (b) sold to a
third party, with the excess of the Redemption Price, plus, if such transfer is
made prior to the applicable Premium Termination Date, a Make-Whole Premium, if
any, plus any other amounts that Kmart owes to such Owner Participant and Owner
Trustee over the net sale price being contributed by Kmart; or (ii) the Owner
Participant's interest in the related Properties may be (a) transferred to a
third party, in which case the related Mortgage Notes will not be redeemed, or
(b) transferred to Kmart for an amount equal to the Redemption Price, plus, if
such transfer is made prior to the applicable Premium Termination Date, a Make-
Whole Premium, if any, plus any other amounts that Kmart owes to the related
Owner Participant and Owner Trustee. Under certain conditions Kmart may elect
to purchase the related Properties or the related Owner Participant's interest
therein subject to the lien of the Indenture, and assume, in accordance with
and subject to the terms of the Indenture, personal liability for the payment
of the related Mortgage Notes and in such event such Mortgage Notes will not be
redeemed. (Base Indentures, Section 6.1; Participation Agreements, Section 3)
CONSEQUENCES OF KMART'S BANKRUPTCY
If Kmart were to become a debtor in a bankruptcy proceeding under the
Bankruptcy Code, Kmart or its bankruptcy trustee could seek to reject any or
all of the Leases. If the bankruptcy court treated any Lease as a true lease
and approved the rejection of such Lease, such rejection would constitute a
breach of such Lease and, as provided in applicable non-bankruptcy law, deprive
Kmart of the use and possession of the related Property. If any Lease were
rejected, rental payments thereunder would terminate, thereby leaving the
related Owner Trustee (and by virtue of the assignment effected by the
Indentures, the Indenture Trustee) without regular rent payments and with a
claim for damages as a source of payment of amounts due under the Mortgage
Notes issued in respect of the Property leased pursuant to the rejected Lease.
Under section 502(b)(6) of the Bankruptcy Code, a claim by a lessor for damages
resulting from the rejection by a debtor of a lease of real property is limited
to an amount equal to the rent reserved under the lease, without acceleration,
for the greater of one year or 15 percent (but not more than three years) of
the remaining term of the lease, plus rent already due but unpaid. There can be
no assurance that any such claim for damages would be sufficient to provide for
the repayment of the Mortgage Notes issued under the Indenture related to such
Lease. Regardless of any limitation of damages pursuant to section 502(b)(6) of
the Bankruptcy Code, the Indenture Trustee under the related Indenture could
also seek to foreclose upon its lien and security interest in the related
Property under applicable state law, which lien and security interest would not
be affected by rejection of the related Lease, and apply the proceeds of any
foreclosure sale to any amounts unpaid with respect to the related Mortgage
Notes.
40
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel to
Kmart, the following discussion accurately describes the material federal
income tax consequences of the ownership and disposition of Certificates. This
discussion is based on laws, regulations, rulings and decisions now in effect,
all of which are subject to change or different interpretation. Moreover,
certain of the anticipated federal income tax consequences discussed herein are
based on regulations of the Treasury Department ("Treasury Regulations") which
are proposed and subject to change and which are not binding authority until
adopted as final or temporary Treasury Regulations. As a result, definitive
guidance cannot be provided regarding all of the federal income tax
consequences to Certificateholders or to the Pass Through Trusts. In addition,
there can be no assurance that the Internal Revenue Service or the courts would
not take positions different from those discussed herein and which positions
could be materially adverse to Certificateholders. Investors should consult
their own tax advisors in determining the federal, state, local, foreign and
any other tax consequences to them of the purchase, ownership, redemption
and/or disposition of the Certificates, including the advisability of making
any elections discussed herein. This discussion does not purport to address
federal income tax consequences applicable to particular categories of
investors some of which (for example, insurance companies and foreign
investors) may be subject to special rules.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS IN DETERMINING
THE FEDERAL, STATE, LOCAL AND ANY OTHER TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF CERTIFICATES, INCLUDING THE ADVISABILITY
OF MAKING ANY ELECTION DISCUSSED BELOW.
The Pass Through Trusts will not be indemnified for any federal income taxes
that may be imposed upon them, and the imposition of any such taxes could
result in a reduction in the amounts available for distribution to the holders
of Certificates evidencing interests in the affected Pass Through Trust.
GENERAL
Based upon an interpretation of analogous authorities under currently
applicable law, the Pass Through Trusts created by the Agreements will not be
classified as associations taxable as corporations, but, rather will be
classified as grantor trusts under Subpart E, Part 1, Subchapter J of Chapter 1
of the Internal Revenue Code of 1986, as amended (the "Code"). Each
Certificateholder will be treated as the owner of a pro rata undivided interest
in each of the Mortgage Notes or any other property held in the Pass Through
Trust in which the Certificate held by such holder evidences an interest.
In reaching the conclusion that each of the Pass Through Trusts will be
classified as a grantor trust, counsel considered whether the Pass Through
Trusts could be recharacterized as "taxable mortgage pools" which are treated
as corporations for federal income tax purposes. Generally, an entity is
classified as a "taxable mortgage pool" only if, among other requirements, the
entity is the obligor on debt obligations (or equity interests with terms
similar to debt obligations) with two or more maturities. Because each Pass
Through Trust will issue only one class of beneficial interest having only one
maturity date, the Pass Through Trusts could be treated as "taxable mortgage
pools" only if the two Pass Through Trusts were integrated (i.e., treated as
one trust). While there is no authority directly on point, in rendering its
opinion that the Pass Through Trusts will be treated as grantor trusts, counsel
concluded that the Pass Through Trusts should be respected as separate
entities, in part, because (i) each Pass Through Trust will own separate
assets, (ii) each Pass Through Trust will have separate independent Trustees,
(iii) each Pass Through Trust will have separate sets of Certificateholders and
(iv) each Pass Through Trust will have independent economic substance. Proposed
Treasury Regulations under section 7701(i) of the Code provide that for
purposes of applying the taxable mortgage pool rules, ownership interests in
entities that are classified as "investment trusts" under the rules of Treasury
Regulations section 301.7701-4(c) will not be treated as debt obligations of
such trusts. Since each Pass Through Trust is expected to be classified as an
"investment trust" under such Treasury
41
<PAGE>
Regulations, the Proposed Treasury Regulations would confirm that the taxable
mortgage pool rules should not apply to the Pass Through Trusts.
Each Certificateholder, in accordance with its method of accounting, will be
required to report on its federal income tax return its pro rata share of the
interest and other income from the Mortgage Notes or any other property held in
the related Pass Through Trust and may, subject to applicable Code limitations
on deductions, deduct its pro rata share of the deductible expenses of the
related Pass Through Trust, at the same time and to the same extent as if it
held directly a pro rata interest in the assets of the Pass Through Trust and
received and paid directly the amounts received and paid by the Pass Through
Trust. A Certificateholder who is an individual, trust or estate will be
allowed a deduction for certain itemized deductions only to the extent they
exceed, in the aggregate, 2% of the Certificateholder's adjusted gross income
and such amounts will not be deductible in computing such taxpayer's
alternative minimum tax liability if any.
A purchaser of a Certificate will be treated as purchasing an interest in
each Mortgage Note and any other property in the related Pass Through Trust at
a price determined by allocating the purchase price paid for the Certificate
among such Mortgage Notes and other property in proportion to their fair market
values at the time of purchase of the Certificate.
SALES OF CERTIFICATES
A Certificateholder that sells a Certificate will recognize gain or loss (in
the aggregate) equal to the difference between its adjusted tax basis in the
Certificate and the amount realized on the sale (except to the extent
attributable to accrued interest, which should be taxable as interest income).
Subject to the market discount provisions of the Code (described below), any
such gain or loss will be capital gain or loss if the Certificate was held as a
capital asset and will be long-term capital gain or loss if the Certificate was
held for more than one year.
MARKET DISCOUNT
A purchaser of a Certificate subsequent to its original issue will be
considered to have acquired an interest in a Mortgage Note at a "market
discount" to the extent the remaining principal amount of the Mortgage Note
allocable to the Certificate exceeds the Certificateholder's tax basis
allocable to such Mortgage Note, unless the excess does not exceed a prescribed
de minimis amount. In the event such excess exceeds the de minimis amount, the
Certificateholder will be subject to the market discount rules of sections 1276
to 1278 of the Code with regard to its interest in the Mortgage Note.
In the case of a sale or certain other disposition of indebtedness subject to
the market discount rules, section 1276 of the Code requires that gain, if any,
from such sale or disposition be treated as ordinary income to the extent such
gain does not exceed the market discount that has accrued on such indebtedness
during the period in which it was held.
In the case of a partial principal payment on indebtedness subject to the
market discount rules, section 1276 of the Code requires that such payment be
included in gross income as ordinary income to the extent such payment does not
exceed the market discount that has accrued on such indebtedness during the
period in which it was held. The amount of any accrued discount later required
to be included in income upon a disposition, or a subsequent partial principal
payment, will be reduced by the amount of such partial principal payment
previously included in income.
Generally, market discount accrues under a straight line method, or, at the
election of the taxpayer, a constant interest method. However, in the case of
installment obligations (such as the Mortgage Notes), the manner in which
market discount is to be accrued has been left to Treasury Regulations not yet
issued. Until such Treasury Regulations are issued, the Conference Report
indicates that holders of installment obligations
42
<PAGE>
with market discount may elect to accrue market discount either on the basis of
a constant interest rate or (assuming the installment obligation was issued
without original issue discount) as follows: the amount of market discount that
is deemed to accrue is the amount of market discount that bears the same ratio
to the total amount of market discount remaining that the amount of stated
interest paid in the accrual period bears to the total amount of stated
interest remaining to be paid on the installment obligation as of the beginning
of such period.
Under section 1277 of the Code, if in any taxable year interest paid or
accrued on indebtedness incurred or continued to purchase or carry market
discount indebtedness exceeds the interest currently includible in income with
respect to such market discount indebtedness, deduction of such excess interest
must be deferred to the extent of the market discount allocable to the portion
of the taxable year in which such market discount indebtedness was held by the
taxpayer. The deferred portion of such interest will generally be deductible
when such market discount is included in income upon the sale or other
disposition (including repayment) of the indebtedness.
Section 1278 of the Code allows a taxpayer to make an election to include
market discount in gross income currently. If such election is made, the rules
of sections 1276 and 1277 (described above) will not apply to the taxpayer.
Such an election shall apply to all debt instruments with market discount
acquired by the taxpayer on or after the first day of the first taxable year to
which the election applies. The election shall apply to all subsequent taxable
years and may not be revoked without the consent of the Secretary of Treasury.
PREMIUM
A Certificateholder will generally be considered to have acquired an interest
in a Mortgage Note at a premium to the extent the purchaser's tax basis
allocable to such interest exceeds the remaining principal amount of the
Mortgage Note allocable to such interest. In that event, a Certificateholder
that holds a Certificate as a capital asset may elect to amortize that premium
as an offset to interest income under section 171 of the Code with
corresponding reductions in the Certificateholder's tax basis in that Mortgage
Note. Generally, such amortization is on a constant yield basis. However, in
the case of installment obligations (such as the Mortgage Notes), the
Conference Report indicates a Congressional intent that amortization be in
accordance with the rules that apply to the accrual of market discount on
installment obligations. See "--Market Discount". Such an election shall apply
to all debt instruments with amortizable bond premium (other than debt
instruments the interest on which is excludible from gross income) held by the
Certificateholder as of the beginning of the taxable year for which the
election applies or thereafter acquired. The election will apply to all
subsequent taxable years, and may not be revoked without the consent of the
Secretary of the Treasury.
Since the Mortgage Notes may be redeemed at a premium prior to maturity,
amortizable bond premium may be determined by reference to an early redemption
date if this results in a smaller premium attributable to the period before the
redemption date. Due to the complexities of the amortizable premium rules,
particularly where there is more than one possible redemption date and the
amount of any premium is uncertain, Certificateholders are urged to consult
their own tax advisors as to the amount of any such amortizable premium.
ORIGINAL ISSUE DISCOUNT
Generally, a holder of a debt instrument issued with original issue discount
that is not de minimis must include original issue discount in income for
federal income tax purposes as it accrues, in advance of the receipt of the
cash attributable to such income, using a method that takes into account the
compounding of interest. It is anticipated that the Mortgage Notes will not be
issued with original issue discount.
43
<PAGE>
BACKUP WITHHOLDING
Payments made on the Certificates, and proceeds from the sale of the
Certificates to or through certain brokers, may be subject to a "backup"
withholding tax of 31% unless the Certificateholder complies with certain
reporting procedures or is an exempt recipient under section 6049(b)(4) of the
Code. Any such withheld amount will be allowed as a credit against the
Certificateholder's federal income tax.
CERTAIN CONNECTICUT TAXES
The Trustee is a national banking association with its principal corporate
trust office in Hartford, Connecticut. Shipman & Goodwin, special counsel to
the Trustee, has advised Kmart that, in its opinion, prior to a default and
under currently applicable law, assuming that the Pass Through Trusts will not
be taxable as corporations but, rather, will be treated as investment trusts
which are classified as grantor trusts under subpart E, Part I of Subchapter J
of the Code, (i) the Pass Through Trusts will not be subject to any tax
(including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Connecticut or any political
subdivision thereof and (ii) Certificateholders who are not residents of or
otherwise subject to tax in Connecticut will not be subject to any tax
(including, without limitation, net or gross income, tangible or intangible
property, net worth, capital, franchise or doing business tax), fee or other
governmental charge under the laws of the State of Connecticut or any political
subdivision thereof solely as a result of purchasing, holding (including
receiving payments with respect to) or selling a Certificate. Neither the Pass
Through Trusts nor the Certificateholders will be indemnified for any state or
local taxes imposed on them, and the imposition of any such taxes on the Pass
Through Trusts could result in a reduction in the amounts available for
distribution to the Certificateholders. In general, should a Certificateholder
or the Pass Through Trusts be subject to any state or local tax which would not
be imposed if the Trustee were located in a different jurisdiction in the
United States, the Trustee will resign and a new Trustee in such other
jurisdiction will be appointed.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain restrictions on covered employee
benefit plans, including corporate pension and profit sharing plans ("Plans"),
and on persons who are parties in interest or disqualified persons ("Parties in
Interest") with respect to such Plans. ERISA also imposes certain duties on
persons who are fiduciaries of Plans and prohibits non-exempt transactions
between a Plan and its Parties in Interest. Governmental plans and certain
church plans are not subject to ERISA or Section 4975 of the Code.
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. Moreover, each Plan fiduciary should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Plan fiduciaries must also determine whether the acquisition and holding of
the Certificates and the operations of the Pass Through Trusts and the Owner
Trustees (collectively, the "Trust Funds") would result in direct or indirect
prohibited transactions. The operations of the Trust Funds could result in
prohibited transactions if Plans that purchase the Certificates are deemed to
own an interest in the underlying assets of one or more of the Pass Through
Trusts under the Plan Assets Regulation (as described below). There may also be
an improper delegation of the responsibility to manage Plan assets if Plans
that purchase the Certificates are deemed to own an interest in the underlying
assets of the Pass Through Trusts.
44
<PAGE>
The U.S. Department of Labor ("DOL") has issued a final regulation (29 C.F.R.
Section 2510.3-101) (the "Plan Assets Regulation") providing that, as a general
rule, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities (other than operating companies) in which a
Plan makes an equity investment will be deemed for purposes of ERISA and
Section 4975 of the Code to be assets of the investing Plan, unless certain
exceptions apply. If the assets of the Pass Through Trusts were deemed to
constitute assets of the Plans holding Certificates, the persons providing
services with respect to the assets of the Pass Through Trusts may be subject
to the fiduciary responsibility provisions of Title I of ERISA, and
transactions involving such Pass Through Trust assets may be subject to the
prohibited transaction provisions of ERISA and Section 4975 of the Code.
Transactions involving the assets of the Pass Through Trusts, as well as
purchases and sales of the Certificates, however, may be exempt from the
prohibited transaction restrictions of ERISA and the Code under administrative
exemptions issued by the DOL or statutory exemptions. Among the administrative
class and statutory exemptions that may be available are: Prohibited
Transaction Class Exemption ("PTE") 75-1, which exempts certain securities
transactions involving employee benefit plans and certain broker-dealers and
banks; PTE 91-38, which exempts certain transactions between bank collective
investment funds and parties in interest; PTE 90-1, which exempts certain
transactions with insurance company pooled separate accounts; or PTE 84-14,
which exempts certain transactions effected on behalf of a plan by a "qualified
professional asset manager".
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with its counsel with respect to the potential applicability of
ERISA and the Code (including the Plan Assets Regulation) to such investments,
whether any prohibited transaction exemptions would be applicable, and whether
all conditions of any potentially applicable prohibited transaction exemption
have been satisfied. Additionally, the Plan fiduciary should consult its
counsel with respect to any valuation issues which may be presented by an
investment in Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), Kmart has agreed to cause
the Trustee to sell to Morgan Stanley & Co. Incorporated and Goldman, Sachs &
Co. (together, the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount of Certificates set forth opposite its
name below.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
UNDERWRITER AMOUNT OF EACH SERIES OF CERTIFICATES
----------- ---------------------- ----------------
<S> <C> <C>
Morgan Stanley & Co. Incorporat-
ed.............................. % $
Goldman, Sachs & Co.............
-------- --------
Total......................... $
======== ========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the Certificates are subject to the approval
of certain legal matters by their counsel and certain other conditions. The
Underwriters are obligated to take and pay for all of the Certificates to be
purchased by them if any are taken.
The Underwriters initially propose to offer all or part of the Certificates
directly to the public at the public offering price per Certificate designation
set forth on the cover page hereof and part to certain dealers at a price which
represents a concession not in excess of the percentage set forth below of the
public offering price of the Certificates. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of the percentage set forth
below of the public offering price of the Certificates to certain other
dealers. After the initial public offering, the public offering prices and such
concessions and discounts may be changed.
45
<PAGE>
<TABLE>
<CAPTION>
PASS THROUGH
CERTIFICATES CONCESSION REALLOWANCE
DESIGNATION TO DEALERS CONCESSION
------------ ----------- -----------
<S> <C> <C>
1995-K3......................................... % %
1995-K4......................................... % %
</TABLE>
All secondary trading on the Certificates will settle in immediately
available funds. See "Description of the Certificates--Same-Day Settlement and
Payment".
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Company does not intend to apply for listing of the Certificates on a
national securities exchange, but has been advised by the Underwriters that
they presently intend to make a market in the Certificates, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however,
to make a market in the Certificates and any such market making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Certificates.
RATING
It is a condition to the issuance of the Certificates that they be rated at
least BBB by S&P and Baal by Moody's. The ratings will not address the receipt
of the Make-Whole Premium, if any, payable upon the occurrence of an Event of
Default.
A security rating is not a recommendation to buy, sell or hold securities,
may be subject to revision or withdrawal at any time by the assigning rating
agency, and should be evaluated independently of any other rating.
Kmart will be the tenant under all of the Leases and, as such, may become the
ultimate source of payment on the Mortgage Notes and, therefore, the ultimate
source of payment on the Certificates. Because of this dependence upon Kmart
for the ultimate payment of the Certificates, the ratings on the Certificates
are directly related to the credit of Kmart. It should, therefore, be expected
that a reduction or withdrawal of the debt ratings of Kmart would adversely
affect the ratings on the Certificates.
LEGAL OPINIONS
The validity of the Certificates offered hereby will be passed upon for Kmart
by Dickinson, Wright, Moon, Van Dusen & Freeman, Detroit, Michigan, and for the
Underwriters by Shearman & Sterling, New York, New York. Both Dickinson,
Wright, Moon, Van Dusen & Freeman and Shearman & Sterling will rely on the
opinion of Shipman & Goodwin, special counsel for Shawmut Bank Connecticut,
National Association, as Trustee, as to certain matters relating to the
authorization, execution and delivery of the Certificates by, and the valid and
binding effect thereof on, such Trustee.
EXPERTS
The consolidated financial statements and schedules of Kmart appearing in or
incorporated by reference to the Annual Report on Form 10-K of Kmart for the
year ended January 25, 1995, have been so incorporated in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
46
<PAGE>
GLOSSARY OF CERTAIN TERMS APPENDIX
The following is a glossary of certain terms used in this Prospectus. The
definitions of terms used in this glossary that are also used in the
Agreements, Indentures, Leases, Owner Trust Agreements and Participation
Agreements are qualified in their entirety by reference to the definitions of
such terms contained therein.
"Additional Rent" means, generally, all amounts payable under a Lease other
than the basic semiannual rental payments.
"Agreement" means each of the two separate Pass Through Trust Agreements
between Kmart and the Trustee, pursuant to which the Pass Through Trusts will
be formed.
"Bankruptcy Code" means the United States Bankruptcy Code of 1978, as
amended.
"Base Indenture" means, with respect to each Property, the trust indenture
between the related Owner Trustee and the Indenture Trustee.
"Business Day" means any day other than Saturday or Sunday or other day on
which banking institutions in the States of New York, Michigan, or the States
in which the principal offices of the Trustee, Owner Trustee or Indenture
Trustee are located, are authorized or required by law to close.
"Cede" means Cede & Co., as nominee of DTC.
"Certificate" means any of the Pass Through Certificates to be issued under
either of the Agreements.
"Certificate Account" means one or more non-interest bearing accounts
established and maintained by the Trustee for each Pass Through Trust and for
the benefit of Certificateholders for the deposit of payments representing
Scheduled Payments on the Mortgage Notes.
"Certificate Owner" means, for any Pass Through Trust, any person acquiring a
beneficial interest in any Certificate issued by such Pass Through Trust.
"Certificateholder" means the registered holder of any Certificate issued by
a Pass Through Trust.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Company" means Kmart Corporation.
"Definitive Certificates" means Certificates issued in fully registered,
certificated form to Certificate Owners or their nominees, rather than to DTC
or its nominee.
"DTC" means The Depository Trust Company.
"DTC Participants" means those participants for whom DTC holds securities on
deposit.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Estate for Years" shall have the meaning described under "Structure of the
Transaction".
"Event of Default" means, with respect to each Pass Through Trust, the
occurrence and continuance of an Indenture Default under one or more of the
Indentures pursuant to which the Mortgage Notes constituting Trust Property of
such Pass Through Trust will be issued.
"Event of Loss" means, for any Property, any casualty or condemnation
requiring Kmart to make a purchase offer as described in "Description of the
Leases--Condemnation and Casualty".
A-1
<PAGE>
"Excepted Payments" means rights of each Owner Trustee and Owner Participant
relating to indemnification by Kmart of the Owner Trustees or Owner
Participants for certain matters, insurance proceeds payable to the Owner
Trustee or to the Owner Participants under certain insurance maintained by or
for the benefit of the Owner Trustees or the Owner Participants, any amount
payable to the Owner Participant as the Purchase Price for the interests
conveyed in connection with Kmart's exercise of the Competitor Option and
certain reimbursement payments made by Kmart to the Owner Trustee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Improvements" shall have the meaning described in "Structure of the
Transaction".
"Indenture" means, with respect to each Property, the related Base Indenture,
as supplemented by the related Supplemental Indenture, as such Indenture may be
modified, supplemented or amended from time to time.
"Indenture Default" means, for any Indenture, each of the events designated
as an event of default in such Indenture. See "Description of the Mortgage
Notes--Indenture Defaults, Notice and Waiver".
"Indenture Estate" means, with respect to each Indenture, (i) the assignment
of certain rights of the related Owner Trustee's rights as lessor under the
related Lease, including the right to receive base rentals and certain other
payments from Kmart (excluding Excepted Payments), (ii) a first mortgage lien
on the Improvements and Estate for Years acquired by the related Owner Trustee,
subject to the rights of Kmart under the related Lease, and (iii) the
assignment of such Owner Trustee's rights under the Option.
"Indenture Trustee" means collectively, Shawmut Bank Connecticut, National
Association, a national banking association, in its capacity as an Indenture
Trustee under each Indenture, and its successors and assigns thereunder, and
Kathy A. Larimore, in her capacity as an Indenture Trustee under each
Indenture, and her successors and assigns thereunder.
"Indirect Participants" means those persons that clear through or maintain a
custodial relationship with a DTC Participant either directly or indirectly.
"Initial Scheduled Principal Distribution Date" means, with respect to each
Pass Through Trust, the date when the first scheduled payment of principal on
the Mortgage Notes held in such Pass Through Trust is to be received by the
Trustee, as specified on the front cover page of this Prospectus.
"Land" means each of the separate parcels of land upon which a Store subject
to the lien of an Indenture is located.
"Lease" means each of the Leases between Kmart and the related Owner Trustee,
in each case pursuant to which Kmart will lease a Store and the related Land,
as such Lease may from time to time be modified, supplemented or amended.
"Lease Event of Default" means, for any Lease, each of the events designated
as an event of default in such Lease. For a description of the events
constituting Lease Events of Default, see "Description of the Leases--Events of
Default".
"Make-Whole Premium" shall have the meaning described under "Description of
the Mortgage Notes--Redemption".
"Material Default" shall have the meaning described under "Description of the
Leases--Events of Default".
"Mortgage Notes" means any of the Mortgage Notes (including any Mortgage
Notes issued in exchange, replacement or substitution therefor) issued pursuant
to any Indenture.
A-2
<PAGE>
"Operative Documents" means, with respect to each Property, the related
Lease, Indenture, Participation Agreement, Option Agreement, Tripartite
Agreement, Owner Trust Agreement and Mortgage Notes, the Purchase Agreement,
the Certificates and certain related instruments and documents contemplated by
the foregoing documents, insofar as such agreements, instruments and documents
are applicable to such Property.
"Option" shall have the meaning described under "Structure of the
Transaction".
"Owner Participant" means one or more institutional investors for whose
benefit the related Owner Trustee owns the related Properties leased to Kmart
pursuant to the Leases, and its permitted successors and assigns.
"Owner Trustees" means collectively, Wilmington Trust Company, a Delaware
banking corporation, in its capacity as Owner Trustee under the Owner Trust
Agreements, and its successors and assigns thereunder, and William J. Wade, in
his capacity as additional trustee under certain of the Owner Trust Agreements,
and his successors and assigns.
"Owner Trust Agreement" means each of the four Owner Trust Agreements,
between the related Owner Participant and the Owner Trustee, as supplemented
and amended.
"Participation Agreement" means each of the four Participation Agreements,
among Kmart, the related Owner Trustees, the related Owner Participant, the
related Remainderman Participant, the related Remainder Trustee, the Indenture
Trustee and the Trustee.
"Pass Through Trust" means Pass Through Trust 1995-K3 or Pass Through Trust
1995-K4, each to be formed pursuant to the respective Agreement.
"Pool Balance" means, for any Pass Through Trust, as of any date of
determination, the aggregate unpaid principal amount of the Mortgage Notes that
constitute Trust Property of such Pass Through Trust on such date plus the
amount of the principal payments on such Mortgage Notes held by the Trustee and
not yet distributed, plus any proceeds from the sale of the Certificates issued
by such Pass Through Trust that have not yet been used to purchase Mortgage
Notes. The Pool Balance as of any Regular Distribution Date or Special
Distribution Date shall be computed after giving effect to the payment of
principal, if any, on such Mortgage Notes and the distribution thereof being
made on that date.
"Pool Factor" means, for any Pass Through Trust, as of any date of
determination, the quotient (rounded to the seventh decimal place) computed by
dividing (i) the Pool Balance by (ii) the aggregate original principal amount
of the Mortgage Notes held in such Pass Through Trust.
"Property" shall have the meaning described under "Structure of the
Transaction".
"Property Group" shall have the meaning described under "Structure of the
Transaction".
"Purchase Agreement" means the Agreement for Sale of Real Estate among Kmart,
the Owner Trustees and the Remainderman Trustees with respect to the sale of
the Properties and the remainder interests.
"Regular Distribution Date" means, for each Pass Through Trust, January 2 and
July 2 of each year, commencing January 2, 1996.
"Remainderman Participant" means one or more institutional investors for
whose benefit the related Remainderman Trustee owns the remainder interest in
the related Land, and its permitted successors and assigns.
"Remainder Trust Agreement" means each of the four Remainder Trust Agreements
between the related Remainderman Participant and the Remainderman Trustee, as
supplemented and amended.
"Remainderman Trustee" means collectively, First Security Bank of Utah, N.A.,
a national banking association, in its capacity as Remainderman Trustee, and
its successors and assigns thereunder, and Val T. Orton, in his capacity as
additional trustee under certain of the Remainder Trust Agreements, and his
successors and assigns.
A-3
<PAGE>
"Rules" means the rules, regulations and procedures creating and affecting
DTC and its operations.
"Scheduled Payments" means each payment of principal of and/or interest on a
Mortgage Note held in a Pass Through Trust scheduled to be received by the
Trustee on a Regular Distribution Date.
"Special Distribution Date" means the date on which a Special Payment will be
distributed, which date will be the second day of a month.
"Special Payment" means, for any Pass Through Trust, any payments of
principal, premium, if any, and interest received by the Trustee on account of
redemption, if any, of the Mortgage Notes, payments received by the Trustee
following a default in respect of the Mortgage Notes (including payments
received by the Trustee on the account of the purchase by an Owner Trustee of
such Mortgage Notes or payments received on account of the sale of such
Mortgage Notes by the Trustee) and any Scheduled Payments not paid within five
days of a Regular Distribution Date.
"Special Payments Account" means one or more non-interest bearing accounts
established and maintained pursuant to each Pass Through Trust for the benefit
of Certificateholders, for the deposit of payments representing Special
Payments and certain other amounts.
"Specified Investments" means (i) direct obligations of the United States of
America and agencies thereof for which the full faith and credit of the United
States is pledged, (ii) obligations fully guaranteed by the United States of
America, (iii) certificates of deposit issued by, or bankers' acceptances of,
or time deposits with, any bank, trust company or national banking association
incorporated or doing business under the laws of the United States of America
or one of the states thereof having combined capital and surplus and retained
earnings of at least $500,000,000 (including any Indenture Trustee or Owner
Trustee if such conditions are met) and having a rating at least equal to that
assigned to the senior unsecured debt of the Company by Standard & Poor's
Ratings Group and Moody's Investors Service, Inc., but in no event less than
investment grade, at the time such Specified Investment is made, (iv)
commercial paper of companies, banks, trust companies or national banking
associations incorporated or doing business under the laws of the United States
of America or one of the States thereof and in each case having a rating
assigned to such commercial paper by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. (or, if neither such organization shall rate such
commercial paper at any time, by any nationally recognized rating organization
in the United States of America) equal to the highest rating assigned by such
organization, and (v) repurchase agreements with any financial institution
having a combined capital and surplus of at least $750,000,000 and having a
rating at least equal to that assigned to the senior unsecured debt of the
Company by Standard & Poor's Ratings Group and Moody's Investors Service, Inc.,
but in no event less than investment grade, at the time such Specified
Investment is made, fully collateralized by obligations of the type described
in clauses (i) through (iv) above; provided that, if all of the above
investments are unavailable, the entire amount to be invested may be used to
purchase Federal Funds from an entity described in clause (iii) above; and
provided further that no investment shall be eligible as a "Specified
Investment" unless the final maturity or date of return of such investment
occurs no later than the earlier of (x) 91 days from the date of purchase
thereof and (y) the next succeeding Regular Distribution Date.
"Store" means the buildings, structures, alterations, modifications and other
additions to and changes in such buildings and site improvements located on the
Land.
"Supplemental Indenture" means, with respect to each Property, the mortgage,
deed of trust, assignment of leases and rents, security agreement, financing
statement and first supplemental indenture to the related Base Indenture and
pursuant to which the Mortgage Notes to be held in the Pass Through Trusts will
be issued.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trust Property" means, for any Pass Through Trust, all money, instruments,
including the related Mortgage Notes, and other property held as the property
of the Pass Through Trust, including all distributions thereon and proceeds
thereof.
"Trustee" means Shawmut Bank Connecticut, National Association, a national
banking association, in its capacity as trustee under each Pass Through Trust
Agreement, and its successors and assigns thereunder.
A-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 72,414
Printing fee.................................................. 80,000
Blue sky fees and expenses.................................... 25,000
Accounting fees............................................... 30,000
Rating agency fees............................................ 185,000
Legal fees.................................................... 2,000,000
Trustees' fees and expenses................................... 45,000
Miscellaneous................................................. 37,586
----------
Total....................................................... $2,475,000
==========
</TABLE>
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.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1 Form of Underwriting Agreement.
4.1 Form of Pass Through Trust Agreement.
4.2(a) Form of Trust Indenture+
4.2(b) Form of Mortgage, Deed of Trust, Assignment of Leases and Rents,
Security Agreement, Financing Statement and First Supplemental
Indenture .+
4.3 Form of Pass Through Certificate--included as part of Exhibit 4.1.
4.4 Form of Note--included as part of Exhibit 4.2(b).
4.5 Form of Participation Agreement.++
4.6 Form of Lease.+
5.1 Opinion of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for
the Company.
5.2 Opinion of Shipman & Goodwin, counsel for the Trustee.
8.1 Opinion of Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for
the Company, as to tax matters.
8.2 Opinion of Shipman & Goodwin, counsel for the Trustee, as to tax
matters.
12 Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1* Consent of Price Waterhouse LLP.
23.2 Consent of Dickinson, Wright, Moon, Van Dusen & Freeman--included in
Exhibit 5.1 and Exhibit 8.1.
23.3 Consent of Shipman & Goodwin--included in Exhibit 5.2 and Exhibit 8.2.
24 Power of Attorney--included on page II-4.
25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
of Shawmut Bank Connecticut, National Association.
</TABLE>
- --------
+ A separate Base Indenture, Supplemental Indenture and Lease will be entered
into with respect to each Property.
++A separate Participation Agreement will be entered into with respect to each
Property Group.
*Filed herewith.
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)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at 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>
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 Certificates
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>
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 that the security rating requirement
will be met by the time of sale and has duly caused this Registration Statement
or amendment thereto to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Troy, State of Michigan on June 26, 1995.
KMART CORPORATION
By
/s/ Floyd Hall*
---------------------------
FLOYD HALL
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement or amendment thereto has been signed below by the following persons
in the capacities indicated on June 26, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE SIGNATURE TITLE
- --------- ----- --------- -----
<S> <C> <C> <C>
/s/ Floyd Hall* Chairman of the Board, /s/ Joseph P. Flannery * Director
- -------------- President and Chief ----------------------
(FLOYD HALL) Executive Officer (Principal (JOSEPH P. FLANNERY)
Executive Officer)
/s/ Thomas F. Murasky* Executive Vice President /s/ David B. Harper * Director
- --------------------- (Principal Financial and -------------------
(THOMAS F. MURASKY) Accounting Officer) (DAVID B. HARPER)
/s/ Lilyan H. Affinito * Director /s/ F. James McDonald * Director
- ---------------------- ---------------------
(LILYAN H. AFFINITO) (F. JAMES MCDONALD)
/s/ Joseph A. Califano, Jr.* Director /s/ J. Richard Munro * Director
- --------------------------- --------------------
(JOSEPH A. CALIFANO, JR.) (J. RICHARD MUNRO)
/s/ Richard G. Cline * Director /s/ Donald S. Perkins * Director
- -------------------- ---------------------
(RICHARD G. CLINE) (DONALD S. PERKINS)
/s/ Willie D. Davis * Director /s/ Lawrence Perlman * Director
- ------------------- --------------------
(WILLIE D. DAVIS) (LAWRENCE PERLMAN)
/s/ Enrique C. Falla * Director /s/ Gloria M. Shatto * Director
- -------------------- --------------------
(ENRIQUE C. FALLA) (GLORIA M. SHATTO)
</TABLE>
*By: /s/ Nancie W. Laduke
____________________________
NANCIE W. LADUKE
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
EXHIBITS DESCRIPTION SEQUENTIAL
-------- ----------- PAGE NUMBER
-----------
1 Form of Underwriting Agreement.
4.1 Form of Pass Through Trust Agreement.
4.2(a) Form of Trust Indenture.+
4.2(b) Form of Mortgage, Deed of Trust, Assignment of Leases
and Rents, Security Agreement, Financing Statement and
First Supplemental Indenture.+
4.3 Form of Pass Through Certificate--included as part of
Exhibit 4.1.
4.4 Form of Note--included as part of Exhibit 4.2(b).
4.5 Form of Participation Agreement.++
4.6 Form of Lease.+
5.1 Opinion of Dickinson, Wright, Moon, Van Dusen &
Freeman, counsel for the Company.
5.2 Opinion of Shipman & Goodwin, counsel for the Trustee.
8.1 Opinion of Dickinson, Wright, Moon, Van Dusen &
Freeman, counsel for the Company, as to tax matters.
8.2 Opinion of Shipman & Goodwin, counsel for the Trustee,
as to tax matters.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges.
23.1* Consent of Price Waterhouse LLP.
23.2 Consent of Dickinson, Wright, Moon, Van Dusen &
Freeman--included in Exhibit 5.1 and Exhibit 8.1.
23.3 Consent of Shipman & Goodwin--included in Exhibit 5.2
and Exhibit 8.2.
24 Power of Attorney--included on page II-4.
25.1 Form T-1 Statement of Eligibility under the Trust
Indenture Act of 1939 of Shawmut Bank Connecticut,
National Association.
</TABLE>
- --------
+ A separate Base Indenture, Supplemental Indenture and Lease will be entered
into with respect to each Property.
++A separate Participation Agreement will be entered into with respect to each
Property Group.
*Filed herewith.
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
13 Box diagram showing: Lease Rental Payments Assigned
by Owner Trustee flowing from Kmart Corporation to
the Indenture Trustee*; Mortgage Note Payments
flowing from the Indenture Trustee to the Pass
Through Trustee for each of the 1995-K3 and 1995-K4
Trusts, with Certificate Distributions in respect of
the Certificates issued by each such Trust being
made to the respective Certificateholders; and the
Indenture Trustee distributing Excess Payments** to
the Owner Trustee, who in turn distributes such
Excess Payments** to the respective Owner
Participant.
* Each Property will be owned by a single Owner
Trustee and will be subject to a separate Lease and
separate Indenture.
** Excess payments flow to the related Owner Trustee
and then to the respective Owner Participant.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 1 to the Registration Statement on Form
S-3 of our report dated February 27, 1995, which appears on page 30 of the 1994
Annual Report to Shareholders of Kmart Corporation which is incorporated by
reference in Kmart Corporation's Annual Report on Form 10-K for the year ended
January 25, 1995. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 11 of such
Annual Report on Form 10-K. We also consent to the references to us under the
heading "Experts" and "Selected Financial Information" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Information".
Price Waterhouse LLP
Detroit, Michigan 48243
June 26, 1995
