EXHIBIT 4.1
THIS NOTE AND ANY SECURITIES INTO WHICH THIS NOTE MAY BE CONVERTED
(COLLECTIVELY, THE "SECURITIES") HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE
SECURITIES MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT
AND OTHER APPLICABLE SECURITIES LAWS.
NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, NEITHER THE
PRINCIPAL OF NOR THE INTEREST ON THE INDEBTEDNESS CREATED OR EVIDENCED
BY THIS NOTE OR ANY OTHER AMOUNTS IN RESPECT THEREOF SHALL BECOME DUE
OR BE PAID OR PAYABLE EXCEPT TO THE EXTENT PERMITTED UNDER THAT CERTAIN
SUBORDINATION AGREEMENT DATED AS OF MAY 6, 2003, BY AND AMONG CRK
PARTNERS, L.P., CRK PARTNERS II, L.P., ESL INSTITUTIONAL PARTNERS,
L.P., ESL INVESTORS, L.L.C., KMART HOLDING CORPORATION, KMART
CORPORATION, AND GENERAL ELECTRIC CAPITAL CORPORATION, AS
ADMINISTRATIVE AGENT (THE "SUBORDINATION AGREEMENT"), WHICH
SUBORDINATION AGREEMENT IS INCORPORATED HEREIN WITH THE SAME EFFECT AS
IF FULLY SET FORTH HEREIN.
KMART HOLDING CORPORATION
9.00% CONVERTIBLE SUBORDINATED NOTE
$9,259,712.00 Due May 6, 2004 Troy, Michigan
May 6, 2003
Unless converted pursuant to Section 5 hereof, Kmart Holding
Corporation, a Delaware corporation (the "Borrower"), hereby unconditionally
promises to pay to the order of CRK Partners, L.P. ("CRK"), a Delaware limited
partnership (CRK, its successors or assigns, as applicable, "Holder"), in lawful
money of the United States of America and in immediately available funds, the
principal amount of NINE MILLION TWO HUNDRED FIFTY-NINE THOUSAND SEVEN HUNDRED
TWELVE AND NO/100 DOLLARS ($9,259,712.00) (the "Loan") on either (a) May 6,
2004, or (b) upon notice from Holder to Borrower prior to March 6, 2004 of
Holder's election to extend the maturity date of this Note, May 6, 2006 (such
applicable date, the "Maturity Date") (if repayment of the Loan is not permitted
on the applicable maturity date set forth in subclause (a) or (b) of this
paragraph under the Subordination Agreement, then the Loan shall become payable
on demand on the first day permissible under the Subordination Agreement); and
to pay interest at the time, in the form and at the rate set forth herein on the
unpaid principal amount hereof, for the period commencing May 6, 2003 until such
principal amount shall be paid in full. This Convertible Subordinated Note (as
amended, supplemented, extended, restated, renewed, refunded, replaced,
refinanced, increased in amount or otherwise modified, in each case from time to
time and whether in whole or in part, this "Note") evidences the unpaid
principal amount of the Loan together with all accrued and unpaid interest
thereon (collectively, and together with all other amounts payable under this
Note, the "Obligations").
The Holder agrees to make the Loan on the date hereof subject
to and in accordance with the terms and conditions hereof. All capitalized terms
not otherwise defined herein shall have the meaning given to them in the
Investment Agreement, dated as of January 24, 2003, among Borrower, ESL
Investments, Inc. ("ESL") and the other parties thereto (as amended, restated,
supplemented, modified or waived from time to time, the "Investment Agreement").
This Note is issued to Holder as the designee of ESL in accordance with and
subject to the following terms and conditions:
1. INTEREST.
(a) The outstanding principal amount of the Loan shall
accrue interest from the date hereof until all payments hereunder have been
irrevocably paid in full or this Note has been converted as provided in
Section 5 hereof at a per annum rate equal at all times to the lesser of (i) the
maximum lawful rate of interest in effect at such time under "applicable law"
(as defined below), and (ii) nine percent (9%), compounded semi-annually;
provided, however, that in the event the Borrower fails to repay the principal
amount of this Note, or any interest thereon, when due and such failure to pay
continues for five (5) days, then the interest rate on any amount not paid when
due shall be eleven percent (11%), compounded semi-annually. Interest shall be
calculated on the basis of a year of 360 days and shall accrue on the
outstanding principal amount of this Note and, to the extent permitted by law,
on any accrued but unpaid interest thereon that has been compounded until all
payments hereunder have been irrevocably paid in full or the Note has been
converted as provided in Section 5. Except as otherwise provided herein, accrued
and unpaid interest hereunder shall, subject to the terms of the Subordination
Agreement, be due and payable semi-annually on the last Business Day of the
months of January and July, with the first such payment being payable on July
31, 2003.
(b) It is expressly stipulated and agreed to be the
intent of the Holder and the Borrower to, at all times, conform to and contract
in strict compliance with applicable usury laws from time to time in effect. All
agreements between the Holder and the Borrower, including, without limitation,
this Note, are hereby limited by the provisions of this Section 1(b) which shall
override and control all such agreements, whether now existing or hereafter
arising and whether written or oral. In no way, nor in any event or contingency
(including, but not limited to, prepayment, default, demand for payment or
acceleration of maturity), shall the interest taken, reserved, contracted for,
charged, chargeable, received or collected under this Note exceed the maximum
nonusurious amount permitted by applicable law (the "Maximum Amount"). If, from
any possible construction of any agreement, document or instrument (including,
without limitation, this Note), interest would otherwise be payable in excess
of, or is adjudicated to be payable in excess of, the Maximum Amount, any such
construction shall be subject to the provisions of this Section 1(b), and, ipso
facto, such agreement, document or instrument shall be reformed and the interest
payable shall be reduced to the Maximum Amount, without the necessity of
execution of any amendment or new document. If the Holder shall ever receive
anything of value that is characterized as interest under applicable law and
that would apart from this provision be in excess of the Maximum Amount, an
amount equal to the amount that would have been excessive interest shall,
without penalty, be applied first to the reduction of the outstanding principal
amount of this Note, and second to the reduction of any other amounts due and
payable under this Note, and not to the payment of interest, or promptly
refunded to the Borrower or the other payor thereof if and to the extent such
amount that would have been excessive exceeds such unpaid principal amount or
such other amounts. The right to accelerate maturity of this Note or any other
indebtedness does not include the right to accelerate any interest that has not
otherwise accrued on the date of such acceleration, and the Holder does not
intend to take, reserve, contract for, charge, receive or collect any unearned
interest in the event of acceleration. All interest paid or agreed to be paid to
the Holder shall, to the extent permitted by applicable law, be amortized,
prorated, allocated and spread throughout the full stated term (including any
renewal or extension) of the indebtedness to which it relates so that the amount
of interest thereon does not exceed the Maximum Amount. As used in this Section
1(b), the term "applicable law" shall mean the laws of the State of Delaware or
the federal laws of the United States, whichever laws allow the greater
interest, applicable to commercial loans as such laws now exist or may be
changed or amended or come into effect in the future.
2. PAYMENTS.
(a) All payments of principal and interest with respect
to this Note shall be made on the due date thereof no later than 3:00 p.m., New
York, New York time, in immediately available funds in lawful money of the
United States of America (without any counterclaim, offset or deduction
whatsoever and free and clear of, and without withholding or deduction for or on
account of, any present or future taxes, levies, imposts, duties, charges or
fees of any nature), to the Holder by wire transfer (and pursuant to specific
instructions to be supplied by the Holder prior to the date of the first such
payment). All payments (including all prepayments) hereunder received by the
Holder shall be applied first to the payment of accrued and unpaid interest
hereunder and only thereafter to the outstanding principal balance of this Note.
Any payment received by the Holder after 3:00 p.m., New York, New York time, on
any day, will be deemed to have been received on the next following "Business
Day" (as hereinafter defined). "Business Day" means any day on which banks are
not authorized to be closed for business in New York, New York.
(b) Holder and any individual or entity ("Person") to
which the Holder sells, assigns, grants a participation in, or otherwise
transfers, part or all of its interest in this Note agree that on the date the
Holder or
Person becomes a party to this Note, and from time to time thereafter if
requested by the Borrower or required because, as a result of a change in law or
a change in circumstances or otherwise, a previously delivered form or statement
becomes incomplete or incorrect in any material respect, it will deliver
complete, accurate and duly executed forms or other statements prescribed by the
Internal Revenue Service of the United States certifying the Holder's or such
Person's exemption from United States withholding taxes (including backup
withholding taxes) with respect to all payments to be made to such Holder or
Person under this Note, the Guarantee Agreement or under any other Transaction
Document, provided that any such Holder or Person shall not be required to
deliver such forms or statements because such exemption is not available to such
Holder or Person as the result of a change in law or interpretation taking
effect after the later of the date hereof, or the date on which such Person
acquired an interest in the Note.
(c) Subject to the Holder's rights with respect to an
"Event of Default" (as defined below) and the conversion of the Note pursuant to
Section 5, neither the outstanding principal amount of this Note nor any accrued
and unpaid interest hereunder may be prepaid prior to the Maturity Date without
the consent of the Holder.
(d) The Borrower agrees that to the extent the Borrower
makes a payment or payments hereunder which payment or payments, or any part
thereof, are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to the Borrower, its
successors or assigns under any bankruptcy law, state or federal law, common law
or equitable cause, then, to the extent of such payment or repayment, the
obligations, or part thereof, under this Note that have been paid, reduced or
satisfied by such amount shall be reinstated and continued in full force and
effect as of the time immediately preceding such initial payment, reduction or
satisfaction.
3. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Holder that all of
the statements contained in this Section 3 are true and correct as of the date
of this Note (or, if made as of a specified date, as of such date):
(i) Corporate Existence; Compliance with Law. Each of
Borrower and its Subsidiaries (a) is a corporation, limited liability company or
limited partnership duly organized, validly existing and in good standing under
the laws of its respective jurisdiction of incorporation or organization as of
the date hereof, (b) is duly qualified to conduct business and is in good
standing in each other jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except where the
failure to be so qualified would not result in exposure to losses or liabilities
which could reasonably be expected to have a Material Adverse Effect, (c) has
the requisite power and authority and the legal right to own, pledge, mortgage
or otherwise encumber and operate its properties, to lease the property it
operates under lease and to conduct its business as now conducted or proposed to
be conducted, except as would not reasonably be expected to have a Material
Adverse Effect and except as otherwise provided in Section 3.1 of the Credit
Agreement of even date hereof among Kmart Corporation, the other Credit Parties
signatory thereto, the Lenders signatory thereto, General Electric Capital
Corporation (as Administrative Agent, Co-Collateral Agent and Lender) and others
(the "Credit Agreement"), (d) has all licenses, permits, consents or approvals
from or by, and has made all filings with, and has given all notices to, all
Governmental Authorities having jurisdiction, to the extent required for such
ownership, operation and conduct, except as which would not reasonably be
expected to have a Material Adverse Effect and except as otherwise provided for
in Section 3.1 of the Credit Agreement, (e) is in compliance with its charter
and bylaws or partnership or operating agreement, as applicable, and (f) is (and
its respective properties are) in compliance with all applicable provisions of
law, except where the failure to comply with such laws, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect
and except as otherwise provided for in Section 3.1 of the Credit Agreement.
(ii) Corporate Power, Authorization, Enforceable
Obligations. The execution, delivery and performance by Borrower of this Note:
(a) is within Borrower's power, (b) has been duly authorized by all necessary
corporate action, (c) does not contravene any provision of Borrower's charter or
bylaws, (d) does not violate any law or regulation, or any order or decree of
any court or Governmental Authority, (e) does not conflict with or result in the
breach or termination of, constitute a default under or accelerate or permit the
acceleration of any performance required by, any material indenture, mortgage,
deed of trust, lease, agreement or other instrument to which Borrower is a party
or by which Borrower or any of its property is bound, (f) does not result in the
creation or imposition of
any Lien upon any of the property of Borrower, and (g) does not require the
consent or approval of any Governmental Authority or any other Person, other
than the Confirmation Order, which will have been duly obtained prior to the
Closing Date, except, in the case of clauses (d) through (g), as would not
reasonably be expected to have a Material Adverse Effect. This Note shall be
duly executed and delivered by Borrower and shall constitute the legal, valid
and binding obligation of the Borrower enforceable against it in accordance with
its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
4. EVENTS OF DEFAULT.
If any of the following events shall occur and be continuing
(each such event, an "Event of Default"):
(i) the Borrower fails to repay the principal amount of
this Note, or any interest thereon, when due and such failure to pay interest
continues for five (5) days;
(ii) any representation or warranty made by the Borrower
in this Note shall be false in any material respect when made;
(iii) the Borrower fails to convert the outstanding
principal amount of this Note and any accrued and unpaid interest hereunder into
shares of common stock in accordance with the terms of Section 5 and such
failure continues for five (5) days;
(iv) the Borrower violates any material covenant,
agreement or condition contained in this Note, which violation shall not have
been cured for a period of forty-five (45) days following notice to the Borrower
from the Holder;
(v) this Note, or any part thereof, shall (other than
resulting from payment or by consent of the applicable parties thereto), at any
time after its execution and delivery and for any reason, cease to be in full
force and effect or shall be declared to be null and void or the validity or
enforceability thereof shall be contested by the Borrower or the Borrower shall
deny that the Borrower has any or further liability or obligation thereunder;
(vi) any default or breach occurs under any other
agreement, document or instrument to which Borrower or any of its Subsidiaries
is a party that is not cured within any applicable grace period therefor, and
such default or breach involves the failure to make any payment when due in
respect of any principal of or interest on indebtedness or guaranteed
indebtedness for borrowed money (other than the Obligations) of Borrower or any
of its Subsidiaries in excess of $50,000,000 in the aggregate (including amounts
owing to all creditors under any combined or syndicated credit arrangements) and
such failure causes, or permits any holder of such indebtedness or guaranteed
indebtedness or a trustee to cause, such indebtedness or guaranteed indebtedness
or a portion thereof in excess of $50,000,000 in the aggregate to become due
prior to its stated maturity or prior to its regularly scheduled dates of
payment, in each case, regardless of whether such right is exercised, by such
holder or trustee;
(vii) the Borrower shall be liquidated, dissolved,
adjudicated insolvent, or shall fail to pay, or shall admit in writing its
inability to pay its debts as they mature, or shall make a general assignment
for the benefit of creditors; or the Borrower shall apply for or consent to the
appointment of any receiver, custodian, trustee or similar officer for it or for
all or any substantial part of its property, or such receiver, custodian,
trustee or similar officer shall be appointed without the application or consent
of the Borrower; or the Borrower shall institute (by petition, application,
answer, consent or otherwise), or take any action to authorize the institution
of, any bankruptcy, insolvency, reorganization, dissolution, liquidation or
similar proceeding relating to the Borrower under the laws of any jurisdiction;
or any such proceeding shall be instituted (by petition, application or
otherwise) against the Borrower and such proceeding shall not be dismissed
within thirty (30) days after being instituted;
then, (x) upon the occurrence of any Event of Default described in clause (vii)
of this Section 4, the Obligations shall automatically become immediately due
and payable without presentment, demand, protest, notice of intent to
accelerate, notice of acceleration or further notice of any kind, all of which
are hereby expressly waived by the Borrower, and (y) upon the occurrence of any
other Event of Default, the Holder may, at its option, by written notice to the
Borrower declare the Obligations to be forthwith due and payable, whereupon such
Obligations shall become and be forthwith due and payable, without presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or
further notice of any kind, all of which are hereby expressly waived by the
Borrower.
Other than as provided in this Section 4, the Note shall be
satisfied only by Conversion pursuant to Section 5 or by payment in full of all
amounts due hereunder.
5. CONVERSION.
(a) Conversion Right. Subject to and upon compliance with
the provisions hereof, the Holder shall have the right, from time to time, to
convert all or any portion of the Total Convertible Amount into as many shares
of common stock of the Borrower as the portion of the Total Convertible Amount
so converted is a multiple of the Initial Conversion Price or, in case an
adjustment of such price has taken place pursuant to the provisions of this
Section 5, then at the price as last adjusted and in effect at the date this
Note or portion thereof is surrendered for conversion (such price or such price
as last adjusted, as the case may be, the "Conversion Price"). For the purposes
of this Note, the term "Total Convertible Amount" shall mean, on any date, the
sum of the unpaid principal amount of this Note and the accrued and unpaid
interest thereon on such date. For the purposes of this Note, the term "Initial
Conversion Price" shall mean $10 per share.
(b) Manner of Conversion. This Note may be converted on
any Business Day prior to the Maturity Date (any such date of conversion, a
"Conversion Date"). In order to exercise such conversion privilege, the Holder
shall surrender this Note to the Borrower accompanied by a written statement
(the "Conversion Notice") designating the portion of the Total Convertible
Amount to be converted. If the Holder elects to convert this Note, or a portion
thereof, such conversion (a "Conversion") shall be deemed to have taken place
immediately prior to the close of business on the Conversion Date, and at such
time the rights of the Holder as Holder of this Note shall cease to the extent
of the portion of the Total Convertible Amount so converted and the Holder shall
be treated for all purposes (with respect to such portion) as the record holder
of the common stock issuable upon conversion at such time.
(c) Delivery of Stock Certificates, Etc. The Borrower, at
its expense (including the payment by it of any applicable issue taxes, other
than any taxes which may then be payable in respect of the transfer of any such
shares), will issue and deliver to the Holder as promptly as practicable on or
after a Conversion Date a certificate or certificates for the number of shares
of common stock of the Borrower issuable upon the Conversion. If this Note shall
be converted only in part, the Borrower shall, upon such conversion, execute and
deliver to the Holder, at the expense of the Borrower, a new Note in principal
amount equal to the unconverted portion of the Total Convertible Amount (dated
as of the Conversion Date).
(d) Cash Adjustments on Conversion. No payment or
adjustment shall be made upon any Conversion on account of any cash dividends
declared for payment as of a record date prior to a Conversion Date on the
shares of common stock issued upon such Conversion. The Borrower shall pay all
interest on the portion of this Note surrendered for conversion accrued through
the last full business day immediately preceding the date that the Conversion
Notice shall have been received by the Borrower, provided that no such payment
shall be made if the interest so accrued is converted pursuant to this Section
5. No fractional shares of common stock shall be issued upon conversion of this
Note, but if the conversion results in a fraction, an amount equal to such
fraction multiplied by the Per Share Market Price of the common stock on the
last business day prior to the Conversion Date shall be paid in cash to the
Holder. "Per Share Market Price" means, for any date of determination thereof,
the average daily Market Price per share for the 15 trading days immediately
preceding such date. The term "Market Price" shall mean: the last reported sale
price regular way of the common stock on the securities exchange on which the
common stock is at the time listed or admitted to unlisted trading privileges,
or if the common stock is not at the time so listed or admitted to unlisted
trading privileges, the average of the highest reported bid and lowest reported
ask prices of the common stock on each such trading day as reported by the
Nasdaq Stock Market or similar organization, or if no such report is available,
then the fair market price as determined in good faith by the Board of Directors
of the Borrower.
(e) Adjustments to Conversion Price.
(i) Adjustments for Recapitalization. In case
the Borrower at any time on or after the date hereof shall:
(A) pay a dividend or make a distribution in
shares of common stock to holders of its
capital stock of any class,
(B) subdivide its outstanding shares of common
stock into a larger number of shares,
(C) combine its outstanding shares of common
stock into a smaller number of shares,
(D) pay a dividend or make a distribution to
holders of its common stock in (1) shares of
its capital stock other than common stock,
(2) assets (excluding cash dividends) or
rights, or (3) warrants to subscribe for or
purchase any of its securities
(collectively, "Other Securities or
Assets"),
then the Conversion Price shall be adjusted to that price determined by
multiplying the Conversion Price in effect immediately prior to such
event by a fraction (x) the numerator of which shall be the total
number of outstanding shares of common stock of the Borrower
immediately prior to such event, and (y) the denominator of which shall
be the total number of outstanding shares of common stock of the
Company immediately after such event; provided that if the Borrower
shall pay a dividend or make a distribution on its common stock in
Other Securities or Assets, the Conversion Price shall be adjusted to
the price obtained by multiplying the price then subject to adjustment
by a fraction (x) the numerator of which shall be the Per Share Market
Price of the common stock on the record date for such dividend or
distribution, less the fair market value (on a per share of common
stock basis and as determined in good faith by the Board of Directors
of the Borrower) of the Other Securities or Assets so distributed, and
(y) the denominator of which shall be the Per Share Market Price of the
common stock on the record date for such dividend or distribution. Any
adjustment made pursuant to this paragraph shall become effective
immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective
date in the case of subdivision, combination or reclassification.
(ii) De Minimis Adjustments. Except as
hereinafter provided, no adjustment of the Conversion Price hereunder
shall be made if such adjustment results in a change of less than 1% in
the Conversion Price then in effect. Any adjustment of less than 1% in
the Conversion Price then in effect shall be carried forward and shall
be made at the time of and together with any subsequent adjustment
which, together with adjustment or adjustments so carried forward,
amounts to 1% or more of the Conversion Price then in existence.
(f) Adjustments for Reorganization. If the Borrower shall
be reorganized or shall be merged into or consolidate with any another entity or
shall sell all or substantially all of its assets or another entity shall be
merged into Borrower and in connection therewith common stock of the Borrower
shall be changed or converted into Successor Assets (as hereinafter defined), or
if the Borrower shall issue by reclassification of its shares of common stock
any shares of capital stock of the Borrower (each such event, an "Organic
Change"), then, as a condition of such Organic Change, lawful and adequate
provision shall be made whereby the Holder shall thereafter have the right to
receive upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of common stock immediately theretofore receivable upon
conversion of this Note, such shares of stock, securities, assets or cash
(collectively, the "Successor Assets") as may (by virtue of such Organic Change)
be issued or payable with respect to or in exchange for a number of outstanding
shares of common stock equal to the number of shares of common stock immediately
theretofore so receivable by the Holder hereunder had such Organic Change not
taken place. In any such case, appropriate provisions shall be made with respect
to the rights and interests of the Holder to the end that the provisions of this
Section 5 (including, without limitation, provisions for adjustment of the
Conversion Price) shall thereafter be applicable as nearly as may be, in
relation to any Successor Assets thereafter deliverable upon conversion of this
Note.
(g) Dissolution or Liquidation. In the event of any
proposed distribution of the assets of the Borrower in dissolution or
liquidation (except under circumstances when Section 5(f) shall be applicable),
the Borrower shall mail notice thereof to the Holder of this Note and shall make
no distribution to stockholders until the expiration of 30 days from the date of
mailing of such notice and, in any such case, the Holder may exercise the
conversion rights with respect to this Note within 30 days from the date of
mailing such notice and all rights herein granted not so exercised within such
30-day period shall thereafter become null and void.
(h) Certain Events. If any event occurs of the type
contemplated by Sections 5(e), 5(f), or 5(g) but not expressly provided for by
such provisions which adversely affect the rights of the Holder in a manner
different than the holders of common stock, then the Borrower's board of
directors shall make an appropriate adjustment in the number of shares of common
stock obtainable upon conversion of this Note pursuant to Section 5(a) so as to
protect the rights of the Holder.
(i) Notice of Adjustment. Upon any adjustment or other
change relating to the shares of common stock or other property issuable upon
the Conversion pursuant to Section 5(a), then and in each such case the Borrower
shall give written notice thereof to Holder, in accordance with Section 11 of
this Note, which notice shall state the increase or decrease, if any, in the
number or other denomination of the shares of common stock issuable upon the
Conversion pursuant to Section 5(a), and the amount of other property receivable
upon the Conversion, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(j) Adequate Shares. The Borrower will at all times
reserve and keep available out of its authorized but unissued capital stock
shares of common stock for the purpose of effecting the Conversion pursuant to
Section 5(a). All shares of stock which may be issuable upon the Conversion
pursuant to Section 5(a) will, upon issuance, be validly issued, fully paid and
non-assessable and free from all taxes (other than any taxes which may then be
payable in respect of the transfer of any such shares), liens and charges with
respect to the issuance thereof. The shares of stock issuable upon the
Conversion pursuant to Section 5(a) shall be issued without charge to the Holder
thereof for any issuance tax in respect thereof or other cost incurred by the
Borrower in connection with the Conversion and the related issuance of such
shares. The Borrower shall not close its books against the transfer of shares of
stock issued or issuable upon the Conversion pursuant to Section 5(a) in any
manner which interferes with the timely conversion of this Note. The Borrower
shall provide reasonable assistance and cooperate with any Holder of this Note
as required to make any governmental filings or obtain any governmental approval
prior to or in connection with the conversion of this Note (including, without
limitation, making any filings required to be made by the Borrower). The
Borrower shall take all such reasonable actions as may be necessary to assure
that all stock which may be issuable upon the Conversion pursuant to this
Section 5 may be issued without violation of any applicable law or governmental
regulation.
6. COVENANTS OF BORROWER WHILE NOTE IS OUTSTANDING. The Borrower
agrees that, so long as there is any unpaid principal or interest outstanding or
other amount due to the Holder under this Note:
(i) Payment of Obligations. The Borrower will pay and
discharge, and will cause each Subsidiary to pay and discharge, at or before
maturity, all their respective obligations and liabilities, including, without
limitation tax liabilities (other than Taxes that are priority tax claims
pursuant to Section 507 of the Bankruptcy Code and that are to be treated
pursuant to the Chapter 11 Plan, as implemented by the Confirmation Order),
except where such tax liabilities may be contested in good faith by appropriate
proceedings, and will maintain, and will cause each Subsidiary to maintain, in
accordance with generally accepted accounting principles, appropriate reserves
for the accrual of any of the same, and except where such failures to pay and
discharge, individually or in the aggregate, would not reasonably be expected to
have a Material Adverse Effect; and
(ii) Conduct of Business and Maintenance of Existence. The
Borrower will continue, and will cause each Subsidiary to continue, to engage in
business of the same general type as now conducted by the Borrower and its
Subsidiaries, and will preserve, renew and keep in full force and effect, and
will cause each Subsidiary to preserve, renew and keep in full force and effect
their respective corporate existence and their respective rights, privileges and
franchises necessary or desirable in the normal conduct of business, except for
such failures to continue and failures to preserve, renew and keep that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect; provided that nothing in this Section shall prohibit
the
abandonment or termination of the corporate existence, rights, privileges or
franchises of any Subsidiary when deemed by the Borrower in good faith to be in
the best interest of its overall business.
7. INVESTMENT INTENT. The Holder hereby represents and warrants
to the Borrower that the Holder is (i) an "accredited investor" as defined in
Regulation D of the Act, and (ii) acquiring this Note for investment and not
with a view to the distribution thereof. The Holder understands that this Note
is not, and any common stock acquired on Conversion hereof at the time of
issuance will not be, registered under the Act on the grounds that the issuance
of this Note and such stock is exempt from registration under the Act, and that
the Borrower's reliance on such exemption is predicated on the Holder's
representations set forth herein. The Holder represents that it is experienced
in evaluating and investing in companies such as the Borrower, is familiar with
the risks associated with the business and operations of such companies, has
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of its investment, and has the ability to
bear the economic risks of its investment. The Holder represents that it has
had, during the course of this transaction and prior to its purchase of this
Note, the opportunity to request information from and ask questions of the
Borrower and its officers, employees and agents, concerning the Borrower, its
assets, business and operations and to receive information and answers to such
requests and questions. The Holder understands that this Note (and any stock
issued on Conversion hereof) may not be sold, transferred, or otherwise disposed
of without registration under the Act or an exemption therefrom, and that in the
absence of an effective registration statement covering this Note (or the stock
issued on Conversion thereof) or an available exemption from registration under
the Act, this Note (and any stock issued on Conversion thereof) must be held
indefinitely.
8. GUARANTEE. Simultaneous with the execution and delivery of
this Note, Kmart Corporation (the "Guarantor") shall execute and deliver the
Guarantee Agreement in the form of Exhibit A hereto.
9. BUSINESS DAYS. If any payment is due, or any time period for
giving notice or taking action expires, on a day which is not a Business Day,
the payment shall be due and payable on, and the time period shall automatically
be extended to, the immediately succeeding Business Day, and interest shall
continue to accrue at the required rate hereunder until any such payment is
made.
10. GOVERNING LAW; CONSENT TO JURISDICTION. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF DELAWARE WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE THAT WOULD CAUSE THE
APPLICATION OF THE DOMESTIC SUBSTANTIVE LAWS OF ANY OTHER STATE, AND SHALL BIND
AND INURE TO THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS
AND ASSIGNS.
THE BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF
THE COURTS OF ILLINOIS, NEW YORK AND THE UNITED STATES OF AMERICA, IN EACH CASE
LOCATED IN COOK COUNTY OR NEW YORK COUNTY (THE "SELECTED COURTS"), INCLUDING THE
BANKRUPTCY COURT, FOR ANY PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE
(AND AGREES NOT TO COMMENCE ANY PROCEEDING RELATING THERETO EXCEPT IN SUCH
COURTS) AND WAIVES ANY OBJECTION TO VENUE BEING LAID IN ANY OF THE SELECTED
COURTS WHETHER BASED ON THE GROUNDS OF FORUM NON CONVENIENS OR OTHERWISE;
PROVIDED THAT EACH OF THE BORROWER AND THE HOLDER HEREBY IRREVOCABLY SUBMITS TO
THE EXCLUSIVE JURISDICTION OF THE BANKRUPTCY COURT FOR SO LONG AS THE BANKRUPTCY
COURT RETAINS JURISDICTION.
11. NOTICES. All notices provided for herein shall be delivered
(a) if to the Borrower, to it at 3100 West Big Beaver Road, Troy, MI 48084,
Attn: General Counsel and (b) if to the Holder, to it at One Lafayette Place,
Greenwich, CT 06830, Attn: Edward S. Lampert. All notices, requests, consents
and other communications hereunder to any party shall be deemed to be sufficient
if contained in a written instrument delivered in person or sent by telecopy,
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth in this Section 11 or such other address as may hereafter be
designated in writing by such party to the other party.
12. MISCELLANEOUS.
(a) Amendment; Waiver. No failure or delay on the part of
the Holder in exercising any power or right hereunder, and no course of dealing
between the Borrower and the Holder of this Note, shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Note nor
consent to any departure by the Borrower therefrom shall in any event be
effective unless the same shall be in writing and executed by the Holder, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given. No notice to or demand on the Borrower
in any case shall entitle the Borrower to any other or further notice or demand
in similar or other circumstances. No amendment to, or modification of, any
provision of this Note shall in any event be effective unless the same shall be
in writing and executed and delivered by the Borrower and the Holder. No waiver
of, or consent with respect to, any provision of this Note shall in any event be
effective unless the same shall be in writing and executed and delivered by the
party from whom such waiver or consent is sought. Any waiver of any provision of
this Note, and any consent to any departure by the Borrower from the terms of
any provision of this Note, shall be effective only in the specific instance and
for the specific purpose for which given.
(b) Successors and Assigns. This Note shall inure to the
benefit of the Holder of this Note and the Borrower and their respective
successors and assigns and be binding upon the Holder of this Note and the
Borrower and their respective successors and assigns, provided that this note
shall not inure to the benefit of any Person who may subsequently become a
Holder of this Note unless such Person shall assume all of the obligations of
Holder under the Subordination Agreement or such obligations shall be waived by
the Senior Agent (as defined in the Subordination Agreement).
(c) Entire Agreement. This Note and the agreements,
documents and instruments executed in connection herewith, constitute the entire
understanding between the Borrower and the Holder with respect to the subject
matter hereof and supersede any prior agreements, written or oral, with respect
thereto.
13. DESCRIPTIVE HEADINGS. Section headings appearing in this Note
have been inserted for convenience of reference only and shall be given no
substantive meaning or significance whatsoever in construing the terms and
provisions of this Note.
14. SEPARABILITY. Should any provision of this Note be judicially
declared to be invalid, unenforceable or void, such decision will not have the
effect of invalidating or voiding the remainder of this Note, and the parties
hereto agree that the provision of this Note so held to be invalid,
unenforceable or void will be deemed to have been stricken herefrom and the
remainder will have the same force and effectiveness as if such provision had
never been included herein, provided, however the parties hereto shall use their
best efforts replace the provision so deemed to have been stricken herefrom with
a provision that the parties reasonably believe to be valid and enforceable and
which has a substantially identical economic and legal effect as the provision
so deemed to have been stricken herefrom.
IN WITNESS WHEREOF, the Borrower has duly executed and
delivered this Note as of the date first written above.
KMART HOLDING CORPORATION
BY: /s/ RONALD B. HUTCHSION
----------------------------------
NAME: RONALD B. HUTCHISON
TITLE: EXECUTIVE VICE PRESIDENT,
CHIEF RESTRUCTURING OFFICER
EXHIBIT A
GUARANTEE AGREEMENT