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Pursuant to Rule 424(b)(2)
Registration Nos. 333-01121 and 333-01121-01
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 18, 1996)
COMMODITY-INDEXED PREFERRED SECURITIES (COMPSSM), SERIES [A]
J.P. MORGAN INDEX FUNDING COMPANY, LLC
% SERIES [A] PREFERRED SECURITIES
INDEXED TO THE JPMCI ALUMINUM TOTAL RETURN INDEX
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
J.P. MORGAN & CO. INCORPORATED
------------------------
The % Series [A] Preferred Securities (each, a "Preferred Security", and
collectively, the "ComPS") offered hereby are being issued by J.P. Morgan Index
Funding Company, LLC, a limited liability company formed under the laws of the
State of Delaware (the "Company"). The ComPS represent preferred limited
liability company interests in the Company. Each Preferred Security will have an
initial principal amount of [$40] (the "Face Amount"), and thereafter, the
change in value of the principal amount per Preferred Security will be indexed
to the change in value of the JPMCI Aluminum Total Return Index (the "Applicable
Index"), which is calculated based on the change in value of certain aluminum
futures contracts included from time to time in the JPM Indices (such contracts,
from time to time, the "Benchmark Aluminum Contracts") plus a component of
collateral yield computed on such fluctuating index value at the most recent
auction rate for 3-month U.S. Treasury Bills or certain successor rates thereto
(the "Collateral Yield Component"), reduced by a factor designed to offset the
costs of issuing and hedging the indexation of the ComPS (the "Factor"). J.P.
Morgan & Co. Incorporated, a Delaware corporation ("J.P. Morgan"), will directly
or indirectly own all the common securities (the "Common Securities")
representing voting limited liability company interests in the Company (the
ComPS and the Common Securities, collectively, the "Securities"). The Company
exists for the sole purpose of issuing the ComPS and investing the proceeds
thereof in a % Related Note Due , (the "Related Note") of Morgan
Guaranty Trust Company of New York, a trust company with full banking powers
organized under the laws of the State of New York and a wholly-owned subsidiary
of J.P. Morgan ("Morgan Guaranty"), and issuing similar securities and investing
the proceeds thereof in similar notes in the future.
SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE COMPS. THE COMPS ARE NOT FUTURES CONTRACTS AND DO NOT
REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS
DEFINED BELOW) OF THE COMPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI
ALUMINUM TOTAL RETURN INDEX, REDUCED BY THE FACTOR. AS A RESULT, THE REDEMPTION
VALUE PER PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT AND MAY BE
MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE BENCHMARK ALUMINUM
CONTRACTS. SEE "DESCRIPTION OF THE COMPS".
["ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are service marks of
J.P. Morgan & Co. Incorporated.
The ComPS have been authorized for listing on the (the
" ") under the symbol " ", subject to official notice of
issuance. Trading of the ComPS on the is expected to commence within a
30-day period after the date of this Prospectus Supplement. See "Underwriting".]
THE SECURITIES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL
AGENCY.
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 SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price $[40] per Preferred Security plus accrued dividends, if any.
<TABLE>
<CAPTION>
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSIONS(2) THE COMPANY(3)(4)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security..................... $ (3) $
- ----------------------------------------------------------------------------------------------------------------
Total...................................... $ (3) $
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein).
(2) The Company and J.P. Morgan have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting".
(3) Because the proceeds of the sale of the ComPS will be invested in the
Related Note, Morgan Guaranty has agreed to pay to the Underwriters a
commission of $ per Preferred Security (or $ in the
aggregate). See "Underwriting".
(4) Expenses of the offering which are payable by the Company and J.P. Morgan
are estimated to be $ .
------------------------
The ComPS offered hereby are offered severally by the Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the ComPS
will be made on or about , 199 , through the book-entry facilities of
The Depository Trust Company, against payment therefor in same-day funds.
J.P. MORGAN & CO.
The date of this Prospectus Supplement is , 199 .
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE [APPLICABLE STOCK EXCHANGE(S)],
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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STRUCTURAL OVERVIEW
[Graphic Omitted]
1. THE COMPANY. The issuer of the ComPS is a Delaware limited liability company
formed by J.P. Morgan for the sole purpose of issuing the ComPS and other
Preferred Securities and lending the proceeds thereof to Morgan Guaranty. J.P.
Morgan will own, directly or indirectly, 100% of the common limited liability
company interests in the Company. It is intended that the Company be disregarded
for United States Federal income tax purposes.
2. THE COMPS. The ComPS issued by the Company are preferred limited liability
company interests. For tax purposes, holders of ComPS are deemed to receive
interest income to the extent of interest accrued and paid on the Related Note,
and dividends on ComPS are not eligible for the dividends received deduction for
United States Federal income tax purposes. The ComPS Redemption Price and the
ComPS Early Redemption Price are indexed to the JPMCI Aluminum Total Return
Index, reduced by the Factor. The ComPS Early Redemption Price or the ComPS
Redemption Price may be more or less than the Face Amount of the ComPS. The
Company intends to issue more than one series of Preferred Securities.
3. COMPS PROCEEDS LOANED TO MORGAN GUARANTY. Proceeds of ComPS and related
Common Securities will be used by the Company to purchase from Morgan Guaranty
the Related Note with a maturity of and having the same
economic terms as the ComPS.
4. REPAYMENT OF RELATED NOTE. Morgan Guaranty will repay the Related Note in
whole or part to the extent required upon any Early Redemption Date and in whole
at the Stated Maturity (subject to extension in case of a Market Disruption
Event).
5. RELATED NOTE GUARANTEE. J.P. Morgan will guarantee to the Company, on a
subordinated basis, the payment of any distributions on and principal of the
Related Note as provided pursuant to the terms of the Related Note, at such
times and in such amounts as provided therein.
6. GUARANTEE. J.P. Morgan will guarantee to the holders of ComPS, on a
subordinated basis, the payment of (i) the ComPS Early Redemption Price or the
ComPS Redemption Price, as applicable, but if and only if and to the extent
that, in each case, Morgan Guaranty has made payment of interest or principal on
the Related Note, as the case may be, and (ii) upon liquidation, the lesser of
(a) the sum of the Early Redemption Value and the amount of accrued and unpaid
dividends on the ComPS and (b) the amount of assets of the Company available for
distribution to holders of ComPS.
7. MORGAN GUARANTY. Morgan Guaranty, a trust company with full banking powers
organized under the laws of the State of New York, is a wholly-owned subsidiary
of J.P. Morgan.
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SUMMARY OF THE OFFERING
SECURITIES OFFERED...... % Series [A] Preferred Securities ("ComPS")
indexed to the JPMCI Aluminum Total Return Index.
ISSUER..................J.P. Morgan Index Funding Company, LLC (the "Company"),
a Delaware limited liability company and a subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan").
GUARANTOR...............J.P. Morgan, on a subordinated basis, (i) of payments to
holders of ComPS of amounts received on the Related Note
by the Company and (ii) of payments to the Company on
the Related Note by Morgan Guaranty, a wholly-owned
subsidiary of J.P. Morgan.
INITIAL OFFERING PRICE
PER PREFERRED SECURITY
("FACE AMOUNT").........[$40].
AGGREGATE FACE
AMOUNT..................$
COMPS REDEMPTION
PRICE...................Redemption Value at Stated Maturity plus accrued and
unpaid dividends.
STATED MATURITY........., , subject to extension in the case of a Market
Disruption Event.
REDEMPTION VALUE PER
PREFERRED SECURITY......Face Amount X ( Applicable Index Settlement
Value - Factor)
Applicable Index Commencement Value
APPLICABLE INDEX........JPMCI Aluminum Total Return Index.
APPLICABLE INDEX
COMMENCEMENT VALUE......[Set on date of pricing].
APPLICABLE INDEX
SETTLEMENT VALUE........The average of the Applicable Index over the 10
consecutive Trading Days meeting certain conditions
immediately following the 20th scheduled Business Day
prior to redemption (as described herein), unless such
value has been permanently fixed prior to such time as
described under "Description of ComPS -- Early
Determination of Applicable Index Settlement Value and
Redemption Value."
CALCULATION AGENT.......Morgan Guaranty.
DIVIDENDS...............Cumulative cash dividends of % per annum on the Face
Amount (calculated on the basis of a 360 day year of
twelve 30-day months) accruing from , 199 (the
"Issue Date"), and payable quarterly in arrears on the
last calendar day of each March, June, September and
December.
CASH REDEMPTION PRIOR TO
STATED MATURITY
OPTIONAL
REDEMPTION............At the holders' option, on each prior to the Stated
Maturity, for the ComPS Early Redemption Price.
SPECIAL EVENT
REDEMPTION............Under certain circumstances, upon the occurrence of a
Tax Event or an Investment Company Event, for the ComPS
Early Redemption Price.
EARLY DETERMINATION OF
APPLICABLE INDEX
SETTLEMENT VALUE........Upon the occurrence of certain events affecting the
liquidity or increasing the cost of holding or trading
the Benchmark Aluminum Contracts and the inability to
find a suitable replacement Benchmark Aluminum Contract,
the Applicable Index Settlement Value may be fixed, and
such fixed value will be used upon any subsequent Early
Redemption and at Stated Maturity.
COMPS EARLY REDEMPTION
PRICE...................The Early Redemption Value (as defined in the
Prospectus), which represents the payment of the
discounted present value of dividends and Principal
Amount on the applicable Early Redemption Date. See
"Description of the ComPS -- Optional Redemption" and
"-- Special Event Redemption".
VOTING RIGHTS...........Holders of ComPS will have limited voting rights and
will not be entitled to vote to appoint, remove or
replace the Managing Members of the Company (as defined
in the LLC Agreement). See "Description of the
ComPS--Voting Rights".
USE OF PROCEEDS.........The proceeds to the Company from the sale of ComPS and
related Common Securities will be used to purchase a
note of Morgan Guaranty (the "Related Note"), and Morgan
Guaranty will use such proceeds for general corporate
purposes and for hedging its obligations under the
Related Note. See "Use of Proceeds".
FACTOR.................. , which is designed to offset the costs of
issuing and hedging the indexation of the ComPS.
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THE OFFERING
The information in this Prospectus Supplement concerning J.P. Morgan, Morgan
Guaranty, the Company, the ComPS, the Guarantee, the Related Note Guarantee and
the Related Note supplements, and should be read in conjunction with, the
information contained in the accompanying Prospectus. The following summary of
provisions relating to the ComPS is qualified in its entirety by the more
detailed information contained elsewhere or incorporated by reference in this
prospectus supplement (this "Prospectus Supplement") and the prospectus of which
this Prospectus Supplement constitutes a part (the "Prospectus"). Prospective
purchasers of ComPS should carefully review such information. Certain
capitalized terms used in this Prospectus Supplement have the meanings ascribed
to them under the "Glossary of Terms" in Annex I hereto.
GENERAL
Subject to the more specific discussion of each item elsewhere in this
Prospectus Supplement or in the Prospectus (including the effect of a Market
Disruption Event, as defined herein), following is a general summary of the
ComPS:
The ComPS pay a fixed dividend rate on the Face Amount (which equals the initial
price) and are principal-at-risk securities linked directly to the performance
of the JPMCI Aluminum Total Return Index (the "Applicable Index"), reduced by
the Factor. As described herein, the Applicable Index will change based on the
daily percentage change in value of the Benchmark Aluminum Contracts plus a
component of collateral yield computed on such fluctuating index value at the
most recent auction rate for 3-month U.S. Treasury Bills or certain successor
rates thereto (the "Collateral Yield Component"). At maturity, an investor will
receive a principal amount determined by the following formula: Face Amount x
(the 10-day average of the Applicable Index/the Applicable Index set on the day
of pricing, minus the Factor). In no circumstances will the Redemption Value of
the ComPS be less than zero, but the Redemption Value could be more or less than
the Face Amount. Thus, the Redemption Value is linked directly to the
performance of the Applicable Index, reduced by the Factor (e.g., if the average
ending value of the Applicable Index is twice the beginning value, the
Redemption Value will be twice the Face Amount, reduced by the Factor). If the
Applicable Index decreases over the life of the ComPS, or if the percentage
increase in the Applicable Index is less than the amount of the Factor, the
Redemption Value will be less than the Face Amount. If the percentage increase
in the Applicable Index over the life of the ComPS is greater than the amount of
the Factor, the Redemption Value will be greater than the Face Amount.
The Applicable Index (the JPMCI Aluminum Total Return Index) is a Total Return
Index. A Total Return Index, which is described more fully in the attached
Prospectus under "The JPM Indices -- Total Return Methodology", represents the
cumulative return of holding an unlevered position in the designated nearby
commodity futures contracts underlying such Applicable Index, plus the
Collateral Yield Component. Generally, since the Total Return Index is linked
directly (i.e., on a one-to-one basis) to the underlying futures contracts, a 1%
change on any day in the value of the specific underlying designated futures
contract will create a 1% change in the value of the Applicable Index for such
day (not including any change in value resulting from the Collateral Yield
Component). Because the designated futures contracts underlying the Total Return
Indices have maturities (generally less than three months) which are shorter
than the maturity of the ComPS, the index calculation methodology replaces the
underlying contract used to determine the daily change in the value of the
Applicable Index with the next designated contract of the same commodity on a
periodic basis. This process of replacement is called "rolling", and the 5-day
period during which the replacement occurs is called the "Rollover Period". For
any month during which a roll occurs, the daily change in value of a Total
Return Index solely as a result of the change in value of the designated future
contracts ("Change(t)") for all days prior to the Rollover Period is calculated
as 100% of the daily change of the existing ("old") underlying designated
contract. Beginning with the first day after the beginning of the Rollover
Period, the daily Change(t) in a Total Return Index is calculated based 80% on
the percentage change of the old contract and 20% on the percentage change in
the replacement ("new") designated contract. Similar 20% adjustments are made in
the weights attributable to each contract's change for each of the next four
days of the Rollover Period such that, by the day after the Rollover Period ends
and for all subsequent days until the next Rollover Period, 100% of the daily
S-5
<PAGE> 6
Change(t) is attributable to the percentage change of the new designated
contract. Because the change in the Applicable Index is linked directly to the
percentage change in the designated contracts underlying such index, plus the
Collateral Yield Component, any events which affect the designated contracts
underlying the Applicable Index may affect the Early Redemption Value and
Redemption Value of the ComPS.
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary over the life of the ComPS in relation to the Applicable
Index, reduced by the Factor. The Principal Amount repayable on any Early
Redemption Date, upon the occurrence of any Special Event Redemption or at
Stated Maturity will be determined, pursuant to the terms described herein
(including, without limitation, the averaging of the Applicable Index over the
Early Determination Period or Determination Period, as applicable, and the
present-valuing of the dividends and Principal Amount in connection with early
redemptions), by comparing the level of the Applicable Index set on the date of
issuance of the ComPS with the level determined pursuant to the terms hereof for
any such date of redemption, reduced by the Factor.
The ComPS represent preferred limited liability company interests in the
Company, the assets of which will consist of the Related Note and other notes
issued by Morgan Guaranty in connection with other issuances of Preferred
Securities. The Related Note, in which the proceeds of the ComPS and the related
Common Securities will be invested, matures on , (which is the "Stated
Maturity"), subject to extension in the case of a Market Disruption Event, and
is redeemable at certain times, from time to time, at the option of the Company
upon an optional redemption by one or more holders of ComPS in an amount
sufficient to fund such redemption and the redemption of the related Common
Securities and at any time by Morgan Guaranty in whole or in part upon the
occurrence of a Special Event. The ComPS will be redeemed at Stated Maturity at
the ComPS Redemption Price, which is equal to the sum of (a) the Redemption
Value (as defined below) per Preferred Security plus (b) accrued and unpaid
dividends thereon to but excluding the date of redemption. In addition, if, as a
result of a Special Event, Morgan Guaranty redeems the Related Note in whole or
in part prior to Stated Maturity, the Company must redeem ComPS and related
Common Securities having an aggregate Principal Amount equal to the Principal
Amount of the Related Note so redeemed at the ComPS Early Redemption Price. See
"Description of the ComPS -- Redemption at Stated Maturity"; -- Special Event
Redemption". For purposes of this Prospectus Supplement, "Principal Amount"
means (i) in the case of any Preferred Security, the Early Redemption Value
thereof or the Redemption Value thereof (as if determined as of such time), as
applicable, and (ii) in the case of the Related Note, the principal amount
thereof at such time determined pursuant to the terms thereof.
DIVIDENDS
The holders of ComPS are entitled to receive cumulative cash dividends at the
rate of % per annum on the Face Amount per Preferred Security, accruing from
the Issue Date, and payable quarterly in arrears on the last calendar day of
each March, June, September and December, commencing , 199 , or, if
any such date is not a Business Day (as defined herein), the next succeeding
Business Day when, as and if available for payment by the Company (as described
herein), except as otherwise described herein. The first dividend payment will
be for the period from and including the Issue Date to but excluding ,
199 . Dividends (or amounts equal to accrued and unpaid dividends) payable on
the ComPS for any period shorter than a quarterly dividend period will be
computed on the basis of a 360-day year of twelve 30-day months and on the basis
of the actual number of days elapsed (but never greater than 30) in any period
shorter than a month. See "Description of the ComPS -- Dividends".
REDEMPTION AT STATED MATURITY
Unless previously redeemed pursuant to the optional or special redemption
provisions described below, each of the outstanding ComPS will be redeemed by
the Company, in cash, on , which is the Stated Maturity of the Related
Note, subject to extension in the case of a Market Disruption Event (as defined
herein), at the ComPS Redemption Price, which is equal to (a) the Redemption
Value per Preferred Security plus (b) accrued and unpaid dividends thereon to
but excluding the date of redemption. See
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"Description of the ComPS -- Redemption at Stated Maturity"; "Risk
Factors -- Extension of Settlement Date or Stated Maturity".
CALCULATION OF REDEMPTION VALUE
The Principal Amount of each Preferred Security is indexed to the difference of
(i) the Applicable Index, which is calculated based on the change in value of
certain aluminum futures contracts included from time to time in the JPM Indices
(such contracts, from time to time, the "Benchmark Aluminum Contracts") plus the
Collateral Yield Component, and (ii) the Factor. On the date of this Prospectus
Supplement, the Benchmark Aluminum Contract is the High Grade Primary Aluminum
contract traded on the London Metals Exchange (the "LME"). Any contracts for
forward delivery on the LME shall be referred to herein as "futures contracts"
or "contracts." In summary, and subject to the complete definitions and formulae
contained herein and in the Prospectus, the Principal Amount of each Preferred
Security at Stated Maturity, subject to extension in the case of a Market
Disruption Event (the "Redemption Value"), shall be determined by multiplying
the Face Amount of each Preferred Security by the difference of (a) a fraction,
the numerator of which is the Applicable Index Settlement Value and the
denominator of which is the Applicable Index Commencement Value, and (b) the
Factor. However, the Redemption Value may not be less than zero. Subject to the
more complete definitions contained herein and in the accompanying Prospectus,
"Applicable Index Settlement Value" means the arithmetic average of the values
of the Applicable Index during the Determination Period (as defined below), and
"Applicable Index Commencement Value" means [value set on date of issuance]. See
"Description of ComPS--Calculation of Redemption Value" herein and "Description
of ComPS--Determination Period and Settlement Date" in the Prospectus.
EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE
Upon the occurrence of certain events affecting the liquidity or increasing the
cost of holding or trading the Benchmark Aluminum Contracts and the inability to
find a suitable replacement Benchmark Aluminum Contract, Morgan Guaranty has the
right to cause the Applicable Index Settlement Value to be fixed. Following such
an event, the Applicable Index Settlement Value will remain fixed and will be
used in calculating the Applicable Index Early Settlement Value for the
computation of any Early Redemption Value and as the Applicable Index Settlement
Value at Stated Maturity. See "Description of the ComPS-- Early Determination of
Applicable Index Settlement Value and Redemption Value".
OPTIONAL REDEMPTION
Each holder of ComPS may, by giving notice as specified herein before of each
year prior to Stated Maturity (each, an "Optional Redemption Date"), cause the
Company to redeem some or all of such holder's ComPS at the ComPS Early
Redemption Price, which is equal to (a) the Early Redemption Value (as defined
in the Prospectus) per Preferred Security as determined at such time plus (b)
accrued and unpaid dividends thereon to but excluding the date of redemption.
See "Description of the ComPS-- Optional Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event or an Investment
Company Event (each as defined herein and each a "Special Event"), Morgan
Guaranty will have the right to redeem the Related Note in whole or, if
redemption of less than all the ComPS will result in the discontinuance of such
Special Event, in part in an amount sufficient to cause such discontinuance, in
each case for cash, with the result that the Company will redeem a Principal
Amount of ComPS and related Common Securities equal to the Principal Amount of
the Related Note so redeemed for cash at the ComPS Early Redemption Price.
However, in the case of a Tax Event, Morgan Guaranty may allow the Related Note
and the Company may allow the ComPS and related Common Securities to remain
outstanding upon the receipt of indemnification by J.P. Morgan of the Company
for all taxes payable by it as a result of such Tax Event. See "Description of
the ComPS--Special Event Redemption".
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UNCONDITIONAL GUARANTEE BY J.P. MORGAN
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee, the LLC Agreement and the Expense Agreement, taken together, will
provide a full and unconditional guarantee, on a subordinated basis, of payments
due on the ComPS. See "Risk Factors--Limitation on Rights Under the Guarantee,
the Related Note Guarantee and the Related Note", "Description of the Related
Note Guarantee" and "Effect of Obligations Under the Guarantee, the Related Note
Guarantee and the Related Note".
THE GUARANTEE
The Guarantee by J.P. Morgan guarantees to the holders of the ComPS the payment
of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as
applicable, but if and only if and to the extent that, in each case, Morgan
Guaranty has made payment of interest or principal on the Related Note, as the
case may be, and (ii) upon a Liquidation Event (as defined herein) (other than
in connection with the redemption of all the ComPS upon maturity or redemption
in whole of the Related Note), the lesser of (A) the sum of (I) the Early
Redemption Value of such ComPS and (II) the amount of accrued and unpaid
dividends on such ComPS to but excluding the date of payment (the "Liquidation
Distribution"), to the extent the Company has funds available therefor, and (B)
the amount of assets of the Company remaining available for distribution to
holders of the ComPS upon such Liquidation Event. J.P. Morgan's obligations
under the Guarantee will be subordinated and junior in right of payment to all
liabilities of J.P. Morgan, pari passu with the most senior preferred stock
outstanding as of the date hereof of J.P. Morgan and senior to the common stock
of J.P. Morgan.
THE RELATED NOTE GUARANTEE
The Related Note Guarantee by J.P. Morgan guarantees to the Company the payment
of any dividends on and principal of the Related Note as provided pursuant to
the terms of the Related Note, at such times and in such amounts as provided
therein. J.P. Morgan's obligations under the Related Note Guarantee will be
subordinated and junior in right of payment to all liabilities of J.P. Morgan,
pari passu with the most senior preferred stock outstanding as of the date
hereof of J.P. Morgan and senior to the common stock of J.P. Morgan.
RELATED NOTE
The Related Note will be issued as an unsecured obligation of Morgan Guaranty,
limited in initial Principal Amount to approximately $ , such amount being the
aggregate Face Amount of the ComPS and the related Common Securities. The
Related Note will mature on the Stated Maturity (subject to extension in the
case of a Market Disruption Event), and will bear interest at an annual rate of
% on such aggregate Face Amount (which is equivalent to the annual dividend
rate with respect to the ComPS), payable quarterly in arrears on the last day of
each calendar quarter, commencing on , 199 . The Principal Amount of the
Related Note at any time will be the aggregate Principal Amount of the
outstanding ComPS and related Common Securities at such time. The amount payable
upon maturity of the Related Note will be the Related Note Redemption Price. The
timing and amount of payments on the Related Note mirror the aggregate financial
terms of the ComPS.
The obligations of Morgan Guaranty under the Related Note will be pari passu
with all present and future Senior Indebtedness of Morgan Guaranty. Morgan
Guaranty's obligations under the Related Note are effectively subordinated to
all liabilities (including indebtedness) of its consolidated and unconsolidated
subsidiaries.
VOTING RIGHTS
Holders of ComPS will have limited voting rights and will not be entitled to
vote to appoint, remove or replace the Managing Members of the Company (as
defined below). See "Description of the ComPS-- Voting Rights".
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USE OF PROCEEDS
The Company will invest the proceeds from the sale of the ComPS offered hereby
and the related Common Securities in the Related Note, the proceeds of which
will be used by Morgan Guaranty for general corporate purposes and for hedging
its obligations under the Related Note. See "Use of Proceeds".
LISTING
[The ComPS have been authorized for listing on the under the symbol " ",
subject to official notice of issuance. Trading of the ComPS on the is
expected to commence within a 30-day period after the date of this Prospectus
Supplement.] [Prior to this offering, there has been no market for the ComPS. In
order to meet one of the requirements for listing the ComPS on the , the
Underwriters will undertake to sell ComPS to a minimum of 400 beneficial
holders.]
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RISK FACTORS
INDEXATION OF PRINCIPAL AMOUNT
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary until Stated Maturity of the ComPS in relation to the
Applicable Index (the JPMCI Aluminum Total Return Index), reduced by the Factor.
The Principal Amount repayable on any Optional Redemption Date, upon the
occurrence of any Special Event Redemption or in connection with any Liquidation
Distribution (each such redemption date, an "Early Redemption Date") or at
Stated Maturity will be determined, pursuant to the terms described herein
(including, without limitation, the averaging of the Applicable Index over the
Early Determination Period or Determination Period, as applicable, and the
present-valuing of the dividends and Principal Amount in connection with early
redemptions), by comparing the level of the Applicable Index at the date of
issuance of the ComPS with the level determined pursuant to the terms hereof for
any such date of redemption, reduced by the Factor. Accordingly, the Principal
Amount to be received upon any date of redemption will fluctuate based on the
Applicable Index (reduced by the Factor) and may be lower than the Face Amount.
If the Applicable Index decreases over the life of the ComPS, or if the
percentage increase in the Applicable Index is less than the amount of the
Factor, the Redemption Value will be less than the Face Amount. If the
percentage increase in the Applicable Index is greater than the amount of the
Factor, the Redemption Value will be greater than the Face Amount.
LIMITATION ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE
RELATED NOTE
The Guarantee will be effective with respect to the ComPS from the time of
issuance of the ComPS but will not apply to any payment of dividends or other
amounts due in respect of the ComPS to the extent Morgan Guaranty has failed to
make a payment of principal of or interest on the Related Note. To the extent
Morgan Guaranty were to default on its obligation to pay amounts payable on the
Related Note, the Company would lack available funds for the payment of
distributions on or amounts payable on redemption of the ComPS and, in such
event, holders of the ComPS would not be able to rely on the Guarantee for
payment of such amounts. Instead, holders of the ComPS would rely on the
enforcement by the Company of its rights as holder of the Related Note against
Morgan Guaranty and as holder of the Related Note Guarantee against J.P. Morgan.
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee, the LLC Agreement and the Expense Agreement, taken together, will
provide a full and unconditional guarantee, on a subordinated basis, of payments
due on the ComPS. See "Description of the Guarantee" and "Description of the
Related Note Guarantee".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, unless waived by Morgan Guaranty or
subject to cure as specified herein, Morgan Guaranty shall have the right to
redeem the Related Note, in whole or in part, in which event the Company will
redeem the ComPS and related Common Securities on a pro rata basis to the same
extent as the Principal Amount of the Related Note is redeemed by Morgan
Guaranty.
As described in more detail below, a Special Event is either (i) a Tax Event or
(ii) an Investment Company Event. A Special Event may occur at any time. See
"Description of the ComPS--Special Event Redemption".
It is possible that the occurrence of a Special Event could cause the market
price of the ComPS in any existing secondary market to decline.
LIMITED VOTING RIGHTS
Holders of ComPS will have limited voting rights relating to a payment default
on or an adverse change to the ComPS, and will not be entitled to vote to
appoint, remove or replace the Managing Members of the Company (J.P. Morgan and
JPM Ventures), which voting rights are vested exclusively in the holders of the
Common Securities. See "Description of the ComPS--Voting Rights".
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<PAGE> 11
TRADING PRICE MAY NOT REFLECT ACTUAL ECONOMIC VALUE
[The ComPS have been authorized for listing on the under the
symbol " ", subject to official notice of issuance. Trading of the
ComPS on the is expected to commence within a 30-day period after the
date of this Prospectus Supplement. [Prior to this offering there has been no
market for the ComPS. In order to meet one of the requirements for listing the
ComPS on the , the Underwriters will undertake to sell ComPS to a
minimum of 400 beneficial holders.] However, it is not possible to predict
whether the necessary number of holders will purchase and, for the remaining
term of the ComPS, continue to hold ComPS in order that any secondary market
which does develop will continue to exist. The Underwriters are not obligated to
make a market for the ComPS, and although JPMSI, as lead Underwriter, intends to
use its reasonable efforts to do so, it is possible that no active secondary
market for the ComPS will develop and remain in existence.
There can be no assurance as to the market prices for the ComPS in any secondary
market which does develop. Accordingly, the ComPS that an investor may purchase,
whether pursuant to the offer made hereby or in the secondary market, may trade
at a discount to the price that the investor paid to purchase such ComPS.
VALUE OF THE COMPS
The value of the ComPS at any time will depend upon the interaction of at least
two key factors: (i) the level of the Applicable Index and (ii) the credit
quality of Morgan Guaranty and J.P. Morgan. As discussed under "Description of
the ComPS", adverse changes in the Applicable Index will directly correlate to
adverse changes in the value of the ComPS. Also, a decline in the credit quality
of Morgan Guaranty and J.P. Morgan could cause the trading price of the ComPS in
any secondary market then existing to decline.
NO RIGHT TO INTEREST ON RELATED NOTE
Because holders of ComPS are essentially investing in a pro rata share of the
Related Note, prospective purchasers of ComPS are also making an investment
decision with regard to the Related Note and should carefully review all the
information regarding the Related Note contained herein and in the accompanying
Prospectus. However, investors in ComPS have no right to direct interest
distributions on the Related Note. See "Description of the Related Note".
IMPOSITION OF BANK REGULATORY RESTRICTIONS
The Company's ability to make distributions and other payments on the ComPS is
dependent upon Morgan Guaranty's making interest and other payments on the
Related Note as and when required or collection by the Company under the Related
Note Guarantee. As noted in the accompanying Prospectus under "J.P. Morgan & Co.
Incorporated--Regulation", Morgan Guaranty is subject to examination and
regulation by U.S. federal and state banking authorities, and although there is
no current restriction on Morgan Guaranty's ability to make payments under the
Related Note, certain transactions with affiliates, including the Company, are
or may in the future become subject to restrictions imposed by bank regulatory
authorities.
EFFECT OF TRADING IN THE BENCHMARK ALUMINUM CONTRACTS AND RELATED COMMODITIES
AND INSTRUMENTS
Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively
involved in the trading of the Benchmark Aluminum Contracts, U.S. Treasury Bills
and other instruments and derivative products based thereon. Morgan Guaranty, in
particular, is an active participant in various commodity markets including the
physical petroleum, precious and base metals and related derivatives markets.
JPMSI and other affiliates may also issue or underwrite, or authorize
unaffiliated entities to issue or underwrite, other securities or financial
instruments with returns indexed to the Applicable Index, the Benchmark Aluminum
Contracts, U.S. Treasury Bills, one or more of the JPM Indices or to another
commodity. Morgan Guaranty has licensed, and may in the future license, the
Applicable Index, the JPM Indices, and related indices and
S-11
<PAGE> 12
sub-indices for use by affiliated and unaffiliated parties, for publication in
newspapers and periodicals, for distribution by information and data
dissemination services and for other purposes. Morgan Guaranty currently intends
to publish individual commodity sub-indices for each of the commodities included
in the JPMCI using the same calculation methodology as that described below. The
Applicable Index on the date hereof is identical to the sub-index having the
same underlying commodity.
Trading in the foregoing contracts, U.S. Treasury Bills and commodities by
Morgan Guaranty, its affiliates (including JPMSI) and unaffiliated third parties
could adversely affect the value of the Applicable Index, which would in turn
adversely affect the return on and the value of the ComPS. See "Description of
the ComPS". Furthermore, additional issuances of securities linked or referenced
to the Benchmark Aluminum Contracts, similar aluminum futures contracts or
aluminum could adversely affect the value of the ComPS.
POTENTIAL FOR ADVERSE INTERESTS
As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in
trading activities related to the Benchmark Aluminum Contracts and U.S. Treasury
Bills and other instruments or derivative products based on or related to the
Applicable Index, for their accounts where permitted or for other accounts under
their management. Morgan Guaranty, JPMSI and their affiliates, as well as
unaffiliated third parties, may also engage in other activities related to the
Applicable Index, as discussed above. Because Morgan Guaranty will issue the
Related Note issued to the Company, all such activities could create interests
of Morgan Guaranty adverse to those of the holders of ComPS. For example, the
issuance of other securities indexed to the Applicable Index, i.e., the
introduction of competing products into the marketplace, could adversely affect
the value of the ComPS. To the extent that J.P. Morgan or one of its affiliates
serves as issuer, or JPMSI or one of its affiliates serves as agent or
underwriter, for such securities or other instruments, their interests with
respect to such products may be adverse to those of the holders of the ComPS.
Morgan Guaranty will serve as Calculation Agent with respect to the ComPS and,
accordingly, will in good faith calculate the Applicable Index, which could also
raise certain adverse interests (e.g., in instances where Morgan Guaranty as the
Calculation Agent is required to exercise discretion).
RISK OF CARRYING AND ROLLING BENCHMARK ALUMINUM CONTRACTS
As discussed below, the Early Redemption Value and the Redemption Value of the
ComPS will be calculated with reference to the Applicable Index, the value of
which is designed to replicate to the extent provided herein the cumulative
return of holding a continuous investment in the Benchmark Aluminum Contracts,
plus the Collateral Return Component. At any given time, the Applicable Index
will be calculated based on the change in value of certain Benchmark Aluminum
Contracts for delivery in the near term (the "shorter-dated contracts"), plus
the Collateral Return Component thereon. The Applicable Index will continue to
be calculated based on the change in value of such shorter-dated contracts until
they approach maturity, at which time the Applicable Index will, as described
below, cease to be calculated based on the change in value of such shorter-dated
contracts and begin to be calculated based on the change in value of the
subsequent Benchmark Aluminum Contracts (the "longer-dated contracts") plus the
Collateral Return Component thereon on a regular periodic basis so as to be
continuously indexed to the change in value of Benchmark Aluminum Contracts. The
period during which each such replacement of shorter-dated contracts with
longer-dated contracts as the basis for the calculation of the change in value
of the Applicable Index occurs is referred to herein as the "Rollover Period",
as further defined below. If the market for Benchmark Aluminum Contracts is in
"contango" (i.e., the prices of longer-dated contracts are above the prices of
shorter-dated contracts), the return on the Applicable Index may be adversely
affected. The Applicable Index would decline if (i) the price of the
longer-dated Benchmark Aluminum Contracts during the Rollover Period were more
than the price of the shorter-dated contracts which they will replace and (ii)
the price of the longer-dated contracts were to decline as such contracts
approach maturity (i.e., the price of the longer-dated contracts were to
converge toward the price of the replaced shorter-dated contracts), in each case
in an amount greater than the Collateral Return Component accruing during such
period. While many of the commodities included in the JPM Indices have
historically
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<PAGE> 13
exhibited periods of both "backwardation" (i.e., the prices of longer-dated
contracts are below the prices of shorter-dated contracts) and contango, there
can be no assurance that backwardation will exist at any or all times. The
absence of backwardation in the market for Benchmark Aluminum Contracts could
adversely affect the Applicable Index and, correspondingly, could adversely
affect the value of the ComPS. Additionally, the issuance and/or the trading of
the ComPS could adversely affect the market for Benchmark Aluminum Contracts and
the extent to which such markets are in backwardation or contango and,
correspondingly, could adversely affect the value of the Applicable Index and
the value of the ComPS. See "Description of ComPS--Calculation of Redemption
Value".
The following table sets forth the simulated month-end level of the JPMCI
Aluminum Total Return Index (the Applicable Index) for the months from January,
1986 through January, 1996, and the actual level of the JPMCI Aluminum Total
Return Index thereafter. Because Morgan Guaranty did not commence actual
calculation and publication of the JPMCI Aluminum Total Return Index using the
rules described herein until February 1, 1996, the levels prior to such date are
simulated levels only, derived by applying the rules of the JPMCI Aluminum Total
Return Index as described herein to historical aluminum contract settlement
values and using as a given the level of the previous JPMCI Aluminum Total
Return Index on January 31, 1996, as the basis for calculation:
LEVEL OF THE APPLICABLE INDEX AS OF THE END OF:
<TABLE>
<CAPTION>
YEAR JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 131.30 130.63 135.29 131.10 132.43 135.15 131.55 132.45 138.62 136.33 133.96 137.35
1987 142.02 154.64 158.23 165.28 170.10 176.34 199.18 215.56 240.00 229.38 213.59 256.16
1988 248.15 305.56 377.01 338.83 495.25 495.50 504.45 530.92 425.52 470.48 470.74 508.54
1989 465.50 462.40 418.74 479.04 439.46 423.99 406.67 429.25 418.98 428.76 426.81 410.00
1990 353.90 380.57 407.46 388.55 405.86 405.96 447.72 487.99 493.98 495.22 403.38 407.23
1991 389.52 409.81 377.46 355.10 328.32 345.80 331.64 327.05 299.85 299.87 284.36 287.84
1992 313.33 332.71 331.69 334.65 332.96 328.36 333.28 329.86 316.93 289.61 303.28 312.10
1993 303.08 298.11 280.66 276.21 277.44 301.29 292.11 279.16 266.95 253.30 251.98 265.40
1994 288.34 304.96 303.81 301.34 314.17 342.21 340.02 353.08 370.23 415.53 444.69 453.68
1995 489.70 408.56 427.31 411.83 420.55 415.13 431.44 412.95 406.54 385.81 382.00 385.13
1996 358.29 362.56 376.28 364.79 355.94 335.27 337.99 333.54 302.38 315.64 339.05
</TABLE>
Additionally, the level of the Applicable Index as of the close of business on
[the date of pricing] was .
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<PAGE> 14
The following is a graph of such simulated and actual month-end values:
LEVELS OF JPMCI ALUMINUM TOTAL RETURN INDEX, 1986-1996
[Graphic Omitted]
Using the month-end levels noted above as hypothetical Applicable Index
Settlement Values, the hypothetical Redemption Value of a Preferred Security as
if maturing at the end of each of the past ten years for a Preferred Security
priced on December 31, 1986, with a hypothetical Face Amount of $40.00, an
Applicable Index Commencement Value of 137.35 and a hypothetical Factor of 0.30
would be as follows:
<TABLE>
<CAPTION>
HYPOTHETICAL APPLICABLE INDEX
YEAR SETTLEMENT VALUE HYPOTHETICAL REDEMPTION VALUE
---------------- ----------------------------- -----------------------------
<S> <C> <C>
1986............ 137.35 $ 28.00
1987............ 256.16 $ 62.60
1988............ 508.54 $136.10
1989............ 410.00 $107.40
1990............ 407.23 $106.60
1991............ 287.84 $ 71.82
1992............ 312.10 $ 78.89
1993............ 265.40 $ 65.29
1994............ 463.66 $120.11
1995............ 385.13 $100.16
</TABLE>
VOLATILITY OF AND ADVERSE CHANGES TO ALUMINUM AND ALUMINUM FUTURES PRICES
Market prices for aluminum can fluctuate widely and are affected by numerous
factors, with the two principal factors being the level of economic activity in
the main consuming markets and the rate of supply of new metal from producers.
Other factors influencing market prices for aluminum include disruptions in
aluminum output, the level of metal exports from the former Soviet Union,
producer cut-backs and speculative activity.
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<PAGE> 15
Production of aluminum is a three-stage process beginning with the mining of
bauxite. The mining of bauxite occurs mainly in the tropics, with the major
producing regions being the Caribbean, South America, Africa, Southeast Asia and
Australia. Fluctuation in the supplies of bauxite or social or political
disruptions in the major producing regions could affect the level of the
Applicable Index. The production of aluminum from alumina is a power-intensive
process and a continuous supply of electrical power is essential. A significant
proportion of aluminum production capacity is located close to resources of
hydroelectric power. Other economical energy sources for producing aluminum
include lowgrade coal and waste gases from oil production. However, disruptions
in the supply of energy to aluminum producers or an increase in the cost thereof
could affect the level of the Applicable Index. Furthermore, a significant
proportion of western world aluminum production capacity is controlled by a
small number of companies, and such producers have in the recent past
implemented temporary curtailments of output. Such efforts at supply curtailment
(or the cessation thereof) could affect the value of the Applicable Index.
Aluminum's major end-uses include applications in the transportation,
construction, packaging and electrical industries. Potential for substitution
exists in all areas, although considerations including relative weight and cost
often limit substitution levels. However, the development of a substitute
product could adversely affect the value of the Applicable Index.
The supply of and demand for aluminum influence the aluminum price in the
medium-to-longer term. In the event of sudden disruptions in the supplies of
aluminum, such as those caused by war, accidents, weather or acts of terrorism,
prices of Benchmark Aluminum Contracts and, consequently, the value of the
Applicable Index, could become extremely volatile and unpredictable. Also,
sudden and dramatic declines in Benchmark Aluminum Contract prices as may occur,
for example, upon a cessation of hostilities that may exist in countries
producing aluminum or upon the discovery of significant additional sources or
reserves of the raw materials necessary to produce aluminum (e.g., bauxite or
electricity), the introduction of new or previously withheld supplies into the
market (e.g., aluminum from the former Soviet Union) or the introduction of
substitute products or commodities, could have a significant adverse effect on
the value of the Applicable Index and on the value of the ComPS. In addition,
the price of aluminum has on occasion been subject to very rapid and significant
short-term changes due to speculative activities which, if such activities
result in a price decrease, may cause the value of the ComPS to decrease. In any
case, all such volatility in the Benchmark Aluminum Contracts will correlate
directly to volatility in the Applicable Index. Such volatility could lead some
investors in the Benchmark Aluminum Contracts to withdraw from the applicable
futures markets, which could adversely affect the liquidity of such markets and
could adversely affect the value of the Applicable Index and, correspondingly,
the value of the ComPS.
See "Description of the ComPS--Calculation of Redemption Value".
CHANGE OF EXCHANGE METHODOLOGY
Any exchange on which any Benchmark Aluminum Contract is traded or which
provides information relevant to the calculation of the Applicable Index may
from time to time change any rule or bylaw or take emergency action under its
rules, any of which could affect the settlement prices of the Benchmark Aluminum
Contracts underlying an Applicable Index. Any such change which causes a
decrease in such settlement prices could adversely affect the value of the
Applicable Index.
SUSPENSION OR MATERIAL DISRUPTION OF FUTURES OR COMMODITIES TRADING; TEMPORARY
DISTORTIONS
The futures markets and the markets for aluminum are subject to temporary
distortions or other disruptions due to conditions of illiquidity in the
markets, the participation of speculators, government regulation and
intervention and the other factors referred to in the preceding paragraph. In
addition, the London Metals Exchange (the "LME") has the authority to limit
trading when required in its discretion, and has in the past exercised such
authority to limit the spread at which a futures contract can trade based on the
cash contract (or the difference between adjacent contracts) for the same
commodity. Although the LME has not imposed absolute price limits to date, many
U.S. futures exchanges set and enforce a maximum or minimum price at which a
contract may trade on any given day (such price, a "limit price"). In a
particular futures contract, once the limit price has been reached in such a
contract, no trades
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<PAGE> 16
may be made on that day at a price above or below the limit price, as the case
may be. Limit prices may have the effect of precluding trading in a particular
contract for all or a portion of a trading day or forcing the liquidation of
contracts at disadvantageous times or prices. Any such circumstances,
particularly if they occur during the Rollover Period for the Applicable Index
or during an Early Determination Period or the Determination Period for the
Applicable Index, could adversely affect the value of the Applicable Index
and/or could constitute a Market Disruption Event and, therefore, could
adversely affect the value of the ComPS.
Depending on the period of time over which a Market Disruption Event continues,
the correlation between changes in the value of the Applicable Index and changes
in the general level of prices of aluminum may be adversely affected. Under such
circumstances, the value of the Applicable Index, and the value of the ComPS,
may be adversely affected.
Additionally, because [it is anticipated that] the ComPS will be listed on a
stock exchange and [, if listed, the ComPS] will trade as equity securities on
such exchange, trading in the ComPS may be subject to interruption or delay due
to extreme volatility in the trading prices of equity securities generally on
such exchange (the so-called "circuit breaker" rules), notwithstanding the
specific price movements of the ComPS.
MARKET DISRUPTION EVENTS
In the event of a Market Disruption Event during any Early Determination Period
or the Determination Period, the Early Redemption Value or Redemption Value, as
applicable, payable in respect of the ComPS will be calculated using the
Applicable Index on the day or days on which open-outcry trading on either the
New York Mercantile Exchange (the "NYMEX") or the LME is scheduled to occur or
occurs (each, a "Trading Day") immediately following the termination of such
Market Disruption Event. However, if such Market Disruption Event remains in
effect for longer than 20 consecutive Trading Days and, in the reasonable
judgment of Morgan Guaranty, such Market Disruption Event is likely to remain in
effect, then the Applicable Index Early Settlement Value or the Applicable Index
Settlement Value, as applicable, for each Trading Day subject to a Market
Disruption Event may be determined in good faith by Morgan Guaranty based on
alternative pricing sources reasonably believed by it to be indicative of
then-prevailing prices for notional transactions in futures contracts or
commodities equal in size to the Applicable Index Early Settlement Value or the
Applicable Index Settlement Value, as applicable, although Morgan Guaranty has
no obligation to do so, and such value will be utilized in the calculation of
the Early Redemption Value or the Redemption Value, as applicable, for such
days. Because Morgan Guaranty's obligations under the Related Note will also be
based on the Applicable Index Early Settlement Value or the Applicable Index
Settlement Value, Morgan Guaranty may have an adverse interest with respect to
such determination.
HISTORICAL CORRELATIONS MAY NOT PREVAIL IN THE FUTURE
Although historically the JPMCI Aluminum Total Return Index and the spot prices
of aluminum have shown some positive correlation with inflation and some
negative correlation with stock and bond returns (in each case in the United
States), there can be no assurance that such correlations will prevail in the
future. As a result, investors who invest in ComPS in reliance on these
correlations should individually assess the likelihood of such correlations
continuing.
CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS THEREOF
Prices of commodities and commodity futures contracts may be adversely affected
by the promulgation of new laws or regulations or by the reinterpretation of
existing laws or regulations (including, without limitation, those relating to
taxes and duties on commodities or commodity components) by one or more
governments, governmental agencies or instrumentalities, courts or other
official bodies. Any such event could adversely affect the value of the
Applicable Index and, correspondingly, could adversely affect the value of the
ComPS. Additionally, the occurrence of certain events increasing the cost of
holding or trading
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<PAGE> 17
the Benchmark Aluminum Contracts and the inability to find a suitable
replacement Benchmark Aluminum Contract could lead Morgan Guaranty to cause the
Applicable Index Settlement Value to be fixed, which Applicable Index Settlement
Value would be utilized to determine any Early Redemption Value and in which
event the Redemption Value of the ComPS would not vary through Stated Maturity.
Such an early determination of the Applicable Index Settlement Value may result
in the holders of the ComPS receiving an amount that is less than what
indicative commodity and futures prices prevailing on any Early Redemption Date
or at the Stated Maturity would otherwise imply.
EXTENSION OF SETTLEMENT DATE OR STATED MATURITY
If any Benchmark Aluminum Contract were to be affected by a Market Disruption
Event during any Early Determination Period or the Determination Period, the
applicable Settlement Date would be postponed until the later of (i) the
applicable Early Redemption Date or the Stated Maturity and (ii) the fifth
Business Day after the last day of the applicable Early Determination Period or
the Determination Period. Such delay could be of indefinite duration, during
which time a holder of ComPS will not receive the Early Redemption Value or
Redemption Value thereof, as applicable. In the event that payment of the
Redemption Value is postponed beyond the Stated Maturity, no interest or
dividends will accrue or be payable on the Face Amount, as described under the
caption "Description of the ComPS--Calculation of Redemption Value". In the
event payment of the Early Redemption Value is postponed beyond the applicable
Early Redemption Date, no dividends will be payable, and no interest will accrue
and be payable, with respect to ComPS redeemed on such Early Redemption Date.
DISCONTINUANCE OF PUBLISHING OF THE JPMCI ALUMINUM TOTAL RETURN INDEX
In the event that Morgan Guaranty discontinues publication of the JPMCI Aluminum
Total Return Index, the Calculation Agent will continue to calculate in good
faith the Applicable Index during the remaining term of the ComPS, based on the
methodology described in the Prospectus under "Description of the ComPS".
However, such good-faith calculation may result in a ComPS Redemption Price or
ComPS Early Redemption Price for the ComPS which is less than the ComPS
Redemption Price or ComPS Early Redemption Price, as applicable, for such ComPS
had it been calculated on the basis of the JPMCI Aluminum Total Return Index.
POTENTIAL MODIFICATIONS TO THE JPM INDICES AND/OR THE APPLICABLE INDEX
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As described under "Description of the ComPS--Early Determination of Applicable
Index Settlement Value and Redemption Value", if any Benchmark Aluminum Contract
becomes less liquid or representative, the JPMCI Policy Committee could
recommend a replacement Benchmark Aluminum Contract. Such a change from a less
liquid to a more liquid contract may result in a lower Early Redemption Value or
Redemption Value for the ComPS than would have been the case if the less liquid
contract had remained the benchmark.
If at any time no replacement contracts can be found to serve as a Benchmark
Aluminum Contract, the Applicable Index Settlement Value of the ComPS will be
determined at such time, as described under the caption "Description of the
ComPS--Early Determination of Applicable Index Settlement Value and Redemption
Value". Such an early determination of the Applicable Index Settlement Value may
result in the holders of the ComPS receiving an amount that is less than what
indicative commodity and futures prices prevailing on any Early Redemption Date
or at the Stated Maturity would otherwise imply. Because Morgan Guaranty will be
the Calculation Agent, such early determination may raise adverse interests.
Additionally, if at any time any Benchmark Aluminum Contract, or the trading
thereof, becomes subject to any increased cost or additional tax, Morgan
Guaranty reserves the right to designate a replacement Benchmark Aluminum
Contract or, if no such contract is designated, to cause, at its option, the
Applicable Index Settlement Value of the ComPS to be determined at such time as
described under "Description of the ComPS--Early Determination of Applicable
Index Settlement Value and Redemption Value". Because Morgan Guaranty will, at
the time any Benchmark Aluminum Contract becomes subject to such increased cost
or additional tax, in its discretion decide whether or not to cause an early
determination of the
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<PAGE> 18
Applicable Index Settlement Value of the ComPS, exercise of such option may
raise an adverse interest. Such a change in contracts due to the imposition of
any increased cost or additional tax may result in a lower Redemption Value for
such ComPS than would have been the case if the contract on which such increased
cost or additional tax were imposed had remained a Benchmark Aluminum Contract.
Any early determination of the Applicable Index Settlement Value may cause the
market price of ComPS in any existing secondary market to decline.
EARLY REDEMPTION
The ComPS may be redeemed prior to their Stated Maturity upon the occurrence of
a Special Event or redeemed at the option of the holders thereof on each
Optional Redemption Date. In the case of a redemption upon the occurrence of a
Special Event, the Early Redemption Value paid by the Company at such time may
be significantly less than the Redemption Value that would otherwise have been
payable had the ComPS not been redeemed prior to their Stated Maturity and the
occurrence of such Special Event may cause the market price of ComPS in any
existing secondary market to decline. In the case of an optional redemption by
holders, it is likely, under usually-prevailing market conditions, that the
Early Redemption Value paid by the Company will be less than the amount such
holder could have realized by selling such ComPS in an existing secondary
market, if any, ratably during the Early Determination Period. Delay in payment
of the ComPS Early Redemption Price (as a result of a Market Disruption Event or
a delay in the provision by DTC to the Company of the Applicable Notice (as
defined below)) will not entitle holders of ComPS to additional dividends on the
ComPS or the accrual of any interest on such ComPS Early Redemption Price.
CERTAIN CONSIDERATIONS REGARDING HEDGING
Prospective purchasers of the ComPS who intend to hedge against the risks
associated with the market for aluminum should recognize the complexities of
utilizing the ComPS in this manner. The formula under which the Principal Amount
is calculated is not guaranteed to produce distributions to holders having
readily definable relationships with other aluminum market instruments and
products. As described below, because the Applicable Index is a Total Return
Index, the value of the ComPS will reflect not only the price of the Benchmark
Aluminum Contracts but also the state of the futures market for Benchmark
Aluminum Contracts (i.e., whether such market is in "backwardation" or
"contango" over time, as discussed above) and the Collateral Return Component,
reduced by the Factor. Also, under certain circumstances, amounts payable on the
ComPS may be based on the good faith determination of Morgan Guaranty and not on
the Applicable Index. For these reasons, investors should be cautious in using
the ComPS in a hedging program. The risks associated with utilizing the ComPS in
a hedging program may be magnified in periods of substantial aluminum price
volatility, since properly correlating the ComPS either as a hedge of other
assets or correlating the ComPS to a hedge thereof may become more difficult.
Also, investing in ComPS should not be considered a complete investment program.
UNCERTAIN UNITED STATES FEDERAL INCOME TAX CHARACTERIZATION OF THE COMPANY
Although the Company intends to take the position that it should be disregarded
for United States Federal income tax purposes, the Company may instead be
characterized as a partnership. Such characterization as a partnership may
result in less favorable treatment for holders of ComPS. See "United States
Federal Income Taxation" below.
J.P. MORGAN & CO. INCORPORATED
J.P. Morgan, whose origins date to a merchant banking firm founded in London in
1838, is the holding company for a group of global subsidiaries that provide a
wide range of financial services to corporations, governments, financial
institutions, institutional investors, professional firms, privately held
companies,
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nonprofit organizations, and financially sophisticated individuals. J.P.
Morgan's activities are summarized in the Prospectus.
J.P. MORGAN INDEX FUNDING COMPANY, LLC
J.P. Morgan Index Funding Company, LLC, is a Delaware limited liability company
formed pursuant to (i) the filing of a certificate of formation with the
Secretary of State of the State of Delaware on November 21, 1995 and (ii) the
amended and restated limited liability company agreement, dated May 15, 1996,
and effective as of November 21, 1995 (the "LLC Agreement"), filed as an exhibit
to the Registration Statement relating to this Prospectus Supplement and the
Prospectus. J.P. Morgan will directly or indirectly acquire all Common
Securities of the Company. The Company exists for the exclusive purposes of (i)
issuing the ComPS and Common Securities, and from time to time issuing
additional series of preferred and common securities, (ii) investing the gross
proceeds of the ComPS and Common Securities in the Related Note, and investing
the proceeds of such additional issuances of preferred and common securities in
other debt obligations of Morgan Guaranty, and (iii) engaging in only those
other activities necessary or incidental thereto.
Pursuant to the LLC Agreement, the Common Securities will initially be owned by
J.P. Morgan and by J.P. Morgan Ventures Corporation, a Delaware corporation and
a wholly-owned subsidiary of J.P. Morgan ("JPM Ventures"). J.P. Morgan and JPM
Ventures will be the Managing Members of the Company, as defined in the LLC
Agreement.
Pursuant to the LLC Agreement, the Managing Members of the Company have
unlimited liability for the debts, obligations and liabilities of the Company in
the same manner as a general partner of a Delaware limited partnership (which do
not include obligations to holders of Preferred Securities in their capacity as
such), to the extent not fully satisfied and discharged by the Company. That
liability on the part of such Members is for the benefit of, and is enforceable
by, the liquidating trustee of the Company in the event of its dissolution and
is for the benefit of third parties to whom the Company owes such debts,
obligations and liabilities. The holders of Preferred Securities, in their
capacity as members of the Company, are not liable for the debts, obligations or
liabilities of the Company (subject to their obligation to repay any funds
wrongfully distributed to them).
The rights of the holders of the ComPS, including economic rights, rights to
information and voting rights, are set forth in the LLC Agreement. See
"Description of the ComPS".
J.P. Morgan currently intends to (i) form a trust, the sole purpose of which is
to invest in and hold Related Notes, (ii) cause such trust to obtain an
exemption from the provisions of the Investment Company Act of 1940 and (iii)
cause the Company to merge with and into such trust, with such trust assuming
all liabilities of the Company and with such trust being entitled to all of the
Company's rights under the Related Note Guarantee and any outstanding Related
Notes. Holders of ComPS outstanding at the time of such merger will be notified
prior to the date thereof.
USE OF PROCEEDS
The Company will invest the proceeds from the sale of the ComPS offered hereby
and the related Common Securities in a Related Note of Morgan Guaranty, the
proceeds of which will be used by Morgan Guaranty for general corporate purposes
and for hedging its obligations under the Related Note.
At the time of the pricing of the ComPS, Morgan Guaranty hedged its anticipated
exposure under the Related Note and, subject to market conditions, Morgan
Guaranty expects that it will continue to hedge its exposure under the Related
Note from time to time following this offering of ComPS by taking long or short
positions in the Benchmark Aluminum Contracts or in listed or over-the-counter
options contracts in, or other derivative or synthetic instruments related to,
several or all of the Benchmark Aluminum Contracts. There can be no assurance
that Morgan Guaranty's initial hedging did not, and that its
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continued hedging will not, affect the price of the Benchmark Aluminum Contracts
(and, as a result, the Initial Price and the subsequent value of the ComPS). In
addition, J.P. Morgan and its affiliates may from time to time purchase or
otherwise acquire a long or short position in the ComPS and may, in their sole
discretion, hold or resell such ComPS. Morgan Guaranty may also take positions
in 3-month Treasury Bills and in other types of appropriate financial
instruments that may become available in the future. To the extent Morgan
Guaranty has a long hedge position in several or all of the Benchmark Aluminum
Contracts or options contracts in, or other derivative or synthetic instruments
related to, several or all of the Benchmark Aluminum Contracts, Morgan Guaranty
may liquidate a portion or all of its holdings, as applicable, at or about the
time of any Early Redemption Date or the Stated Maturity of the Related Note
(which correspond to the Early Redemption Dates and the Stated Maturity of the
ComPS). Depending on, among other things, future market conditions, the
aggregate amount and the composition of those positions are likely to vary over
time. Profits or losses from any such position cannot be ascertained until that
position is closed out and any offsetting position or positions are taken into
account. However, none of the contracts or securities acquired in connection
with any hedging activity will be held for the benefit of holders of ComPS.
DESCRIPTION OF THE COMPS
The ComPS will be issued pursuant to the LLC Agreement. The following summary of
the principal terms and provisions of the ComPS does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the Prospectus
and the LLC Agreement, a copy of which is filed as an exhibit to the
Registration Statement relating to this Prospectus Supplement and the
Prospectus.
GENERAL
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary over the life of the ComPS in relation to the Applicable Index
(the JPMCI Aluminum Total Return Index), reduced by the Factor. As described
herein, the Applicable Index will change based on the daily percentage change in
value of the Benchmark Aluminum Contracts plus the Collateral Return Component.
The Principal Amount repayable on any Early Redemption Date, upon the occurrence
of any Special Event Redemption or at Stated Maturity will be determined,
pursuant to the terms described herein (including, without limitation, the
averaging of the Applicable Index over the Early Determination Period or the
Determination Period, as applicable, and the present-valuing of the dividends
and Principal Amount in connection with redemptions prior to Stated Maturity),
by comparing the level of the JPMCI Aluminum Total Return Index set on the date
of issuance of the ComPS with the level determined pursuant to the terms hereof
for any such date of redemption, reduced by the Factor.
The LLC Agreement authorizes the Company to issue Preferred and Common
Securities. All of the Common Securities will be owned, directly or indirectly,
by J.P. Morgan. Payments of dividends on and redemptions of principal of the
ComPS and the related Common Securities will be made on a pro rata basis among
the ComPS and the related Common Securities, except that upon the occurrence of
a liquidation, termination or winding up of the Company, the rights of the
holders of the Common Securities to receive payment of periodic dividends and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of all Preferred Securities of the Company. The Guarantee
does not permit the incurrence of any indebtedness by the Company (other than
any preferred securities thereof) while any Preferred Securities are
outstanding. The payment of distributions out of money held by the Company, and
payments upon liquidation, termination or winding-up of the Company, are
guaranteed by J.P. Morgan to the extent described under "Description of the
Guarantee". The Guarantee does not cover payment of distributions when Morgan
Guaranty has not made payment of principal or interest, as applicable, on the
Related Note. In such event, the remedy of a holder of ComPS is to direct the
Company to enforce its rights under the Related Note and the Related Note
Guarantee with respect to such Related Note. See "-- Voting Rights" and "Effect
of Obligations Under the Guarantee, the Related Note Guarantee and the Related
Note".
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DIVIDENDS
Dividends on the ComPS will be fixed at a rate per annum of % of the Face
Amount of $[40] per Preferred Security. The amount of dividends payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months
(and actual days elapsed (but never more than 30), in the case of periods of
less than a month) and will include the first day but exclude the last day of
such period.
Dividends on the ComPS will be cumulative, will accrue from and including the
Issue Date and will be payable quarterly in arrears on the last calendar day of
each March, June, September and December, commencing , 1996, when, as
and if available for payment.
Dividends on the ComPS will be payable to the holders thereof as they appear on
the books and records of the Company on the relevant record dates, which, as
long as the ComPS remain in book-entry only form, will be one Business Day prior
to the relevant payment dates. Subject to any applicable laws and regulations
and the provisions of the LLC Agreement, each such payment will be made as
described under "-- Book-Entry Only Issuance -- The Depository Trust Company".
In the event that the ComPS do not continue to remain in book-entry only form,
the Company shall have the right to select relevant record dates, which shall be
at least one Business Day prior to the relevant payment dates. In the event that
any date on which dividends are to be made on the ComPS is not a Business Day,
then payment of the dividends payable on such date will be made on the next
succeeding Business Day with the same force and effect as if made on such date
and no interest on such distributions will accrue from and after such date,
except that, if such Business Day is in the next succeeding calendar year, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date. A "Business Day" shall
mean any day other than Saturday, Sunday or any other day on which banking
institutions in The City of New York, New York are permitted or required by any
applicable law to close.
The payment of dividends on the ComPS out of moneys held by the Company is
guaranteed by J.P. Morgan on a subordinated basis as and to the extent set forth
under "Description of the Guarantee". The Guarantee is effective from the time
of issuance of the ComPS, but the Guarantee covers dividends and other payments
on the ComPS only if and to the extent that Morgan Guaranty has made a payment
to the Company of interest or principal on the Related Note, as the case may be.
REDEMPTION AT STATED MATURITY
Unless previously redeemed pursuant to the optional or special redemption
provisions and subject to extension in the case of a Market Disruption Event (as
defined below), each of the outstanding ComPS will be redeemed by the Company,
in cash, on the Stated Maturity, at the ComPS Redemption Price. The ComPS
Redemption Price is the sum of (a) the Redemption Value per Preferred Security
plus (b) accrued but unpaid dividends on such ComPS to but excluding the date of
redemption.
CALCULATION OF REDEMPTION VALUE
The Principal Amount of each Preferred Security is indexed to the difference of
(i) the Applicable Index, which is calculated based on the change in value of
certain aluminum futures contracts included from time to time in the JPM Indices
(such contracts, from time to time, the "Benchmark Aluminum Contracts") plus the
Collateral Yield Component, and (ii) the Factor. On the date of this Prospectus
Supplement, the Benchmark Aluminum Contract is the LME High Grade Primary
Aluminum contract. Subject to the more complete definitions and formulae
contained in the accompanying Prospectus, the Principal Amount of each Preferred
Security payable at Stated Maturity, subject to extension in the case of a
Market Disruption Event (the "Redemption Value"), shall be determined by
multiplying the Face Amount of each Preferred Security by the difference of (a)
a fraction, the numerator of which is the Applicable Index Settlement Value and
the denominator of which is the Applicable Index Commencement Value, and (b) the
Factor. For purposes of this Prospectus Supplement, the "Applicable Index
Settlement Value" means the arithmetic average of the daily values of the
Applicable Index for each day of the Determination Period (the period of
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ten consecutive Trading Days on which no Market Disruption Event occurs
commencing immediately following the twentieth scheduled Business Day prior to
Stated Maturity), and the "Applicable Index Commencement Value" means . The
ComPS Redemption Price will first be payable on the later of the Stated Maturity
and the fifth Business Day after the completion of the Determination Period.
For a complete description and definition of a Total Return Index, see
"Description of ComPS -- Calculation of Redemption Value" and "The JPM
Indices -- Total Return Methodology" in the Prospectus. As defined in the
accompanying Prospectus under "Description of ComPS -- Market Disruption
Events", a Market Disruption Event, as determined by Morgan Guaranty, is the
occurrence of one or more of the following on any Trading Day with respect to
any Benchmark Aluminum Contract underlying the Applicable Index, or an exchange
on which any Benchmark Aluminum Contract is traded (a "Relevant Exchange"): (a)
a day on which the fluctuation of the price of any Benchmark Aluminum Contract
underlying the Applicable Index is materially limited by the rules of a Relevant
Exchange setting the maximum or minimum price for such day (a "Limit Price");
(b) a day on which the official settlement price (the "Settlement Price") on the
Relevant Exchange of a Benchmark Aluminum Contract underlying the Applicable
Index is the Limit Price; (c) the failure of a Relevant Exchange to determine,
announce or publish the Settlement Price with respect to a Benchmark Aluminum
Contract underlying the Applicable Index; (d) the material suspension of trading
in any Benchmark Aluminum Contract underlying the Applicable Index on a Relevant
Exchange; (e) the failure of trading to commence, or the permanent
discontinuation of trading, in any Benchmark Aluminum Contract underlying the
Applicable Index on any Relevant Exchange and (f) the imposition of any material
limitation on trading in any Benchmark Aluminum Contract underlying the
Applicable Index on any Relevant Exchange.
EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As discussed in the accompanying Prospectus, the JPMCI Policy Committee advises
Morgan Guaranty with respect to, among other things, the composition of the JPM
Indices, the price sources upon which the JPM Indices are based (i.e., the
underlying futures contracts, including the Benchmark Aluminum Contracts), and
the weightings and calculation methodology of the JPM Indices, with a view
toward maintaining the JPM Indices as appropriate commodity investment
benchmarks that serve as a measure of performance of the commodity markets. The
inclusion requirements for the futures contracts underlying the JPM Indices
require that such futures contracts be sufficiently liquid and representative
price sources. It is possible, however, that any such underlying contract could
become less liquid or representative and, as a result, the JPMCI Policy
Committee may recommend a modification in the calculation methodology or the
contracts underlying the JPM Indices and, therefore, the Applicable Index. Any
such replacement contract (i) will be required to satisfy the JPMCI Inclusion
Criteria, as described in the Prospectus under the caption "The JPMCI Policy
Committee", (ii) must be traded in a market or with a self-regulator which has
established either (a) a comprehensive information sharing agreement with the
exchange, if any, on which the ComPS are then traded or (b) suitable alternative
arrangements with the Commission and (iii) will be with respect to the same
general commodity type as the contract being replaced (e.g., assuming the JPMCI
Policy Committee recommends a modification and assuming the requirements of
clauses (i) and (ii) are satisfied, a NYMEX crude oil futures contract could be
replaced by an International Petroleum Exchange crude oil futures contract).
Under no circumstances will the general commodity type underlying the futures
contract be changed (e.g., an aluminum futures contract could not be replaced by
a gold futures contract).
If at any time no contract satisfying both clauses (i) and (ii) of the previous
paragraph can be found to serve as a Benchmark Aluminum Contract, the Applicable
Index Settlement Value of the ComPS will be determined at such time (in
accordance with the methodology for the Total Return ComPS set forth above under
the caption "Description of the ComPS--Early Redemption Upon the Occurrence of a
Special Event or at the Election of the Holders") as if the last date of the
inclusion of the final Benchmark Aluminum Contract in the JPM Indices were the
Early Redemption Date. However, the ComPS will not be redeemed at such time;
rather, the ComPS will remain outstanding to Stated Maturity, will continue to
be entitled to
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dividends and will be redeemed at Stated Maturity for a Redemption Value
calculated using the Applicable Index Settlement Value determined at such time
as no contract satisfying clauses (i) and (ii) of the previous paragraph was
able to be found. Such ComPS will also be subject to redemption upon the
occurrence of a Special Event and optional redemption on each Optional
Redemption Date (treating the Applicable Index Settlement Value determined
pursuant to the terms of this paragraph as the Applicable Index Early Settlement
Value for any Early Redemption Date).
Additionally, if at any time any Benchmark Aluminum Contract, or the trading
thereof, becomes subject to any increased cost or additional tax, whether
imposed by any exchange or otherwise, Morgan Guaranty reserves the right (x) to
designate a replacement Benchmark Aluminum Contract, satisfying both clauses (i)
and (ii) of the second preceding paragraph, which contract is subject to an
amount of cost or tax less than or equal to such increased amount, or (y) if no
contract satisfying clause (x) of this paragraph is designated by Morgan
Guaranty, to cause, at its option, the Applicable Index Settlement Value of the
ComPS to be determined at such time (in accordance with the methodology set
forth above) as if the date of such increase in cost or tax (or, in Morgan
Guaranty's discretion, the last calendar day of the month in which the
determination of the Applicable Index Settlement Value is completed) were the
applicable Early Redemption Date. However, the ComPS will not be redeemed at
such time; rather, the ComPS will remain outstanding to Stated Maturity, will
continue to be entitled to dividends and will be redeemed at Stated Maturity for
a Redemption Value calculated using the Applicable Index Settlement Value
determined pursuant to the terms of this paragraph. Such ComPS will also be
subject to redemption upon the occurrence of a Special Event and optional
redemption on each Optional Redemption Date (treating the Applicable Index
Settlement Value determined pursuant to the terms of this paragraph as the
Applicable Index Early Settlement Value for any Early Redemption Date). See
"Risk Factors -- Potential Modification to the JPM Indices and/or the Applicable
Index".
OPTIONAL REDEMPTION
The ComPS will be subject to redemption prior to their Stated Maturity at the
election of the holders thereof on each prior to the Stated Maturity,
beginning , 199 (each, an "Optional Redemption Date"). In order to
effect an Optional Redemption, any such redeeming holder will be required to
provide notice of the number of ComPS shares to be redeemed on such Early
Redemption Date to a Participant or Direct Participant in DTC, and such
Participant or Direct Participant must communicate such notice to DTC no earlier
than 32 scheduled Business Days prior to but no later than 22 scheduled Business
Days prior to the applicable Early Redemption Date. The DTC will then provide
notice to the Company or its Transfer Agent of the total number of ComPS shares
to be redeemed on the Optional Redemption Date (the "Applicable Notice"). Each
Applicable Notice will be provided by DTC to the Company by 12:30 p.m. New York
time on the Business Day next succeeding the last day of the applicable notice
period. Each Applicable Notice will be irrevocable upon receipt by the Company
or its Transfer Agent, and may not be withdrawn or modified after such receipt.
Additionally, the Early Determination Period will not commence until the Company
has received the Applicable Notice and the applicable Optional Redemption Date
will be subject to extension in the case of a Market Disruption Event. The
redeeming holders will be entitled to the ComPS Early Redemption Price for each
Preferred Security redeemed, which is equal to (a) the Early Redemption Value
for such ComPS plus (b) accrued and unpaid dividends thereon to but excluding
the scheduled Optional Redemption Date. The Early Redemption Value of such ComPS
shall be determined in accordance with the formula specified in the Prospectus;
provided that, for the purposes of this Prospectus Supplement, "unused costs"
shall equal . See "-- Book Entry Issuance -- The Depository Trust
Company" herein and "Description of ComPS -- Early Redemption Upon the
Occurrence of a Special Event or at the Election of the Holders of the ComPS" in
the Prospectus.
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<PAGE> 24
SPECIAL EVENT REDEMPTION
The ComPS will be subject to redemption by the Company prior to Stated Maturity,
at its option, upon the occurrence of a Tax Event or an Investment Company Event
(each, a "Special Event"), as discussed herein.
"Tax Event" means that the Company shall have obtained an opinion of nationally
recognized independent tax counsel experienced in such matters (a "Tax Opinion")
to the effect that, as a result of (a) any amendment to, or change (including
any announced prospective change) in, the laws (or any regulations thereunder)
of the United States or any political subdivision or taxing authority thereof or
therein, (b) any amendment to, or change in, an interpretation or application of
any such laws or regulations by any legislative body, court, governmental agency
or regulatory authority (including the enactment of any legislation and the
publication of any judicial decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the theretofore generally accepted
position or (d) any action taken by any governmental agency or regulatory
authority, which amendment or change is enacted, promulgated, issued or
announced or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after the date of this Prospectus
Supplement, there is more than an insubstantial risk that at such time or within
90 days of the date thereof (i) the Company is or would be subject to United
States Federal income tax with respect to income accrued or received on the
Related Note, (ii) the interest payable on the Related Note is not, or would not
be, deductible by Morgan Guaranty for United States Federal income tax purposes,
(iii) the contingent principal in excess of the Face Amount, if any, payable on
the Related Note is not, or would not be, deductible by Morgan Guaranty for
United States Federal income tax purposes or (iv) the Company is or would be
subject to more than a de minimis amount of other taxes, duties, assessments or
other governmental charges.
"Investment Company Event" means that the Company shall have received an opinion
of a nationally recognized independent counsel experienced in such matters to
the effect that, as a result of the occurrence of a change in law or regulation,
a written change in interpretation or application of law or regulation by any
legislative body, court, governmental agency or regulatory authority or the
expiration or revocation of any exemption from any provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), obtained by the Company (a
"Change in 1940 Act Law"), there is more than an insubstantial risk that the
Company is or will be considered an "investment company" that is required to be
registered as such under the 1940 Act, which Change in 1940 Act Law becomes
effective on or after the date of this Prospectus Supplement.
If at any time a Tax Event or an Investment Company Event shall occur and be
continuing, J.P. Morgan shall elect to either:
(a) direct, within 90 days following the occurrence of such Special
Event, Morgan Guaranty to redeem the Related Note in whole or in part, upon
not less than 22 scheduled Business Days' notice to DTC, in which case the
Company shall redeem in cash on a pro rata basis ComPS and related Common
Securities having an aggregate Principal Amount equal to the Principal
Amount of the Related Note so redeemed, at a price per Preferred Security
of the Early Redemption Value, plus an amount equal to all accrued and
unpaid dividends on such ComPS to but excluding such Early Redemption Date;
provided, that Morgan Guaranty shall only be entitled to redeem the Related
Note in part if such partial redemption is sufficient to cause such Special
Event to cease; or
(b) in the case of a Tax Event, allow the Related Note and the ComPS to
remain outstanding and indemnify the Company for all taxes payable by it as
a result of such Tax Event (if any);
provided that, if at the time there is available to the Company the opportunity
to eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, that has no adverse effect on the
Company, J.P. Morgan, Morgan Guaranty or the holders of ComPS, the Company will
pursue such measure in lieu of redemption; provided further, that Morgan
Guaranty shall have no right to redeem the Related Note and
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J.P. Morgan shall have no right to direct the Company to redeem the ComPS while
the Company is pursuing any such ministerial action or reasonable measure unless
the Special Event shall not have been so eliminated by the 85th day following
the occurrence thereof, in which case J.P. Morgan shall be permitted to direct
Morgan Guaranty to provide notice to the Company of the redemption of the
Related Note.
Under current United States Federal income tax law, a redemption of ComPS upon
the occurrence of a Special Event, whether or not upon dissolution of the
Company, would be a taxable event to such holders. See "United States Federal
Income Taxation".
REDEMPTION PROCEDURES
In the case of a redemption by a holder of ComPS on an Optional Redemption Date,
any such redeeming holder will be required to provide notice of the number of
ComPS shares to be redeemed on such Optional Redemption Date to a Participant in
DTC, and such Participant must communicate such notice to DTC no earlier than 32
scheduled Business Days prior to but no later than 22 scheduled Business Days
prior to the applicable Optional Redemption Date. Following receipt by DTC of
such notice, DTC will assign a new CUSIP number to ComPS with respect to which
such notice has been given, and such ComPS will no longer be usable for settling
trades with other DTC book-entry securities.
In the case of a redemption of ComPS upon the occurrence of a Special Event, the
Company will provide notice of such redemption to the Transfer Agent and to DTC
on a date not less than 22 scheduled Business Days prior to such Early
Redemption Date stating, among other things, the date of such redemption.
The related Common Securities will be redeemed on a pro rata basis with the
ComPS except that, in the case of any dissolution or liquidation in which the
assets of the Company are insufficient to repay in full the Principal Amount of
all Preferred Securities then outstanding, all Preferred Securities will be
redeemed prior to the redemption of any Common Securities. ComPS registered in
the name of and held by DTC (as defined herein) or its nominee will be redeemed
in accordance with DTC's standard procedures. See "--Book-Entry Only
Issuance--The Depository Trust Company".
Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as
applicable, of the ComPS is conditioned upon delivery or book-entry transfer of
such ComPS (together with necessary endorsements) to the Company at any time
(whether prior to, on or after the relevant Redemption Date) after the required
notice is given (to the extent such notice is required). See "--Book-Entry Only
Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price
or the ComPS Early Redemption Price, as applicable, for such ComPS will be made
by the delivery of cash no later than the applicable Settlement Date with
respect to such ComPS (subject to delay in the case of a Market Disruption
Event) or, if later, the time of delivery or book-entry transfer of such ComPS.
If the Company holds money sufficient to pay the ComPS Redemption Price or the
ComPS Early Redemption Price, as applicable, of the ComPS on the applicable
Settlement Date, then immediately at the close of business on such Settlement
Date, such ComPS will cease to be outstanding and dividends with respect to such
ComPS will cease to accrue, whether or not such ComPS are delivered to the
Company, and all rights of the holder of such ComPS shall terminate and lapse,
other than the right to receive the ComPS Redemption Price or the ComPS Early
Redemption Price, as applicable, upon delivery of the ComPS.
Provided that Morgan Guaranty has paid to the Company the required amount of
cash due upon any redemption or at the maturity of the Related Note, the Company
will irrevocably deposit with DTC no later than the close of business on the
applicable Settlement Date funds sufficient to pay the ComPS Redemption Price or
the ComPS Early Redemption Price, as applicable, payable with respect to ComPS
on such date and will give the Depositary irrevocable instructions and authority
to pay such amount to the holders of ComPS entitled thereto. See "--Book-Entry
Only Issuance--The Depository Trust Company". In the event that any Settlement
Date is not a Business Day, then payment of the ComPS Redemption Price or the
ComPS Early Redemption Price, as applicable, payable on such date will be made
on the next succeeding Business Day with the same force and effect as if made on
such date and no interest on such distributions will accrue from and after such
date, except that, if such Business Day falls in the next calendar year such
payment will be made on the immediately preceding Business Day. In the event
that
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payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as
applicable, is improperly withheld or refused and not paid by the Company or by
J.P. Morgan pursuant to the Guarantee, dividends on such ComPS will continue to
accrue from the original Redemption Date to the actual date of payment by the
Company to DTC.
The Company may not redeem fewer than all of the outstanding ComPS on any
Redemption Date unless all accrued and unpaid dividends have been or are
concurrently being paid on all ComPS for all monthly dividend periods
terminating on or prior to the applicable Redemption Date. If a partial
redemption as a result of a Special Event Redemption by Morgan Guaranty of a
part or all of the Related Note would result in the delisting of the ComPS by
any national securities exchange (or automated inter-dealer quotation system,
including The Nasdaq Stock Market ("Nasdaq")) on which the ComPS are then
listed, Morgan Guaranty may only redeem the Related Note in whole and, as a
result, the Company may only redeem the ComPS in whole.
Subject to the foregoing and to applicable law (including, without limitation,
United States Federal securities laws), J.P. Morgan or its affiliates may, at
any time and from time to time, purchase outstanding ComPS by tender, in the
open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any liquidation, dissolution, winding-up or termination of the
Company (each, a "Liquidation Event"), whether voluntary or involuntary, the
holders of ComPS on the date of such Liquidation Event will be entitled to be
paid out of the assets of the Company the Liquidation Distribution. The
"Liquidation Distribution" will be equal to (a) the Early Redemption Value with
respect to such ComPS (treating the date of such distribution as the Early
Redemption Date) plus (b) the amount of accrued and unpaid dividends on such
ComPS to but excluding the date of payment. To the extent the assets of the
Company are insufficient to repay all amounts due to holders of all Preferred
Securities of the Company, holders of all Preferred Securities then outstanding
(including the ComPS) will be entitled to a pro rata share of the assets of the
Company, based upon the relative Principal Amounts of all Preferred Securities
outstanding. In addition, in the event that the assets of the Company exceed the
amount necessary to pay to all holders of ComPS the full amount of the
Liquidation Distribution, such excess will be paid to the holders of Common
Securities.
Pursuant to the LLC Agreement, the legal existence of the Company shall
terminate on November 21, 2105.
VOTING RIGHTS
Except as described herein and under "--Modification of the LLC Agreement", and
as otherwise required by law and the LLC Agreement, the holders of the ComPS
will have no voting rights.
Pursuant to the provisions of the Guarantee, certain amendments to or
modifications of the Guarantee may only be effected with the approval of a
majority in aggregate Principal Amount at such time of the ComPS and all other
affected Preferred Securities. See "Description of the Guarantee--Modification
of the Guarantee".
Pursuant to the provisions of the Related Note and the LLC Agreement, certain
amendments to or modifications of the Related Note may only be effected with the
approval of a majority in aggregate Principal Amount at such time of the ComPS.
See "Description of the Related Note--Modification of the Related Note".
Notwithstanding that holders of ComPS are entitled to vote or consent under any
of the circumstances described above, any of the ComPS that are owned at such
time by J.P. Morgan or any entity directly or indirectly controlling or
controlled by, or under direct or indirect common control with, J.P. Morgan,
shall not be entitled to vote or consent and shall, for purposes of such vote or
consent, be treated as if such ComPS were not outstanding.
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The procedures by which holders of ComPS may exercise their voting rights are
described below under "--Book-Entry Only Issuance--The Depository Trust Company"
and in the LLC Agreement.
MODIFICATION OF THE LLC AGREEMENT
The LLC Agreement may be amended or modified if approved by a written instrument
executed by a majority in interest of the holders of Common Securities; provided
that, if any proposed amendment provides for (i) any action that would adversely
affect the powers, preferences or special rights of the ComPS or (ii) the
dissolution, winding up or termination of the Company other than pursuant to the
terms of the LLC Agreement, then the holders of all affected outstanding
Preferred Securities (or, in the case of an event described in clause (ii), all
Preferred Securities) of the Company voting together as a single class will be
entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of holders of not less than a
majority in aggregate Principal Amount of all affected outstanding Preferred
Securities (or, in the case of an event described in clause (ii), all Preferred
Securities) of the Company affected thereby.
The LLC Agreement further provides that it may be amended without the consent of
the holders of the ComPS to (i) cure any ambiguity, (ii) correct or supplement
any provision in the LLC Agreement that may be defective or inconsistent with
any other provision of the LLC Agreement, (iii) add to the covenants,
restrictions or obligations of J.P. Morgan, (iv) conform to changes in, or a
change in interpretation or application of, certain requirements of the 1940 Act
by the Commission and (v) conform to certain requirements of the Code with
respect to the characterization of the Company for U.S. Federal income tax
purposes (including, without limitation, an alteration of the capitalization of
the Company or the events causing dissolution of the Company) upon any such
change, which amendment does not adversely affect the rights, preferences or
privileges of the holders of the ComPS.
LISTING
[The ComPS have been authorized for listing on the under the symbol
" ", subject to official notice of issuance. Trading of the ComPS on
the is expected to commence within a 30-day period after the date of
this Prospectus Supplement.] [Prior to this offering, there has been no market
for the ComPS. In order to meet one of the requirements for listing the ComPS on
the , the underwriters will undertake to sell ComPS to a minimum of 400
beneficial holders.]
ACCOUNTING TREATMENT
The financial statements of the Company will be included in the consolidated
financial statements of J.P. Morgan, with the ComPS included on the balance
sheet as "Long-term debt not qualifying as risk-based capital", with a footnote
disclosing that (1) the Company is a wholly-owned subsidiary of J.P. Morgan, (2)
the sole assets of the Company are the Related Note and other similar notes,
specifying the principal amount, interest rate and maturity of each, and (3)
considered together, the Guarantee and the Related Note Guarantee and J.P.
Morgan's obligations under the LLC Agreement and the Expense Agreement
constitute a full and unconditional guarantee by J.P. Morgan with respect to the
ComPS.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Company may not consolidate, amalgamate, merge with or into or be replaced
by, or convey, transfer or lease its properties and assets substantially as an
entirety to, any corporation or other entity, except upon satisfaction of the
conditions set forth in Section 2.8 of the LLC Agreement, which includes in
certain circumstances approval of 2/3 of the outstanding Principal Amount of all
Preferred Securities. In addition, so long as any ComPS are outstanding and are
not held directly or indirectly entirely by J.P. Morgan, the Company may not
voluntarily liquidate, dissolve, wind-up or terminate on or prior to the Stated
Maturity.
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BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depositary for the
ComPS. The ComPS will be issued only as fully-registered securities registered
in the name of Cede & Co. (DTC's nominee). One or more fully-registered global
ComPS certificates, representing the total aggregate number of ComPS, will be
issued and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). DTC holds securities that its
participants ("Participants") deposit with DTC. DTC also facilitates the
settlement among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others, such as securities brokers and
dealers, banks and trust companies that clear transactions through or maintain a
direct or indirect custodial relationship with a Direct Participant either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Commission.
Purchases of ComPS within the DTC system must be made by or through Direct
Participants, which will receive a credit for the ComPS on DTC's records. The
ownership interest of each actual purchaser of each Preferred Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased ComPS. Transfers of ownership interests in
the ComPS are to be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the ComPS, except in the
event that use of the book-entry system for the ComPS is discontinued.
To facilitate subsequent transfers, all ComPS deposited by Participants with DTC
are registered in the name of DTC's nominee, Cede & Co. The deposit of ComPS
with DTC and their registration in the name of Cede & Co. effect no change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the ComPS. DTC's records reflect only the identity of the Direct Participants to
whose accounts such ComPS are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants and by Direct and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time.
In the case of a Special Event Redemption, redemption notices shall be sent to
Cede & Co. If less than all of the ComPS are being redeemed, DTC will reduce the
amount of the interest of each Direct Participant in such ComPS in accordance
with its procedures. In the case of an Optional Redemption, redemption notices
shall be provided by Beneficial Owners and Participants to DTC in accordance
with its procedures. DTC will then provide the Applicable Notice to the Company
or its Transfer Agent of the number of ComPS to be redeemed on the applicable
Optional Redemption Date. The Applicable Notice will be irrevocable upon receipt
by the Company or its Transfer Agent, and may not be withdrawn or modified after
such receipt.
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Although voting with respect to the ComPS is limited, in those cases where a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to ComPS. Under its usual procedures, DTC would mail an Omnibus Proxy to
the Company as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co. consenting or voting rights to those Direct Participants to whose
accounts the ComPS are credited on the record date (identified in a listing
attached to the Omnibus Proxy). J.P. Morgan and the Company believe that the
arrangements among DTC, Direct and Indirect Participants and Beneficial Owners
will enable the Beneficial Owners to exercise rights equivalent in substance to
the rights that can be directly exercised by a holder of a limited liability
company interest in the Company.
Dividend payments on the ComPS will be made to DTC. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name", and such payments will
be the responsibility of such Participant and not of DTC, the Company or J.P.
Morgan, subject to any statutory or regulatory requirements to the contrary that
may be in effect from time to time. Payment of dividends to DTC is the
responsibility of the Company, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursement of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with respect
to the ComPS at any time by giving reasonable notice to the Company. Under such
circumstances, in the event that a successor securities depositary is not
obtained, ComPS certificates are required to be printed and delivered.
Additionally, the Company may decide to discontinue use of the system of
book-entry transfers through DTC (or any successor depositary) with respect to
the ComPS. In that event, certificates for the ComPS will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that J.P. Morgan believes to be reliable, but neither
J.P. Morgan nor the Company takes responsibility for the accuracy thereof.
GOVERNING LAW
The LLC Agreement and the ComPS will be governed by and interpreted in
accordance with the laws of the State of Delaware.
DESCRIPTION OF THE RELATED NOTE
Set forth below is a summary of the terms of the Related Note in which the
Company will invest the proceeds from the issuance and sale of the ComPS and the
related Common Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Prospectus and the Related Note, the form of which is filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement and the
Prospectus. Certain capitalized terms are used herein as defined in the Related
Note.
GENERAL
The Related Note will be issued as an unsecured, unsubordinated obligation of
Morgan Guaranty, limited in initial principal amount to approximately $ ,
such amount being the sum of the aggregate Initial Public Offering Price shown
on the cover page hereof for the ComPS and the related Common Securities issued
in connection therewith.
The Related Note is not subject to a sinking fund provision. The entire
Principal Amount of the Related Note will mature and become due and payable,
together with any accrued and unpaid interest thereon, if any, on the Stated
Maturity (subject to extension in the case of a Market Disruption Event),
subject to the
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prior redemption of the Related Note in whole or in part at the option of the
holders of ComPS or in certain circumstances upon the occurrence of a Special
Event. If Morgan Guaranty redeems the Related Note in whole or in part, the
Company must redeem on a pro rata basis ComPS and related Common Securities
having an aggregate Principal Amount equal to the Principal Amount of the
Related Note so redeemed at the ComPS Early Redemption Price. See "Description
of the ComPS--Redemption at Stated Maturity; --Special Event Redemption".
RELATED NOTE REDEMPTION PRICE
The amount payable under the Related Note by Morgan Guaranty to the Company at
any time shall equal (a) the Principal Amount of the Related Note at such time
plus (b) any accrued but unpaid distributions due to the Company (the "Related
Note Redemption Price"). The Principal Amount of the Related Note at any time
shall equal the aggregate Principal Amount of outstanding ComPS and the related
Common Securities at such time. The timing and amount of payments on the Related
Note mirror the aggregate financial terms of the ComPS.
SUBORDINATION
Morgan Guaranty's obligations under the Related Note are effectively
subordinated to all liabilities (including indebtedness) of its consolidated and
unconsolidated subsidiaries. Moreover, Morgan Guaranty's subsidiaries may incur
indebtedness and other liabilities and have obligations to third parties.
Generally, the claims of such third parties to the assets of Morgan Guaranty's
subsidiaries will be superior to those of Morgan Guaranty as a stockholder, and,
therefore, the Related Note may be deemed to be effectively subordinated to the
claims of such third parties.
Upon any payment or distribution of all or substantially all of the assets of
Morgan Guaranty or in the event of any insolvency, bankruptcy, receivership,
liquidation, dissolution, reorganization or other similar proceeding, whether
voluntary or involuntary, relative to Morgan Guaranty or its creditors, the
holders of all Senior Indebtedness of Morgan Guaranty will be entitled to
receive payment pari passu and pro rata with the Company. However, depositors in
Morgan Guaranty will have a preference over holders of Senior Indebtedness of
Morgan Guaranty upon any such event.
As used in the Related Note, the term "Senior Indebtedness" means the principal
of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for
money borrowed, whether outstanding as of the date hereof or hereafter created,
issued or incurred (other than Morgan Guaranty's obligations to its depositors),
except any indebtedness expressly subordinated to such Senior Indebtedness, and
(b) any deferrals, renewals or extensions of any such Senior Indebtedness. The
Related Note does not limit the amount of Senior Indebtedness which Morgan
Guaranty may incur.
INTEREST
The Related Note shall bear interest at the rate of % per annum on the Face
Amount from the original date of issuance, payable quarterly in arrears on the
last calendar day of each March, June, September and December (each, an
"Interest Payment Date"), commencing , 199 , to the Company, subject to
certain exceptions, at the close of business on the Business Day next preceding
the relevant Interest Payment Date.
The amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. The amount of interest payable for any
period shorter than a full monthly period for which interest is computed will be
computed on the basis of the actual number of days elapsed (but never more than
30) per 30-day month. In the event that any date on which interest is payable on
the Related Note is not a Business Day, payment of the interest payable on such
date will be made on the next succeeding Business Day with the same force and
effect as if made on such date and no interest on such distributions will accrue
from and after such date, except that, if such Business Day is in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
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OPTIONAL REDEMPTION
The Company shall have the right to call for redemption prior to each Optional
Redemption Date a Principal Amount of the Related Note sufficient to allow it to
pay the ComPS Early Redemption Price to any holders of ComPS who exercise their
right to redeem any or all of such holders' ComPS and a pro rata portion of the
related Common Securities. See "Description of the ComPS--Optional Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, Morgan Guaranty will have the right to
elect to, under certain circumstances, (a) redeem the Related Note at the
Related Note Redemption Price or (b) in the case of a Tax Event, allow the
Related Note to remain outstanding and indemnify the Company for any taxes
payable by it as a result of such Tax Event. See "Description of the
ComPS--Special Event Redemption".
EVENTS OF DEFAULT
The Related Note Events of Default are described in "Description of the Related
Notes--Related Note Events of Default" in the Prospectus of which this
Prospectus Supplement constitutes a part. A default or event of default under
any Senior Indebtedness would not constitute a default or event of default under
the Related Note.
MODIFICATION OF THE RELATED NOTE
The Related Note contains provisions permitting Morgan Guaranty and the Company,
with the consent of the holders of not less than a majority in Principal Amount
of the outstanding ComPS, to modify the Related Note, subject to certain
exceptions. See "Description of the Related Notes--Modification of the Related
Notes" in the Prospectus of which this Prospectus Supplement constitutes a part.
CONSOLIDATION, MERGER AND SALE
The Related Note provides that Morgan Guaranty may, without the consent of the
Company or the holders of the ComPS, consolidate or merge with or into, or sell
or transfer all or substantially all of its property or assets to, any
corporation or association; provided that (i) the corporation (if other than
Morgan Guaranty) or association formed by or resulting from any such
consolidation or merger or which shall have received such property or assets
shall have assumed Morgan Guaranty's obligations under the Related Note and (ii)
immediately after giving effect to such transaction, Morgan Guaranty or such
successor corporation shall not be in default under the terms of the Related
Note.
GOVERNING LAW
The Related Note will be governed by, and construed in accordance with, the laws
of the State of New York.
MISCELLANEOUS
Morgan Guaranty will have the right at all times to assign any of its rights or
obligations under the Related Note to J.P. Morgan or to a direct or indirect
wholly-owned subsidiary of Morgan Guaranty; provided that, in the event of any
such assignment, Morgan Guaranty will remain jointly and severally liable for
all such obligations. Subject to the foregoing, the Related Note will be binding
upon and inure to the benefit of the parties thereto and their respective
successors and assigns. The Related Note is not a deposit or other obligation of
a bank and is not insured by the Federal Deposit Insurance Corporation or any
other federal agency. The obligations of Morgan Guaranty under the Related Note
are pari passu with all present and future Senior Indebtedness of Morgan
Guaranty (as defined herein) and are junior to Morgan Guaranty's obligations to
its depositors in the event of a receivership. In addition, J.P. Morgan's
obligations under the Guarantee and the Related Note Guarantee and Morgan
Guaranty's obligations under the Related Note are effectively subordinated to
all liabilities (including indebtedness) of the respective consolidated and
unconsolidated subsidiaries of each.
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DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee that will
be delivered by J.P. Morgan for the benefit of the holders of ComPS. The terms
of the Guarantee will be those set forth in the Guarantee Agreement. The
following summary does not purport to be complete and is subject in all respects
to the provisions of, and is qualified in its entirety by reference to, the
Prospectus and the form of Guarantee Agreement, which is filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement and the
Prospectus.
GENERAL
Pursuant to the Guarantee, J.P. Morgan irrevocably and unconditionally agrees,
on a subordinated basis, to pay in full to the holders of the ComPS the
Guarantee Payments (as defined herein) (except to the extent paid by the
Company), as and when due, regardless of any defense, right of set-off or
counterclaim that the Company may have or assert. The following payments with
respect to ComPS issued by the Company (the "Guarantee Payments"), to the extent
not paid by the Company, will be subject to the Guarantee (without duplication):
(i)(A) any accrued and unpaid dividends that are required to be paid on the
ComPS and (B) the ComPS Early Redemption Price or the ComPS Redemption Price, as
applicable, but if and only if to the extent that, in each case, Morgan Guaranty
has made payment of interest or principal on the Related Note, as the case may
be, and (ii) upon a Liquidation Event (other than in connection with the
redemption of all of the ComPS at Stated Maturity or redemption in whole of the
Related Note) the lesser of (A) the Liquidation Distribution to the extent the
Company has funds available therefor and (B) the amount of assets of the Company
remaining available for distribution to holders of the ComPS upon such
Liquidation Event. J.P. Morgan's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by J.P. Morgan to the
holders of ComPS or by causing the Company to pay such amounts to such holders.
The Guarantee will be effective with respect to the ComPS from the time of
issuance of the ComPS to the extent Morgan Guaranty has made payments under the
Related Note. If Morgan Guaranty does not make payments on the Related Note, the
Company may not pay distributions on the ComPS issued and may not have funds
available therefor. See "Description of the Related Note".
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
holders of all Preferred Securities (in which case no vote will be required),
the Guarantee may be amended only with the prior approval of the holders of not
less than a majority in aggregate Principal Amount of the outstanding ComPS and
all other Preferred Securities entitled to vote thereon, voting as a single
class. All guarantees and agreements contained in the Guarantee shall bind the
successors, assignees, receivers, trustees and representatives of J.P. Morgan
and shall inure to the benefit of the holders of the ComPS.
REMEDIES OF HOLDERS
If J.P. Morgan fails to perform any of its payment or other obligations with
respect to the ComPS under the Guarantee, any holder of ComPS may institute a
legal proceeding directly against J.P. Morgan to enforce such holder's rights
under the Guarantee without first instituting a legal proceeding against the
Company or any other person or entity. Subject to the award by a court of
competent jurisdiction of legal fees in connection with any such legal
proceeding, each holder will be required to bear its own costs in connection
with instituting a legal proceeding directly against J.P. Morgan, which cost may
be significant.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate with respect to the ComPS upon full payment of the
aggregate ComPS Early Redemption Price or ComPS Redemption Price, as applicable,
or upon full payment of the amounts payable in accordance with the LLC Agreement
upon liquidation of the Company. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of ComPS must
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restore payment of any sums paid under such ComPS or the Guarantee (e.g., upon a
subsequent bankruptcy of Morgan Guaranty or J.P. Morgan).
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of J.P. Morgan and will
rank (i) subordinate and junior in right of payment to all other liabilities of
J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock
outstanding as of the date hereof of J.P. Morgan and (iii) senior to J.P.
Morgan's common stock. The terms of the ComPS provide that each holder of ComPS
by acceptance thereof agrees to the subordination provisions and other terms of
the Guarantee.
The Guarantee will constitute a guarantee of payment and not of collection (that
is, the guaranteed party may institute a legal proceeding directly against the
guarantor to enforce its rights under the Guarantee without instituting a legal
proceeding against any other person or entity).
GOVERNING LAW
The Guarantee will be governed by and construed and interpreted in accordance
with the laws of the State of New York.
DESCRIPTION OF THE RELATED NOTE GUARANTEE
Set forth below is a summary of information concerning the Related Note
Guarantee that will be delivered by J.P. Morgan for the benefit of the Company.
The terms of the Related Note Guarantee will be those set forth in the Related
Note Guarantee Agreement. The following summary does not purport to be complete
and is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Prospectus and the form of Related Note Guarantee
Agreement, which is filed as an exhibit to the Registration Statement relating
to this Prospectus Supplement and the Prospectus. The Related Note Guarantee
will be held by the Company, as the holder of the Related Note.
GENERAL
Pursuant to the Related Note Guarantee, J.P. Morgan irrevocably and
unconditionally agrees, on a subordinated basis, to pay in full to the Company
the Related Note Guarantee Payments (as defined herein), as and when due,
regardless of any defense, right of set-off or counterclaim that Morgan Guaranty
may have or assert with respect to its obligation to make such Related Note
Guarantee Payments. The following payments with respect to the Related Note
issued by Morgan Guaranty (the "Related Note Guarantee Payments") will be
subject to the Related Note Guarantee (without duplication): (i) any accrued and
unpaid distributions that are required to be paid by Morgan Guaranty on the
Related Note and (ii) any principal payable by Morgan Guaranty under the Related
Note, as and when payable by Morgan Guaranty. J.P. Morgan's obligation to make a
Related Note Guarantee Payment may be satisfied by direct payment of the
required amounts by J.P. Morgan to the Company or by causing Morgan Guaranty to
pay such amounts to the Company. The Related Note Guarantee will be a full and
unconditional guarantee with respect to the Related Note from the time of
issuance of the Related Note.
MODIFICATION OF THE RELATED NOTE GUARANTEE; ASSIGNMENT
The Related Note Guarantee may be amended only with the prior approval of the
Company. All guarantees and agreements contained in the Related Note Guarantee
shall bind the successors, assignees, receivers, trustees and representatives of
J.P. Morgan and shall inure to the benefit of the Company as the holder of the
Related Note.
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REMEDIES OF THE COMPANY
The Company has the sole right to direct the time, method and place of
conducting any proceeding for any remedy available to it in respect of the
Related Note Guarantee.
TERMINATION OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will terminate with respect to the Related Note upon
full payment of the Related Note Redemption Price (as defined below) of the
Related Note. The Related Note Guarantee will continue to be effective or will
be reinstated with respect to the Related Note, as the case may be, if at any
time the Company must restore payment of any sums paid under the Related Note or
the Related Note Guarantee (e.g., upon a subsequent bankruptcy of J.P. Morgan).
STATUS OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will constitute an unsecured obligation of J.P.
Morgan and will rank (i) subordinate and junior in right of payment to all other
liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or
preference stock outstanding as of the date hereof of J.P. Morgan and (iii)
senior to J.P. Morgan's common stock. The terms of the ComPS provide that each
holder of ComPS by acceptance thereof agrees to the subordination provisions and
other terms of the Related Note Guarantee.
The Related Note Guarantee will constitute a guarantee of payment and not of
collection (that is, the Company may institute a legal proceeding directly
against J.P. Morgan to enforce its rights under the Related Note Guarantee
without instituting a legal proceeding against Morgan Guaranty).
GOVERNING LAW
The Related Note Guarantee will be governed by and construed and interpreted in
accordance with the laws of the State of New York.
EFFECT OF OBLIGATIONS UNDER THE GUARANTEE,
THE RELATED NOTE GUARANTEE AND THE RELATED NOTE
As set forth in the LLC Agreement, the sole purpose of the Company is to issue
the Securities and other preferred and common securities, and to invest the
proceeds from such issuances in the Related Note and other debt obligations of
Morgan Guaranty.
As long as payments of interest and other payments are made when due on the
Related Note, such payments will be sufficient to cover dividends and payments
due on the ComPS because of the following factors: (i) the Principal Amount of
the Related Note will be equal to the sum of the aggregate Principal Amount of
the ComPS and the related Common Securities outstanding at any time; (ii) the
interest rate and the interest and other payment dates on the Related Note will
match the dividend rate and dividend and other payment dates for the ComPS;
(iii) J.P. Morgan shall pay all, and the Company shall not be obligated to pay,
directly or indirectly, any, costs and expenses of the Company other than
principal of and dividends on the ComPS and the related Common Securities; and
(iv) the LLC Agreement further provides that the J.P. Morgan shall not cause the
Company to, among other things, engage in any activity that is not consistent
with the purposes of the Company.
Payments of dividends (to the extent Morgan Guaranty has made payments of
interest on the Related Note) and other payments due on the ComPS (to the extent
Morgan Guaranty has made payment of principal and other amounts on the Related
Note) are guaranteed by J.P. Morgan as and to the extent set forth under
"Description of the Guarantee" herein and in the Prospectus. If Morgan Guaranty
does not make interest payments on the Related Note, it is expected that the
Company will not have sufficient funds to pay dividends on the ComPS. The
Guarantee is a full and unconditional guarantee from the time of its
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issuance but does not apply to any dividends or other payments unless and until
Morgan Guaranty has made payment of interest or other payments on the Related
Note.
If Morgan Guaranty fails to make interest or other payments on the Related Note
when due, the LLC Agreement provides a mechanism whereby the holders of the
ComPS, using the procedures described in the LLC Agreement, may direct the
Company to enforce its rights under the Related Note and the Related Note
Guarantee. If J.P. Morgan fails to perform any of its payment or other
obligations with respect to the ComPS under the Guarantee, any holder of ComPS
may institute a legal proceeding directly against J.P. Morgan to enforce such
holder's rights under the Guarantee without first instituting a legal proceeding
against the Company or any other person or entity.
The Related Note Guarantee by J.P. Morgan guarantees to the Company the payment
of any distributions on and principal of the Related Note as provided pursuant
to the terms of the Related Note, at such times and in such amounts as provided
therein. J.P. Morgan's obligations under the Related Note Guarantee will be
subordinated and junior in right of payment to all liabilities of J.P. Morgan,
pari passu with the most senior preferred stock outstanding as of the date
hereof of J.P. Morgan and senior to the common stock of J.P. Morgan.
The LLC Agreement and the Agreement as to Expenses and Liabilities dated as of
, 1996 (the "Expense Agreement"), provide that J.P. Morgan will pay,
or cause to be paid, all debts and obligations (other than with respect to the
ComPS and other Preferred Securities the Company to the extent set forth herein
and in the Prospectus) and all costs and expenses of the Company, including any
taxes and all costs and expenses with respect thereto, to which the Company may
become subject. The LLC Agreement and the Expense Agreement provide that any
person to whom such debts, obligations, costs and expenses are owed will have
the right to enforce J.P. Morgan's obligations in respect of such debts,
obligations, costs and expenses directly against J.P. Morgan without first
proceeding against the Company.
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee, the LLC Agreement and the Expense Agreement, taken together, will
provide a full and unconditional guarantee, on a subordinated basis, of payments
due on the ComPS. See "Description of the Guarantee -- General" and "Description
of the Related Note Guarantee -- General" herein and in the accompanying
Prospectus.
Upon any voluntary or involuntary liquidation, dissolution, winding-up or
termination of the Company, the holders of Securities will be entitled to
receive the Liquidation Distribution. Holders of ComPS will be entitled to the
benefits of the Guarantee with respect to the Liquidation Distribution. See
"Description of the ComPS -- Liquidation Distribution Upon Dissolution". Upon
any voluntary or involuntary liquidation or bankruptcy of Morgan Guaranty, the
Company as holder of the Related Note would be pari passu with creditors of
Morgan Guaranty (other than any depositors therein), equal in right of payment
with all Senior Indebtedness and entitled to receive payment in full of
principal, premium, if any, and interest, before any stockholders of Morgan
Guaranty receive payments of distributions.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a summary of the material United States Federal income tax
consequences of the purchase, ownership and disposition of ComPS by U.S. Holders
(as defined herein). Unless otherwise stated, this summary deals only with ComPS
held as capital assets by holders who purchase the ComPS upon original issuance
("Initial Holders").
This summary does not address tax considerations applicable to investors that
may be subject to special U.S. Federal income tax treatment, such as dealers in
securities or persons that will hold the ComPS as a position in a "straddle"
(within the meaning of Section 1092 of the Internal Revenue Code of 1986, as
amended (the "Code")), or as part of a "conversion transaction" (within the
meaning of Section 1258 of the Code) or "synthetic security" or other integrated
investment comprised of ComPS and one or more
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other investments. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. Dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of ComPS.
Further, it does not include any description of any alternative minimum tax
consequences or the tax laws of any state or local government or of any foreign
government that may be applicable to the ComPS.
This summary is based on the Code, Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis. In the opinion
of Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Company
("Tax Counsel"), the statements contained in the following summary, to the
extent they constitute matters of law, accurately described the material U.S.
Federal income tax consequences to Initial Holders of the acquisition, ownership
and disposition of ComPS. For purposes of this summary, a "U.S. Holder" shall
mean a holder who is (i) a citizen or a resident of the United States (or any
state thereof), (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, (iii) an estate or trust, the income of which is subject to U.S.
Federal income tax regardless of its source, and (iv) any other person subject
to U.S. Federal income tax on net income.
CLASSIFICATION OF THE COMPANY
The Company intends to take the position that it should be disregarded for U.S.
Federal income tax purposes and that consequently each holder of ComPS should be
deemed to hold an undivided beneficial interest in the Related Note. This
position is based on the position that the Company is a "grantor trust" for
Federal income tax purposes because it lacks an "objective to carry on business"
and because the Company does not have the power under the LLC Agreement to vary
its investments, and alternatively, on the Company's election pursuant to
Section 761 of the Code to be exempted from classification as a partnership.
By acquiring ComPS, a holder agrees to treat the ComPS as an undivided
beneficial interest in the Related Note. Accordingly, for U.S. Federal income
tax purposes, each holder will be required to report income, gain or loss as if
the holder directly held its pro rata share of the Related Note. No portion of
the income accrued by holders will be eligible for the corporate dividends
received deduction.
If the Company is not disregarded for U.S. Federal income tax purposes, it will
be classified as a partnership and not as an association taxable as a
corporation. See "-- Classification of the Company as a Partnership", below.
CLASSIFICATION OF THE RELATED NOTE
It is believed that the Related Note is properly treated as a contingent payment
debt instrument subject to the Treasury regulations promulgated in June 1996
governing such instruments (the "Contingent Payment Regulations"). The Company
intends to treat the Related Note accordingly. However, no ruling is being
requested from the Internal Revenue Service (the "IRS") and there is no direct
authority addressing the characterization of the Related Note. Other
characterizations might result in consequences different than those discussed
below.
U.S. HOLDERS OF COMPS
The following discussion of the tax consequences to U.S. Holders assumes both
that the Company will be disregarded for United States Federal income tax
purposes and that the Related Note will be treated as a contingent payment debt
instrument. If these assumptions are not correct, holders could be subject to
different consequences than those discussed below. The following discussion also
assumes that the Initial Holders purchased ComPS at the Face Amount.
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INTEREST INCOME
Under the Contingent Payment Regulations, the original issue discount ("OID")
rules of the Code apply to a contingent payment debt instrument. OID must be
accrued each year at a rate equal to the "comparable yield" for fixed debt
issued by the issuer of the instrument (or, if a hedge is available to the
issuer, the fixed yield on the combination of the contingent debt instrument and
the hedge). The comparable yield is determined at the time of issuance of the
obligations and cannot be less than the rate on United States Treasury
obligations of comparable maturities. After the "comparable yield" is
determined, a projected payment schedule for the instrument must be determined
as of the issue date, which schedule remains fixed through the term of the debt
instrument. Such schedule includes all noncontingent payments and projected
contingent payments, and must result in a yield to investors equal to the
comparable yield. If the actual amount of a contingent payment differs from the
projected amount, adjustments to income accruals to holders are made at that
time to account for the difference.
In the case of ComPS, all payments except the final payment are fixed and the
"comparable yield" of the ComPS is exactly equal to the rate of stated dividends
on the ComPS. Thus, the projected payment schedule consists of the scheduled
fixed payments of interest on the Related Note and a payment of $ per
Preferred Security at the Stated Maturity. Based on this projected payment
schedule.
Therefore, an Initial Holder of ComPS (whether on the cash or accrual method of
accounting) will be required to include in income the stated dividends on the
ComPS as they accrue. The Company will report annually to the Internal Revenue
Service ("IRS") and to record holders of the ComPS information with respect to
amounts of stated dividends paid or payable during such calendar year.
SALE OR OTHER DISPOSITION OF COMPS
Assuming that an Initial Holder purchased its ComPS for the Face Amount, its
basis in such ComPS will be the Face Amount. Any gain recognized by an Initial
Holder on the sale, exchange, early redemption or retirement of ComPS will be
ordinary income. Any loss recognized by an Initial Holder on the sale, exchange,
early redemption or retirement of ComPS will be ordinary loss to the extent of
such holder's total prior dividend inclusions on such ComPS. Any additional loss
will generally be treated as capital loss, and any such capital loss will be
long-term capital loss if upon such disposition such ComPS was held for more
than one year.
SECONDARY MARKET PURCHASERS
If a secondary market purchaser purchases ComPS at a premium or discount to
their principal amount, an adjustment must be made to the amount of OID to be
included in the income of the holder. To the extent any such premium or discount
reflects an increase or decrease, respectively, in the value of the stated
dividend payments, such premium or discount must be allocated to such payments
and will result in a decrease or increase, respectively, in the amount of OID to
be included in income prior to Stated Maturity. To the extent any such premium
or discount reflects an increase or decrease, respectively, in the expected
payment at Stated Maturity, it must be allocated to such payment and will
decrease or increase, respectively, the amount of income to be reported at such
time. Gain or loss recognized by such a holder upon a disposition of ComPS will
also reflect the unamortized portion of any such premium or discount.
The foregoing rules could result in a secondary market purchaser being required
to report ordinary income on the ComPS at a rate higher than the market interest
rate on the purchase date. For example, if a holder purchased ComPS at the Face
Amount at a time when, compared to the Issue Date, market interest rates as well
as the expected payment at Stated Maturity had decreased (thus offsetting each
other and not affecting the value of such ComPS), there would be no adjustment
under the rules of the preceding paragraph, and the holder would be required to
report as OID the full rate of stated dividends on the ComPS. Secondary market
purchasers should consult their individual tax advisors regarding the
consequences of purchasing and holding ComPS.
CLASSIFICATION OF THE COMPANY AS A PARTNERSHIP
If the Company is not disregarded for United States Federal income tax purposes,
the Company will be treated as a partnership for United States Federal income
tax purposes. As a result, holders of ComPS will
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have to report the income from the ComPS as partners in a partnership. This
could result in less favorable treatment than that described above. For example,
Initial Holders of ComPS who sell their ComPS at a loss will have a capital loss
on the disposition, even though such loss may economically offset dividend
income that had been taxed at ordinary income rates. Secondary market purchasers
may not be able to include the portion of the purchase price of such ComPS
attributable to accrued but unpaid interest in their basis in such ComPS, and
thus may recognize ordinary income in excess of the economic benefit of the
ComPS, with an offsetting capital loss upon disposition. Furthermore, the
Company will not make an election under Section 754 of the Code to adjust the
Company's tax basis of the Related Note to reflect the price paid for ComPS by a
secondary market purchaser. This could result in adverse tax consequences to
such a purchaser which holds such ComPS until Stated Maturity or early
redemption, such as taxable ordinary income in excess of the economic profit on
the ComPS, offset by a capital loss that might result in no tax benefit.
If the Company is treated as a partnership for United States Federal income tax
purposes, the Company's taxable income from the Related Note for each quarter
will be allocated, pursuant to a quarterly convention, to holders who hold ComPS
on the record date for the payment of dividends for that quarter. Thus, taxable
income is allocated when paid and not on an accrual basis. As a result, the
taxable income allocated to a holder who sells (or buys) ComPS between record
dates will not accurately reflect the accrued interest on the Related Note for
the holders's actual holding period for ComPS during the quarter of sale (or
purchase), which may affect such holder's tax liability and tax basis in the
ComPS.
Moreover, the IRS may determine that the use of this quarterly convention is not
permitted. If this quarterly convention is not allowed, taxable income of the
Company from the Related Note in the quarter of sale might be reallocated among
the sellers and buyers of ComPS. The LLC Agreement permits the Company to revise
its method of allocation between sellers and buyers to conform to a method
permitted by future regulations.
Also, if the Company is treated as a partnership for United States Federal
income tax purposes, Section 6031 of the Code requires that any person (other
than certain clearing agencies) that holds ComPS as a nominee at any time during
a calendar year furnish the Company with a statement containing certain
information on the nominee, the beneficial holders and the ComPS so held.
Nominees, brokers and financial institutions that fail to provide the Company
with such information may be subject to penalties.
Purchasers of ComPS should consult their individual tax advisors regarding the
consequences of the potential treatment of the Company as a partnership for
United States Federal income tax purposes.
NON-UNITED STATES HOLDERS
In the case of a holder of ComPS that is not a U.S. Holder, it is believed that
payments made with respect to ComPS will not be subject to U.S. withholding tax;
provided that such holder complies with applicable certification requirements
(and does not directly or indirectly own 10% or more of the voting stock of J.P.
Morgan). Any capital gain realized upon the redemption, sale or other
disposition of ComPS by a holder that is not a U.S. Holder will generally not be
subject to U.S. Federal income tax if (i)'such gain is not effectively connected
with a U.S. trade or business of such holder and (ii) in the case of an
individual, such individual is not present in the United States for 183 days or
more in the taxable year of the redemption, sale or other disposition or the
gain is not attributable to a fixed place of business maintained by such
individual in the United States.
INFORMATION REPORTING TO HOLDERS
The Company will annually report to each holder, on IRS Form 1099, the OID
attributable to such holder's ComPS (which, as stated above, will equal the
stated dividends on the ComPS). As noted above, the interest reported on such
form may not be accurate for secondary market purchasers. Also, the Company will
report to holders of ComPS the difference between the actual payment upon
redemption in full or at Stated Maturity and the payment projected for purposes
of computing the projected payment schedule, although the method the Company
will be required to use to report such amount is not yet clear. If the
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Company is not disregarded for United States Federal income tax purposes (and is
thus treated as a partnership), the Company will report each holder's
distributable share of the Company's income, gains, expenses and losses to the
holders of ComPS on IRS Form K-1.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the ComPS may be subject to a
"backup" withholding tax of 31% unless the holder complies with certain
identification requirements. Any withheld amounts will be allowed as a credit
against the holder's United States Federal income tax, provided that the
required information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMPS, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") or Section 4975 of the Code ("Plans"), may
purchase ComPS, subject to the investing fiduciary's determination that the
investment in ComPS satisfies ERISA's fiduciary standards and other requirements
applicable to investments by the Plans. Furthermore, assuming the ComPS are (i)
freely transferable, (ii) part of a class of securities that is owned by 100 or
more investors independent of the issuer and of one another at the conclusion of
the offering and (iii) either (a) part of a class of securities registered under
Section 12(b) or 12(g) of the Exchange Act, or (b) sold to a Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or such
later time as may be allowed by the Commission) after the end of the fiscal year
of the issuer during which the offering of such securities to the public
occurred, the underlying assets of the Company will not constitute "plan assets"
for purposes of ERISA.
In any case, J.P. Morgan, Morgan Guaranty and/or any affiliates of either may be
considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to certain Plans. The acquisition and ownership of ComPS by a Plan (or
by an individual retirement arrangement or other plans described in Section
4975(e)(i) of the Code) with respect to which J.P. Morgan, Morgan Guaranty or
any of its affiliates of either is considered a party in interest or a
disqualified person may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless such ComPS are acquired pursuant to
and in accordance with an applicable exemption.
As a result, Plans with respect to which J.P. Morgan, Morgan Guaranty or any
affiliates of either is a party in interest or a disqualified person should not
acquire ComPS. Any other Plans or other entities whose assets include plan
assets subject to ERISA proposing to acquire ComPS should consult with their own
ERISA counsel.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to the Underwriters,
and the Underwriters have agreed, severally and not jointly, to purchase, the
ComPS. In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the ComPS offered
hereby if any of the ComPS are purchased. In the event of default by any
Underwriter and failure by the other Underwriters to purchase such defaulting
Underwriter's portion of the ComPS, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
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The Underwriters propose to offer the ComPS, in part, directly to the public at
the initial public offering price set forth on the cover page of this Prospectus
Supplement, and, in part, to certain securities dealers at such price less a
concession of $ per Preferred Security. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per Preferred Security
to certain brokers and dealers. After the ComPS are released for sale to the
public, the offering price and other selling terms may from time to time be
varied by the Representatives.
In view of the fact that the proceeds of the sale of the ComPS will ultimately
be used to purchase the Related Note of Morgan Guaranty, the Underwriting
Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters'
Compensation") to the several Underwriters $ per Preferred Security (or
$ in the aggregate) for the account of the several Underwriters.
[The ComPS have been authorized for listing on the under the symbol " ",
subject to official notice of issuance. Trading of the ComPS on the is
expected to commence within a 30-day period after the date of this Prospectus
Supplement.] [Prior to this offering, there has been no market for the ComPS. In
order to meet one of the requirements for listing the ComPS on the , the
Underwriters will undertake to sell ComPS to a minimum of 400 beneficial
holders.]
The Company and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
This Prospectus Supplement and related the Prospectus may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and
sales related to secondary market transactions in the ComPS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
The Underwriters, certain agents and their associates may be customers of,
engage in transactions with, and perform services for, J.P. Morgan in the
ordinary course of business.
The lead Underwriter is an indirect, wholly-owned subsidiary of J.P. Morgan. The
participation of the lead Underwriter in the offer and sale of the ComPS
complies with the requirements of Schedule E of the By-laws of the National
Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of
securities of an affiliate and complies with any restrictions imposed on such
Underwriters by the Board of Governors of the Federal Reserve System.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon by Gene A.
Capello, Vice President and Assistant General Counsel of J.P. Morgan, and by
Cravath, Swaine & Moore, New York, New York, counsel for the Underwriter. Mr.
Capello owns or has the right to acquire a number of shares of Common Stock of
J.P. Morgan equal to or less than 0.01% of the outstanding Common Stock of J.P.
Morgan.
EXPERTS
The audited financial statements contained in J.P. Morgan's Annual Report on
Form 10-K for the year ended December 31, 1995 (included in J.P. Morgan's Annual
Report to Stockholders), are incorporated by reference in this Prospectus
Supplement in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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ANNEX I
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used in
the Prospectus Supplement. The LLC Agreement, the Guarantee, the Related Note
Guarantee and the Related Note may contain more complete definitions of certain
of the terms defined herein, as well as definitions of certain other terms not
defined herein, and reference should be made to the LLC Agreement, the
Guarantee, the Related Note Guarantee and the Related Note, as applicable, for
complete definitions of such terms.
APPLICABLE INDEX........the JPMCI Aluminum Total Return Index.
APPLICABLE INDEX
COMMENCEMENT
VALUE...................
APPLICABLE INDEX
SETTLEMENT VALUE........the arithmetic average of the values of the Applicable
Index during the Determination Period; provided,
however, that if the Applicable Index Settlement Value
has been permanently determined prior to such time, the
Applicable Index Settlement Value shall equal the value
so determined.
APPLICABLE INDEX EARLY
SETTLEMENT VALUE........for each day of the Early Determination Period, the
value of the Applicable Index for such day of the Early
Determination Period; provided, however, that if the
Applicable Index Settlement Value has been permanently
determined prior to such time, the Applicable Index
Early Settlement Value shall equal the value so
determined.
BENCHMARK ALUMINUM
CONTRACTS...............the aluminum futures contracts included from time to
time in the JPM Indices, which shall initially be the
LME High Grade Primary Aluminum contract.
BUSINESS DAY............any day other than a Saturday, Sunday or any other day
on which banking institutions in The City of New York,
New York, are permitted or required by any applicable
law to close.
CODE....................the Internal Revenue Code of 1986, as amended.
COLLATERAL YIELD
COMPONENT...............a component of the value of the Applicable Index,
computed on the fluctuating index value of the
Applicable Index at the most recent auction rate for
3-month U.S. Treasury Bills or any successor rate
thereto with a maturity of 3 months or less or, if no
such rate has been determined in the 13 days prior to
the date of determination, as Morgan Guaranty may
determine in its reasonable discretion.
COMMISSION..............the Securities and Exchange Commission.
COMMON SECURITIES.......the common securities of the Company representing voting
limited liability company interests in the Company, to
be directly or indirectly owned by J.P. Morgan.
COMPS EARLY REDEMPTION
PRICE...................On any Early Redemption Date, an amount equal to (i) the
Early Redemption Value per Preferred Security plus (ii)
accrued and unpaid dividends to but excluding the date
of redemption.
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COMPS REDEMPTION
PRICE...................at Stated Maturity, an amount equal to (i) the
Redemption Value per Preferred Security plus (ii)
accrued and unpaid dividends to but excluding Stated
Maturity.
DETERMINATION PERIOD....the 10 consecutive Trading Days on which no Market
Disruption Event
occurs immediately following the 20th scheduled Business
Day prior to Stated Maturity.
DIVIDENDS...............cumulative cash dividends of % per annum on the Face
Amount (calculated on the basis of a 360 day year of
twelve 30-day months) accruing from the Issue Date and
payable quarterly in arrears.
DTC.....................the Depository Trust Company.
EARLY DETERMINATION
PERIOD..................the 10 consecutive Trading Days which are Business Days
on which U.S. Treasury Bond markets are open and on
which no Market Disruption Event occurs immediately
following the 20th scheduled Business Day prior to the
applicable Early Redemption Date.
EARLY REDEMPTION
VALUE...................the average for the 10 days of the Early Determination
Period of the discounted present value of the future
dividends and the indexed Principal Amount of the ComPS,
as set forth in the accompanying Prospectus under
"Description of ComPS--Early Redemption Upon the
Occurrence of a Special Event or at the Election of the
Holders of the ComPS".
EARLY REDEMPTION
DATE....................each Optional Redemption Date and the date of any
Special Event Redemption or Liquidation Distribution.
ERISA...................the Employee Retirement Income Security Act of 1974.
EXCHANGE ACT............the Securities Exchange Act of 1934, as amended.
FACE AMOUNT.............[$40].
FACTOR.................. , which is designed to offset the costs of
issuing and hedging the indexation of the ComPS.
GUARANTEE...............the Guarantee Agreement executed by J.P. Morgan on
behalf of the holders of each series of Preferred
Securities.
GUARANTEE PAYMENTS......without duplication, (i)(A) any accrued and unpaid
dividends that are required to be paid on the ComPS and
(B) the ComPS Early Redemption Price or the ComPS
Redemption Price, as applicable, but if and only to the
extent that, in each of case, Morgan Guaranty has made a
payment of interest or principal, as the case may be, on
the Related Note and (ii) upon a Liquidation Event
(other than in connection with the redemption of all the
ComPS upon the maturity or redemption of the Related
Note), the lesser of (A) the Liquidation Distribution to
the extent the Company has funds available therefor, and
(B) the amount of assets of the Company remaining
available for distribution to holders of all Preferred
Securities upon such Liquidation Event.
INITIAL HOLDERS.........holders who purchase any ComPS upon original issuance.
INTEREST PAYMENT DATE...with respect to the Related Note, the last calendar day
of each March, June, September and December, beginning
, 1996.
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INVESTMENT COMPANY
EVENT...................the receipt by the Company of an opinion of a nationally
recognized independent counsel experienced in such
matters to the effect that, as a result of the
occurrence of a change in law or regulation, a written
change in interpretation or application of law or
regulation by any legislative body, court, governmental
agency or regulatory authority or the expiration or
revocation of any applicable exemption obtained by the
Company (a "Change in 1940 Act Law"), there is more than
an insubstantial risk that the Company is or will be
considered an "investment company" that is required to
be registered under the 1940 Act, which Change in 1940
Act Law becomes effective on or after the date of this
Prospectus.
IRS.....................Internal Revenue Service.
ISSUE DATE.............. , 1996.
JPMCI...................The J.P. Morgan Commodity Index.
LIQUIDATION
DISTRIBUTION............in respect of any Liquidation Event, the sum of (a) the
Early Redemption Value (treating the date of such
distribution as the Early Redemption Date), plus (b) the
amount of accrued and unpaid dividends on such Preferred
Security to but excluding the date of payment.
LIQUIDATION EVENT.......any liquidation, dissolution, winding-up or termination
of the Company, whether voluntary or involuntary.
LLC AGREEMENT...........the amended and restated limited liability company
agreement among J.P. Morgan, JPM Ventures and holders of
Preferred Securities subsequently becoming members
thereof dated May 15, 1996, and effective as of November
21, 1995.
LME.....................the London Metals Exchange.
MARKET DISRUPTION
EVENT...................the occurrence of one or more of the following on any
Trading Day with respect to any Benchmark Aluminum
Contract underlying the Applicable Index, or an exchange
on which any Benchmark Aluminum Contract is traded (a
"Relevant Exchange"): (a) a day on which the fluctuation
of the price of any Benchmark Aluminum Contract
underlying the Applicable Index is materially limited by
the rules of a Relevant Exchange setting the maximum or
minimum price for such day (a "Limit Price"); (b) a day
on which the official settlement price (the "Settlement
Price") on the Relevant Exchange of a Benchmark Aluminum
Contract underlying the Applicable Index is the Limit
Price; (c) the failure of a Relevant Exchange to
determine, announce or publish the Settlement Price with
respect to a Benchmark Aluminum Contract underlying the
Applicable Index; (d) the material suspension of trading
in any Benchmark Aluminum Contract underlying the
Applicable Index on a Relevant Exchange; (e) the failure
of trading to commence, or the permanent discontinuation
of trading, in any Benchmark Aluminum Contract
underlying the Applicable Index on any Relevant
Exchange; and (f) the imposition of any material
limitation on trading in any Benchmark Aluminum Contract
underlying the Applicable Index on any Relevant
Exchange.
NASDAQ..................The Nasdaq Stock Market.
1940 ACT................the Investment Company Act of 1940, as amended.
A-3
<PAGE> 44
OPTIONAL REDEMPTION.....the redemption of ComPS by the holders thereof on any
Optional Redemption Date for the ComPS Early Redemption
Price.
OPTIONAL REDEMPTION
DATE....................each prior to Stated Maturity, subject to
extension in the case of (i) delay in the provision by
DTC of the Applicable Notice or (ii) the occurrence and
continuance of a Market Disruption Event.
PRINCIPAL AMOUNT........at any time, (i) in the case of ComPS, the Redemption
Value or Early Redemption Value, as applicable, as if
determined as of such time, and (ii) in the case of the
Related Note, the principal amount thereof at such time
determined pursuant to the terms thereof.
REDEMPTION DATE.........either the Stated Maturity or an Early Redemption Date,
as applicable.
REDEMPTION VALUE........at Stated Maturity, the Face Amount per Preferred
Security multiplied by a fraction, the numerator of
which is the Applicable Index Settlement Value and the
denominator of which is the Applicable Index
Commencement Value.
RELATED NOTE............the % unsecured, unsubordinated debt obligation of
Morgan Guaranty due .
RELATED NOTE EVENT OF
DEFAULT.................(i) default for 30 days in the payment of interest on
the Related Note; (ii) default in payment of principal
amount at the Stated Maturity or any amount payable upon
any redemption of the Related Note; (iii) failure by
Morgan Guaranty for 90 days after receipt of notice to
it to comply with any of its covenants or agreements
contained in the Related Note; and (iv) certain events
of bankruptcy, insolvency, receivership or
reorganization involving Morgan Guaranty or certain
affiliates.
ROLLOVER PERIOD.........the period during which each replacement of
shorter-dated Benchmark Aluminum Contracts with
longer-dated Benchmark Aluminum Contracts as the basis
for the change in value of the Applicable Index occurs.
SECURITIES..............the ComPS and the Common Securities.
SECURITIES ACT..........the Securities Act of 1933.
SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, the principal of,
premium, if any, and interest on (a) all indebtedness of
Morgan Guaranty for money borrowed, whether outstanding
as of the date hereof or hereafter created, issued or
incurred (other than Morgan Guaranty's obligations to
its depositors), except any indebtedness expressly
subordinated to such Senior Indebtedness, and (b) any
deferrals, renewals or extensions of any such Senior
Indebtedness.
SPECIAL EVENT...........either a Tax Event or an Investment Company Event.
SPECIAL REDEMPTION......upon the occurrence and during the continuation of a
Special Event, Morgan Guaranty will have the right to
redeem the Related Note in whole or in part for cash at
the Related Note Redemption Price, with the result that
the Company will redeem on a pro rata basis ComPS and
related Common Securities in an equal Principal Amount
for cash at the ComPS Early Redemption Price.
A-4
<PAGE> 45
SPECIAL REDEMPTION
DATE....................any date in respect of which upon the occurrence and
continuation of a Tax Event or an Investment Company
Event Morgan Guaranty shall have called for redemption
in whole or in part the Related Note, and the Company
shall have called for redemption on a pro rata basis an
equal Principal Amount of the ComPS and related Common
Securities.
STATED MATURITY......... , .
TAX COUNSEL.............Cravath, Swaine & Moore, special tax counsel to J.P.
Morgan and the Company.
TAX EVENT...............the receipt by the Company of an opinion of nationally
recognized independent tax counsel experienced in such
matters (a "Tax Opinion") to the effect that, as a
result of (a) any amendment to, or change (including any
announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or
therein, (b) any amendment to, or change in, an
interpretation or application of such laws or
regulations by any legislative body, court, governmental
agency or regulatory authority (including the enactment
of any legislation and the publication of any judicial
decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a
position with respect to such laws or regulations that
differs from the theretofore generally accepted position
or (d) any action taken by any governmental agency or
regulatory authority, which amendment or change is
enacted, promulgated, issued or announced or which
interpretation or pronouncement is issued or announced
or which action is taken, in each case on or after the
date of this Prospectus Supplement, that there is more
than an insubstantial risk that at such time or within
90 days of the date thereof (i) the Company is or would
be subject to United States Federal income tax with
respect to income accrued or received on any Related
Note, (ii) the interest payable on any Related Note is
not or would not be deductible by Morgan Guaranty for
United States Federal income tax purposes, (iii) the
contingent principal in excess of the Face Amount of any
series of Preferred Securities (if any) payable on any
Related Note is not or would not be deductible by Morgan
Guaranty for United States Federal income tax purposes
or (iv) the Company is or would be subject to more than
a de minimis amount of other taxes, duties or other
governmental charges.
TRADING DAY.............any day on which open-outcry trading on either the New
York Mercantile Exchange (the "NYMEX") or the LME is
scheduled to occur or occurs.
A-5
<PAGE> 46
PROSPECTUS
$700,000,000
J.P. MORGAN INDEX FUNDING COMPANY, LLC
Preferred Securities guaranteed to the extent set forth herein by
J.P. MORGAN & CO. INCORPORATED
------------------------
J.P. Morgan Index Funding Company, LLC (the "Company"), a Delaware limited
liability company, may offer, from time to time, preferred securities
representing preferred limited liability company interests in the Company
("Preferred Securities"). The payment of periodic cash distributions
("distributions") with respect to Preferred Securities out of moneys held by the
Company and payments on liquidation, redemption or otherwise with respect to
such Preferred Securities will be guaranteed on a subordinated basis by J.P.
Morgan & Co. Incorporated, a Delaware corporation ("J.P. Morgan"), to the extent
described herein (the "Guarantee"). See "Description of the Guarantee". The
Company will invest the proceeds from the issuance of Preferred Securities and,
at the option of the Company, related Common Securities in unsecured notes
(each, a "Related Note") of Morgan Guaranty Trust Company of New York ("Morgan
Guaranty"), a trust company with full banking powers organized under the laws of
the State of New York, and payments to the Company on liquidation, redemption or
otherwise with respect to the Related Notes will be guaranteed on a subordinated
basis by J.P. Morgan to the extent described herein (the "Related Note
Guarantee"). See "Description of the Related Note Guarantee". J.P. Morgan's
obligations under the Guarantee and Related Note Guarantee are subordinate and
junior in right of payment to all other liabilities of J.P. Morgan and rank pari
passu with the most senior preferred stock outstanding as of the date hereof of
J.P. Morgan. Related Notes may be issued and sold from time to time by Morgan
Guaranty to the Company in connection with the investment of the proceeds from
the offering of Preferred Securities and, at the option of the Company, common
securities (the "Common Securities") of the Company. J.P. Morgan, through its
obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement
and the Expense Agreement, taken together, will provide a full and unconditional
guarantee, on a subordinated basis, of payments due on the Preferred Securities.
Specific terms of the Preferred Securities in respect of which this Prospectus
is being delivered (the "Offered Securities") will be set forth in an
accompanying Prospectus Supplement (the "Prospectus Supplement") with respect to
such Offered Securities, which will describe, without limitation and where
applicable, the following: (i) in the case of Preferred Securities, the
designation, number of securities, liquidation preference per security
(including, without limitation, a description of any indexation thereof),
initial public offering price, any listing on a securities exchange,
distribution rate (or method of calculation thereof), dates on which
distributions shall be payable and dates from which distributions shall accrue,
any voting rights, terms for any conversion or exchange into other securities,
any redemption, exchange or sinking fund provisions, any other rights,
preferences, privileges, limitations or restrictions relating to the Preferred
Securities and the terms upon which the proceeds of the sale of the Preferred
Securities shall be used to purchase a specific Related Note of Morgan Guaranty;
(ii) in the case of the applicable Related Note, the specific designation,
aggregate principal amount (including, without limitation, a description of any
indexation thereof), denomination, maturity, premium, if any, any exchange,
conversion, redemption or sinking fund provisions, if any, interest rate (which
may be fixed or variable), if any, the time and method of calculating interest
payments, if any, dates on which premium, if any, and interest, if any, will be
payable, the right of Morgan Guaranty, if any, to defer payment of interest on
the Related Note and the maximum length of such deferral period, and (iii) the
initial public offering price, subordination terms, and other specific terms of
the offering.
The Offered Securities may be offered in amounts, at prices and on terms to be
determined at the time of offering; provided, however, that the aggregate
initial public offering price of all Offered Securities shall not exceed
$700,000,000. Any Prospectus Supplement relating to any series of Offered
Securities will contain information concerning certain United States Federal
income tax considerations, if applicable, for purchasers and holders of the
Offered Securities.
SEE "RISK FACTORS WITH RESPECT TO ALL PREFERRED SECURITIES" ON PAGE 17 AND "RISK
FACTORS WITH RESPECT TO COMPS" ON PAGE 18 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN ANY PREFERRED SECURITIES OR COMPS, AS APPLICABLE. AN INVESTOR IN
COMPS COULD LOSE ITS ENTIRE INVESTMENT.
The Company may sell the Offered Securities directly, through agents designated
from time to time or through underwriters or dealers. See "Plan of
Distribution". If any agents of the Company or any underwriters or dealers are
involved in the sale of the Offered Securities, the names of such agents,
underwriters or dealers and any applicable commissions and discounts will be set
forth in any related Prospectus Supplement.
No dealer, salesperson or any other individual has been authorized by the
Company or J.P. Morgan to give any information or to make any representation
other than those contained or incorporated by reference in this Prospectus or
any accompanying Prospectus Supplement and, if given or made, such information
or representation must not be relied upon as having been authorized. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
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 J.P. Morgan, Morgan Guaranty or the Company since the date hereof.
THE SECURITIES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL
AGENCY.
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. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF
SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
The date of this Prospectus is November 18, 1996.
<PAGE> 47
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by J.P. Morgan and the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Offered Securities. This
Prospectus does not contain all of the information set forth in such
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Reference is made to such
Registration Statement and to the exhibits relating thereto for further
information with respect to J.P. Morgan, the Company and the Offered Securities.
Any statements contained herein concerning the provisions of any document filed
as an exhibit to the Registration Statement or otherwise filed with the
Commission or incorporated by reference herein are not necessarily complete,
and, in each instance, reference is made to the copy of such document so filed
for a more complete description of the matter involved. Each such statement is
qualified in its entirety by such reference.
J.P. Morgan 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
Commission. Reports, proxy statements and other information concerning J.P.
Morgan can be inspected and copied at prescribed rates at the Commission's
Public Reference Room, Judiciary Plaza, 450 Fifth Street, Northwest, Washington,
D.C. 20549, as well as the following Regional Offices of the Commission: Seven
World Trade Center, New York, New York 10048; and Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661-2511. Such reports, proxy
statements and other information may also be inspected at the offices of the New
York Stock Exchange, on which J.P. Morgan common stock is traded, at 20 Broad
Street, New York, New York 10005.
No separate financial statements of the Company have been included herein. J.P.
Morgan does not consider that such financial statements would be material to
holders of the Preferred Securities because (i) all of the voting securities of
the Company will be owned, directly or indirectly, by J.P. Morgan, a reporting
company under the Exchange Act, (ii) the Company has no independent operations
and exists for the sole purpose of issuing securities and investing the proceeds
thereof in Related Notes to be issued by Morgan Guaranty, and (iii) the
obligations of the Company under the Preferred Securities that may be issued
from time to time are fully and unconditionally guaranteed, on a subordinated
basis, by J.P. Morgan to the extent that the Company has funds available to meet
such obligations. See "Description of the Related Notes", "Description of the
Guarantee" and "Description of the Related Note Guarantee".
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
J.P. Morgan hereby incorporates by reference in this Prospectus J.P. Morgan's
Annual Report on Form 10-K for the year ended December 31, 1995 (included in its
Annual Report to Stockholders), the Quarterly Reports of J.P. Morgan on Form
10-Q for the quarters ended March 31, 1996 and June 30, 1996, and J.P. Morgan's
Reports on Form 8-K dated January 11, 1996, February 6, 1996, February 20, 1996,
February 23, 1996, April 11, 1996, May 13, 1996, July 11, 1996, and August 13,
1996, heretofore filed pursuant to Section 13 of the Exchange Act.
In addition, all reports and definitive proxy or information statements filed
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
Securities shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the date of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein or in the accompanying Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
2
<PAGE> 48
J.P. MORGAN WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL
OWNER, TO WHOM THIS PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF
ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED
HEREIN BY REFERENCE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS). WRITTEN REQUESTS
SHOULD BE DIRECTED TO THE OFFICE OF THE SECRETARY, J.P. MORGAN & CO.
INCORPORATED, 60 WALL STREET, NEW YORK, NEW YORK 10260-0060. TELEPHONE REQUESTS
MAY BE DIRECTED TO (212) 648-2157.
J.P. MORGAN & CO. INCORPORATED
J.P. Morgan, whose origins date to a merchant banking firm founded in London in
1838, is the holding company for a group of global subsidiaries that provide a
wide range of financial services to corporations, governments, financial
institutions, institutional investors, professional firms, privately held
companies, nonprofit organizations, and financially sophisticated individuals.
J.P. Morgan's activities are summarized below.
FINANCE AND ADVISORY
J.P. Morgan provides strategic advice and capital raising services to its broad
range of clients. J.P. Morgan advises clients on the financial and business
implications of corporate strategies, which may result in mergers, acquisitions,
divestitures, recapitalizations, privatizations, joint ventures, and
restructurings. J.P. Morgan also provides advice on defensive strategies and
analysis and research on capital structure. J.P. Morgan structures and executes
financing strategies in markets throughout the world. These strategies may
involve commercial paper, syndicated loans, private placements, and the
underwriting of both debt and equity, as well as other financing techniques.
J.P. Morgan also extends credit, accepts deposits, and provides a variety of
other banking and financial services.
SALES AND TRADING
J.P. Morgan is an active participant, as a principal and as an agent for
clients, in the markets for all major financial instruments, and it engages in
hedging and managing a wide variety of financial risks both for clients and its
own account. J.P. Morgan trades debt and equity securities in U.S. and
international markets, and it distributes these securities to investors. J.P.
Morgan structures, executes and makes markets in swaps, options, and other
derivative instruments, and it buys and sells foreign currencies, conducting all
of these transactions with clients and counterparties around the world. J.P.
Morgan also trades certain commodities, and it buys and sells the loans of
emerging market countries and other debtors. Market activities for clients and
for its own account are supported by credit, economic, market, and fundamental
industry and company research.
ASSET MANAGEMENT AND SERVICING
J.P. Morgan provides investment management services to institutional investors
and investment management and fiduciary services to private clients, consisting
of wealthy individuals, their families, and their businesses. J.P. Morgan
manages employee benefit plans for corporations, state and local governments,
and unions. Investment management services are also provided to a broad spectrum
of other institutional investors, including foundations, endowments, sovereign
governments, and insurance companies. Discretionary and nondiscretionary
investment management services, credit and deposit products, and investment
banking services are provided to private clients as well as fiduciary services,
consisting of generational planning and trust and estate administration
services.
J.P. Morgan provides operational services such as the administration of American
and other depositary receipts as well as U.S. money transfer, and global trust
and agency services. J.P. Morgan operates the Euroclear System, the world's
largest clearance and settlement system for internationally traded securities,
under contract to the Euroclear System Societe Cooperative in Brussels, Belgium.
J.P. Morgan also serves
3
<PAGE> 49
as a futures commission merchant in the execution and clearance of futures
contracts on major futures exchanges worldwide.
EQUITY INVESTMENTS
J.P. Morgan invests in debt and equity securities for its own account. The firm
acquires equity securities for investment purposes primarily through private
placements, recapitalizations, and corporate restructurings.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management activities include managing the interest rate
risk that arises from the firm's interest-rate-sensitive assets and liabilities.
A variety of instruments, both on- and off-balance sheet, in numerous currencies
are used in an integrated manner to achieve the firm's objectives.
REGULATION
J.P. Morgan is subject to regulation under the Bank Holding Company Act of 1956
(the "Act"). Under the Act, J.P. Morgan is required to file certain reports with
the Board of Governors of the Federal Reserve System (the "Board") and is
subject to examination by the Board. The Act generally precludes J.P. Morgan and
its subsidiaries from engaging in nonbanking activities, or from acquiring more
than 5% of any class of voting securities of any company engaging in such
activities, unless the Board has determined, by order or regulation, that such
proposed activities are closely related to banking. Federal law and Board
interpretations limit the extent to which J.P. Morgan and its subsidiaries can
engage in certain aspects of the securities business. Under Board policy, J.P.
Morgan is expected to act as a source of financial strength to each subsidiary
bank and to commit resources to support such subsidiary bank, even in
circumstances where J.P. Morgan might not be in a financial position to do so.
The Glass-Steagall Act prohibits affiliates of banks that are members of the
Federal Reserve System, including J.P. Morgan Securities Inc. ("JPMSI"), from
being "engaged principally" in bank-ineligible underwriting and dealing
activities (mainly corporate debt and equity securities). As interpreted by the
Board, this prohibition restricts JPMSI's gross revenues from such activities to
a maximum of 10% of its total gross revenues. J.P. Morgan continues to seek ways
to expand the limits on such activities, including the reform of the
Glass-Steagall Act, necessary to achieve our strategic objectives.
Morgan Guaranty, J.P. Morgan's largest subsidiary, is a member of the Federal
Reserve System. It and J.P. Morgan Delaware, another wholly owned subsidiary of
J.P. Morgan, are members of the Federal Deposit Insurance Corporation ("FDIC").
Their businesses are subject to both U.S. federal and state law and to
examination and regulation by U.S. federal and state banking authorities. In
1996, an application was filed with the Federal Reserve Bank of New York and the
states of New York and Delaware to merge Morgan Guaranty and J.P. Morgan
Delaware. The Federal Reserve Bank of New York and the States of Delaware and
New York approved the merger of Morgan Guaranty and J.P. Morgan Delaware with a
June 1, 1996 effective date. J.P. Morgan and its nonbank subsidiaries are
affiliates of Morgan Guaranty and J.P. Morgan Delaware within the meaning of the
applicable federal statutes. Such banks are subject to restrictions on loans and
extensions of credit to J.P. Morgan and certain other affiliates and on certain
other types of transactions with them or involving their securities.
Among other wholly owned subsidiaries:
JPMSI is a broker-dealer registered with the Securities and Exchange
Commission and is a member of the National Association of Securities
Dealers, the New York Stock Exchange, and other exchanges.
J.P. Morgan Futures Inc. is subject to regulation by the Commodity
Futures Trading Commission, the National Futures Association, and the
commodity exchanges and clearinghouses of which it is a member.
4
<PAGE> 50
J.P. Morgan Investment Management Inc. is registered with the Securities
and Exchange Commission as an investment adviser under the Investment
Advisers Act of 1940, as amended.
J.P. Morgan subsidiaries conducting business in other countries are also
subject to regulations and restrictions imposed by those jurisdictions,
including capital requirements.
The principal executive office of J.P. Morgan is located at 60 Wall Street, New
York, New York 10260-0060, and its telephone number is (212) 483-2323.
As used in this Prospectus, unless the context otherwise requires, the term
"J.P. Morgan" refers to J.P. Morgan & Co. Incorporated and its consolidated and
unconsolidated subsidiaries.
J.P. MORGAN INDEX FUNDING COMPANY, LLC
J.P. Morgan Index Funding Company, LLC, is a Delaware limited liability company
formed pursuant to (i) the filing of a certificate of formation with the
Secretary of State of the State of Delaware on November 21, 1995 and (ii) the
amended and restated limited liability company agreement, dated May 15, 1996,
and effective as of November 21, 1995 (the "LLC Agreement"), filed as an exhibit
to the Registration Statement of which this Prospectus Supplement and the
accompanying Prospectus form a part. J.P. Morgan will directly or indirectly
acquire all Common Securities of the Company. The Company exists for the
exclusive purposes of (i) issuing the Preferred and Common Securities
representing undivided beneficial interests in the assets of the Company, (ii)
investing the proceeds of the Preferred and, at the option of the Company,
Common Securities in Related Notes of Morgan Guaranty and (iii) engaging in only
those other activities necessary or incidental thereto.
Pursuant to the LLC Agreement, the Common Securities will be owned by J.P.
Morgan and by J.P. Morgan Ventures Corporation, a Delaware corporation and a
wholly-owned subsidiary of J.P. Morgan ("JPM Ventures"). J.P. Morgan and JPM
Ventures will be the Managing Members of the Company, as defined in the LLC
Agreement.
Pursuant to the LLC Agreement, the Managing Members of the Company have
unlimited liability for the debts, obligations and liabilities of the Company in
the same manner as a general partner of a Delaware limited partnership (which do
not include obligations to holders of Preferred Securities in their capacity as
such), to the extent not fully satisfied and discharged by the Company. That
liability on the part of such members is for the benefit of, and is enforceable
by, the liquidating trustee of the Company in the event of its dissolution and
is for the benefit of third parties to whom the Company owes such debts,
obligations and liabilities. The holders of Preferred Securities, in their
capacity as members of the Company, are not liable for the debts, obligations or
liabilities of the Company (subject to their obligation to repay any funds
wrongfully distributed to them).
The rights of the holders of each series of Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
applicable Prospectus Supplement and this Prospectus.
J.P. Morgan currently intends to (i) form a trust, the sole purpose of which is
to invest in and hold Related Notes, (ii) cause such trust to obtain an
exemption from the provisions of the Investment Company Act of 1940 and (iii)
cause the Company to merge with and into such trust, with such trust assuming
all liabilities of the Company and with such trust being entitled to all of the
Company's rights under the Related Note Guarantee and any outstanding Related
Notes. Holders of ComPS outstanding at the time of such merger will be notified
prior to the date thereof.
5
<PAGE> 51
USE OF PROCEEDS
The proceeds to the Company from the sale of the Preferred Securities offered
from time to time hereby and, at the option of the Company, related Common
Securities will be invested in one or more Related Notes of Morgan Guaranty, the
proceeds of which will be used by Morgan Guaranty for general corporate purposes
and for hedging its obligation under the relevant Related Note, except as may
otherwise be set forth in the applicable Prospectus Supplement.
CONSOLIDATED RATIOS OF J.P. MORGAN
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------
1996 1995 1994 1993(A) 1992(B) 1991(C)
----------- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Excluding Interest on Deposits.... 1.42 1.35 1.40 1.70(a) 1.53(b) 1.42(c)
Including Interest on Deposits.... 1.30 1.24 1.28 1.46(a) 1.31(b) 1.23(c)
</TABLE>
- ---------------
(a) For the year ended December 31, 1993, the ratio of earnings to fixed
charges, including the cumulative effect of a change in the method of accounting
for postretirement benefits other than pensions, was 1.64 excluding interest on
deposits and 1.43 including interest on deposits.
(b) For the year ended December 31, 1992, the ratio of earnings to fixed
charges, including the cumulative effect of a change in the method of accounting
for income taxes, was 1.67 excluding interest on deposits and 1.39 including
interest on deposits.
(c) For the year ended December 31, 1991, the ratio of earnings to fixed
charges, including the extraordinary gain on early retirement of debt, was 1.43
excluding interest on deposits and 1.24 including interest on deposits.
CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------
1996 1995 1994 1993(A) 1992(B) 1991(C)
----------- ---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Excluding Interest on Deposits.... 1.41 1.34 1.39 1.69(a) 1.52(b) 1.40(c)
Including Interest on Deposits.... 1.29 1.23 1.27 1.46(a) 1.31(b) 1.22(c)
</TABLE>
- ---------------
(a) For the year ended December 31, 1993, the ratio of earnings to combined
fixed charges and preferred stock dividends, including the cumulative effect of
a change in the method of accounting for postretirement benefits other than
pensions, was 1.63 excluding interest on deposits and 1.42 including interest on
deposits.
(b) For the year ended December 31, 1992, the ratio of earnings to combined
fixed charges and preferred stock dividends, including the cumulative effect of
a change in the method of accounting for income taxes, was 1.65 excluding
interest on deposits and 1.39 including interest on deposits.
(c) For the year ended December 31, 1991, the ratio of earnings to combined
fixed charges and preferred stock dividends, including the extraordinary gain on
early retirement of debt, was 1.41 excluding interest on deposits and 1.23
including interest on deposits.
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<PAGE> 52
DESCRIPTION OF ALL PREFERRED SECURITIES
The Company is authorized by the LLC Agreement to issue, from time to time, one
or more series of Preferred Securities having terms described in the Prospectus
Supplement relating to each. Each series of Preferred Securities will have such
terms, including distributions, redemption, voting, liquidation rights and such
other preferred or other special rights or such restrictions, as shall be set
forth in the Prospectus Supplement relating to such Preferred Securities,
including (i) the distinctive designation of such Preferred Securities, (ii) the
number of Preferred Securities issued in such series, (iii) the annual
distribution rate (or method of determining such rate) for such Preferred
Securities and the date or dates upon which such distributions shall be payable,
(iv) whether distributions on such Preferred Securities shall be cumulative,
and, in the case of Preferred Securities having such cumulative distribution
rights, the date or dates or method of determining the date or dates from which
distributions on such Preferred Securities shall be cumulative, (v) the amount
or amounts (or the method for determining such amount or amounts) which shall be
paid out of the assets of the Company to the holders of such Preferred
Securities upon voluntary or involuntary dissolution, winding-up or termination
of the Company, (vi) the obligation, if any, of the Company to purchase or
redeem , and the option of the holders of Preferred Securities, if any, to
redeem, Preferred Securities issued by the Company and the price or prices at
which, the period or periods within which and the terms and conditions upon
which such Preferred Securities shall be purchased or redeemed, in whole or in
part, pursuant to such obligation, (vii) the voting rights, if any, of such
Preferred Securities in addition to those required by law, including the number
of votes per Preferred Security and any requirement for the approval by the
holders of Preferred Securities as a condition to specified action or amendments
to the LLC Agreement, and (viii) any other relevant rights, preferences,
privileges, limitations or restrictions of Preferred Securities consistent with
the LLC Agreement and with applicable law.
All Preferred Securities offered hereby will be guaranteed, on a subordinated
basis, by J.P. Morgan to the extent set forth below under "Description of the
Guarantee".
Certain United States federal income tax considerations applicable to any
offering of Preferred Securities will be described in the Prospectus Supplement
relating thereto.
In connection with the issuance from time to time of Preferred Securities, the
Company may issue Common Securities. Upon an event of liquidation, termination
or winding-up of the Company, the rights of the holders of the Common Securities
to payments in respect of distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Preferred Securities. Each holder of Common Securities will be a "Managing
Member" of the Company, as defined in the LLC Agreement. All of the Common
Securities will be directly or indirectly owned by J.P. Morgan.
Each series of Preferred Securities will be subject to redemption prior to the
Stated Maturity thereof upon the occurrence of a Tax Event or an Investment
Company Event (each, a "Special Event") upon the terms set forth in the
applicable Prospectus Supplement.
DESCRIPTION OF THE COMPS
Among the types of Preferred Securities currently contemplated for issuance by
the Company are one or more series of Preferred Securities sharing the
characteristics described below (each such series, "ComPS"). The following
description is a general description of all series of ComPS, and prospective
purchasers of any series of ComPS should consult the applicable Prospectus
Supplement for such series and other documents referred to or incorporated by
reference therein (including, without limitation, any public documents filed
after the date hereof and any amendments to any document referred to herein).
GENERAL
The Principal Amount of each series of ComPS to be paid upon any amortization of
principal and at the Stated Maturity of such series (the "Redemption Value")
will be determined with reference to, and will
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<PAGE> 53
fluctuate based on, the level of a commodity index (referred to herein as the
"Applicable Index" or collectively as the "Applicable Indices"), as specified in
the applicable Prospectus Supplement.
The Applicable Index will be one of the following types: (i) an "excess return"
index, the change in value of which will be calculated with reference to the
changes in value of certain futures contracts on the relevant commodity (the
"Benchmark Contracts"), which contracts are replaced regularly as the
determinant of change in value of the Applicable Index according to the
methodology used in calculating the JPM Indices as described herein (such index
referred to herein as an "Excess Return Index"), (ii) a "total return" index,
calculated in the same manner as an Excess Return Index but including an
additional component of return (the "Collateral Return") arising from interest
accrued on the fluctuating value of the Applicable Index (such index referred to
herein as a "Total Return Index") or (iii) the price of the relevant commodity
as reported in the pricing source identified in the Prospectus Supplement, which
may be the settlement prices for futures contracts on the underlying commodity
or prices of the underlying commodity determined by the relevant market
participants, reporting services or associations at the official price
determination, in each case during the applicable distribution period, Early
Determination Period or Determination Period (such index referred to herein as a
"Price Reference Index"). ComPS for which the Applicable Index is a Price
Reference Index in which all distributions and the Principal Amount are indexed
to the value at any time in U.S. dollars (the "Dollar Equivalent Value") of
bullion (i.e., gold, silver, platinum or palladium) will be referred to as
"Bullion ComPS". For the purposes of this Prospectus, "Principal Amount" shall
mean (a) in the case of Bullion ComPS, the applicable portion of the applicable
fixing price of the applicable amount of the applicable bullion commodity at any
time (the "Bullion ComPS Principal Amount"), (b) in the case of all other
Preferred Securities, the Redemption Value, Early Redemption Value or stated
liquidation preference thereof, as applicable, as if determined as of such time,
and (c) in the case of any Related Note, the principal amount thereof at such
time determined pursuant to the terms thereof.
Each commodity underlying the Applicable Index will be one of the commodities
included in the J.P. Morgan Commodity Index (the "JPMCI") (i.e., aluminum,
copper, nickel, zinc, heating oil, natural gas, unleaded gasoline, crude oil,
gold, silver and platinum), one of the JPMCI sub-indices, palladium or such
other commodity as may be specified in the applicable Prospectus Supplement. As
described herein, the JPMCI is computed on an excess return and a total return
basis. The variations of the JPMCI, including the permutations of the JPMCI in
the form of sub-indices, which may be based on one or more commodities (whether
computed on an excess return or total return basis) and which have been or may
be originated and calculated by Morgan Guaranty, are collectively referred to
herein as the "JPM Indices". JPM Indices which are based upon only one
underlying commodity (whether computed on an excess return or total return
basis) are referred to as "JPM Individual Indices".
ComPS are principal-at-risk securities linked directly to the performance of an
Applicable Index. For Bullion ComPS, if the index rises from the starting value
(which is set on the day of pricing), the Redemption Value of such ComPS will be
greater than the original issue price. If the Applicable Index declines from the
starting value, the Redemption Value of such ComPS will be less than the
original issue price. For Excess Return or Total Return ComPS, if the Applicable
Index decreases over the life of the ComPS, or if the percentage increase in the
Applicable Index is less than the amount of the Factor, the Redemption Value of
such ComPS will be less than the Issue Price. If the percentage increase in the
Applicable Index is greater than the amount of the Factor, the Redemption Value
will be greater than the Issue Price. In no circumstances will the Redemption
Value of the ComPS be less than zero, but the Redemption Value could be more or
less than the issue price. Because an investor's principal redemption is linked
to the performance of an Applicable Index calculation, it is important to
understand on what the Applicable Index calculation is based. Subject to the
more specific discussion of each item elsewhere in this Prospectus and in the
relevant Prospectus Supplement, following is a general summary of Bullion ComPS,
Excess Return ComPS and Total Return ComPS:
BULLION COMPS
Bullion ComPS, which are linked to the cash price of bullion (i.e., gold,
silver, platinum or palladium), pay both dividends and principal based on the
price of the applicable bullion. The Principal Amount of a
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<PAGE> 54
Bullion ComPS is the Dollar Equivalent Value of a certain number or fraction of
ounces of the applicable bullion. Each dividend is calculated as a percentage
rate of the Principal Amount (which will fluctuate) Each full dividend will be
equal to the applicable fraction of the annual dividend rate times the Dollar
Equivalent Value of the spot price of the applicable bullion at such time in the
London bullion market multiplied by the fractional number of ounces to which
each Bullion ComPS is linked. Thus, the amount of each dividend will vary. Upon
redemption, the Redemption Value will be equal to the Dollar Equivalent Value of
the 10-day average of the spot price of the applicable bullion in the London
bullion market multiplied by the number or fraction of ounces of the applicable
bullion to which each Bullion ComPS is linked. Therefore, both the dividend
payments and the Redemption Value will fluctuate based on the spot price of the
applicable bullion determined in the London bullion markets. Any events which
adversely affect the spot price of the applicable bullion will adversely affect
both the dividend payments on and the Redemption Value of such Bullion ComPS.
EXCESS RETURN COMPS
ComPS which are linked to an Excess Return Index pay a fixed or floating
dividend rate on the Face Amount of such ComPS (which will equal the initial
price) and the Redemption Value of such ComPS is linked to the performance of
the applicable Excess Return Index, reduced by the applicable Factor. At
maturity, an investor will receive a principal amount determined by the
following formula: Face Amount X (the 10-day average of the Applicable Index/the
Applicable Index set on the day of pricing, minus the Factor). Thus, the
Redemption Value is linked directly to the performance of the applicable Excess
Return Index, reduced by the applicable Factor (e.g., if the ending average
ending value of the Applicable Index is twice the beginning value, the
Redemption Value will be twice the initial price, reduced by the applicable
Factor). The Factor is a percentage which reduces the principal amount to
account for the planned expenses to be incurred by the issuer in replicating the
Applicable Index and issuing the ComPS.
An Excess Return Index, which is described more fully herein under "The JPM
Indices--Excess Return Methodology", represents the cumulative return of holding
an unlevered position in the designated nearby commodity futures contracts
underlying such Applicable Index. Generally, since each Excess Return Index is
linked directly (i.e., on a one-to-one basis) to the underlying futures
contracts, a 1% change on any day in the value of the specific underlying
designated futures contract will create a 1% change in the value of the
Applicable Index for such day. Because the designated futures contracts
underlying the Excess Return indices have maturities (generally less than three
months) which are shorter than the maturity of the ComPS, the index calculation
methodology replaces the underlying contract used to determined the daily change
in the value of the Applicable Index with the next designated contract of the
same commodity on a periodic basis. This process of replacement is called
"rolling", and the 5-day period during which the replacement occurs is called
the "Rollover Period". For any month during which a roll occurs, the daily
change in value of an Excess Return Index for all days prior to the Rollover
Period is calculated as 100% of the daily change of the existing ("old")
underlying designated contract. Beginning with the first day after the beginning
of the Rollover Period, the daily change in an Excess Return Index is calculated
based 80% on the percentage change of the old contract and 20% on the percentage
change in the replacement ("new") designated contract. Similar 20% adjustments
are made in the weights attributable to each contract's change such that, by the
day after the Rollover Period ends and for all subsequent days until the next
Rollover Period, 100% of the daily index change is attributable to the
percentage change of the newly-designated contract.
Therefore, ComPS linked to an Excess Return Index pay dividends which are a
fixed or floating percentage of the Face Amount, and pay a principal amount upon
redemption or at maturity which varies directly with the performance of an
Excess Return Index, reduced by the applicable Factor. The change in an Excess
Return Index is linked directly to the percentage change in the designated
contracts underlying such index. Thus, any events which affect the designated
contracts underlying such Excess Return Index may affect the Redemption Value of
such ComPS.
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<PAGE> 55
TOTAL RETURN COMPS
ComPS which are linked to a Total Return Index will pay a fixed or floating
dividend based on the Face Amount (i.e., the initial price) of such ComPS and
the principal receivable upon redemption or at maturity is directly linked to
the performance of a Total Return Index, reduced by the applicable Factor. At
maturity, an investor in Total Return ComPS will receive a principal amount
determined by the following formula: Face Amount X (the 10-day average of the
Applicable Index/the Applicable Index set on the day of pricing, minus the
Factor). The Factor is a percentage which reduces the principal amount to
account for the planned expenses to be incurred by the issuer in replicating the
Applicable Index and issuing the ComPS. Thus, the Redemption Value is linked
directly to the performance of the applicable Total Return Index (e.g., if the
average ending value of the Applicable Index is twice the beginning value, the
Redemption Value will be twice the initial price reduced by the Factor).
However, the Redemption Value may never be less than zero.
A Total Return Index, which is described more fully herein under "The JPM
Indices--Total Return Methodology", represents the cumulative return of holding
an unlevered position in the designated nearby commodity futures contracts
underlying such Total Return Index, plus a collateral yield on such fluctuating
index value using the most recently auctioned 3-month rate for U.S. Treasury
bills. Generally, since a Total Return Index is linked directly to the
underlying futures contracts, a 1% change on any day in the specific underlying
designated futures contract will result in a 1% change in the applicable Total
Return Index for such day (not including any change in value resulting from the
Collateral Yield). The designated futures contracts underlying Total Return
Indices must also be "rolled" as described above under "Excess Return ComPS".
Therefore, ComPS linked to a Total Return Index will bear dividends which are a
fixed or floating percentage of the Face Amount, and the principal payable upon
redemption or at maturity is linked directly to the performance of a Total
Return Index (less the Factor). The change in each Total Return Index is linked
directly to the percentage change in the designated contracts underlying such
index, plus the collateral yield on the most recently auctioned 3-month U.S.
Treasury bill rate. Thus, any events which affect the designated contracts
underlying any Total Return Index may affect the Redemption Value of such ComPS.
CALCULATION OF REDEMPTION VALUE
The Redemption Value of any particular series of ComPS will be determined in
accordance with one of the following methodologies (however, such Redemption
Value will never be less than zero):
Excess Return Index. In the case of ComPS for which the Applicable
Index is an Excess Return Index, the Redemption Value payable in respect of
the ComPS on the Settlement Date will be determined by the Calculation
Agent based on the following formula:
<TABLE>
<C> <C> <C> <S> <C>
Applicable Index Settlement Value
Redemption Value = FA X ( -------------------------------------- - Factor )
Applicable Index Commencement Value
</TABLE>
where "FA" refers to the Face Amount of the ComPS, "Applicable Index
Settlement Value" refers to the arithmetic average of the values of the
Applicable Index for the 10 consecutive days on which open-outcry
trading on either the New York Mercantile Exchange ("NYMEX") or the
London Metal Exchange (the "LME") is scheduled to occur or occurs (each,
a "Trading Day") and on which no Market Disruption Event occurs
immediately following the 20th scheduled Business Day prior to Stated
Maturity (such 10 days, the "Determination Period") (calculated in
accordance with the methodology described below under the caption "The
JPM Indices--Excess Return Index"); provided, that if a Market
Disruption Event remains in effect for longer than 20 consecutive
Trading Days (or such period as may be specified in the applicable
Prospectus Supplement) falling within such Determination Period and in
the reasonable judgment of Morgan Guaranty such Market Disruption Event
is likely to remain in effect, then the Applicable Index Settlement
Value for such days may be determined by Morgan Guaranty in good faith
based on
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<PAGE> 56
alternative pricing sources reasonably believed by it to be indicative
of then-prevailing prices for transactions with a notional principal
amount equal to the Principal Amount of the outstanding ComPS, although
it will have no obligation to do so, and such value will be utilized in
the calculation of the Redemption Value for such days; "Applicable Index
Commencement Value" means the value of the Applicable Index determined
on the date of issuance of such ComPS, as specified in the applicable
Prospectus Supplement; and Factor shall be the amount provided in the
Applicable Prospectus Supplement. In the case of any Prospectus
Supplement providing for an early determination of Applicable Index
Settlement Value, upon the occurrence of such an event, the Applicable
Index Settlement Value shall have the value so determined.
Total Return Index. In the case of ComPS for which the Applicable Index
is a Total Return Index, the Redemption Value payable in respect of such
ComPS on the Settlement Date will be determined by the Calculation Agent
based on the following formula:
<TABLE>
<C> <C> <C> <S> <C>
Applicable Index Settlement Value
Redemption Value = FA X ( -------------------------------------- - Factor )
Applicable Index Commencement Value
</TABLE>
where each of "FA", "Applicable Index Settlement Value" and "Applicable
Index Commencement Value" refer to the respective definitions set forth
above under Excess Return Index, except that in the case of the
Applicable Index Settlement Value, such value shall be determined in
accordance with the methodology described below under the caption "The
JPM Indices--Total Return Index", and "Factor" shall be the amount
provided in the applicable Prospectus Supplement. In the case of any
Prospectus Supplement providing for an early determination of Applicable
Index Settlement Value upon the occurrence of certain events, upon the
occurrence of such an event, the Applicable Index Settlement Value shall
have the value so determined.
Price Reference Index. In the case of ComPS for which the Applicable
Index is a Price Reference Index, the Redemption Value payable in respect
of such ComPS on the Settlement Date will be determined by the Calculation
Agent (i) in the case of Bullion ComPS, by taking the arithmetic average of
the Dollar Equivalent Value of the applicable portion of the applicable
fixing price for the applicable amount of the applicable bullion commodity
during the Determination Period, and (ii) in the case of all other Price
Reference Index ComPS, by multiplying (a) the Face Amount of such ComPS by
(b) the quotient of (I) the arithmetic average of the closing prices of the
underlying commodity as reported in the pricing source identified in the
applicable Prospectus Supplement for each day of the Determination Period
(i.e., the Applicable Index Settlement Value), divided by (II) the
Applicable Index Commencement Value (as defined above). The Redemption
Value calculations for Price Reference Index ComPS will also be subject to
Market Disruption Events similar to those described above, as specified in
the applicable Prospectus Supplements.
The Calculation Agent in its sole discretion will be responsible for determining
if a Market Disruption Event has occurred. In no event shall the Redemption
Value payable in respect of any series of ComPS be less than zero, although the
Redemption Value of any series of ComPS may be more or less than the Face Amount
of such series.
EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
The JPMCI Policy Committee advises Morgan Guaranty with respect to, among other
things, the composition of the JPM Indices, the price sources upon which the JPM
Indices are based (i.e., the Benchmark Contracts), and the weightings and
calculation methodology of the JPM Indices, with a view toward maintaining the
JPM Indices as appropriate commodity investment benchmarks that serve as a
measure of performance of the commodity markets. Currently, the inclusion
requirements for the futures contracts underlying the JPM Indices require that
such contracts be sufficiently liquid and representative price sources. It is
possible, however, that any such
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<PAGE> 57
underlying contract could become less liquid or representative and, as a result,
the JPMCI Policy Committee may recommend a modification in the calculation
methodology or the contracts underlying the JPM Indices and, therefore, the
Applicable Index. Any such replacement contract (i) will be required to satisfy
the JPMCI Inclusion Criteria, as described below and under the caption "The
JPMCI Policy Committee", (ii) must be traded in a market or with a
self-regulator which has established either (a) a comprehensive information
sharing agreement with the exchange, if any, on which the ComPS are then traded
or (b) suitable alternative arrangements with the Commission and (iii) will be
with respect to the same general commodity type as the contract being replaced
(e.g., assuming the JPMCI Policy Committee recommends a modification and
assuming the requirements of clauses (i) and (ii) are satisfied, a NYMEX crude
oil futures contract may be replaced by an International Petroleum Exchange
crude oil futures contract). Under no circumstances will the general commodity
type underlying the futures contract be changed (e.g., a crude oil futures
contract may not be replaced by a gold futures contract).
If at any time no contracts satisfying both clauses (i) and (ii) of the previous
paragraph can be found to serve as a Benchmark Contract for any series of ComPS
the Applicable Index for which is an Excess Return Index or a Total Return
Index, the Applicable Index Settlement Value of such ComPS will be determined at
such time (in accordance with the methodology set forth in the applicable
Prospectus Supplement) as if the last date of the inclusion of the final
Benchmark Contract with respect to such Applicable Index in the JPM Indices were
the Stated Maturity. However, such ComPS will not be redeemed on such date;
rather, such ComPS will remain outstanding to Stated Maturity thereof, will
continue to be entitled to dividends and will be redeemed at Stated Maturity for
a Redemption Value calculated using the Applicable Index Settlement Value
determined at such time as no contract satisfying clauses (i) and (ii) of the
previous paragraph was able to be found. Such ComPS will also be subject to
redemption upon the occurrence of a Special Event and optional redemption on
each Early Redemption Date if specified in the applicable Prospectus Supplement
(treating the Applicable Index Settlement Value determined pursuant to the terms
of this paragraph as the Applicable Index Early Settlement Value for any such
Early Redemption Date).
Additionally, if at any time the Benchmark Contracts then serving as the basis
for calculating the Applicable Index with respect to any series of ComPS the
Applicable Index for which is an Excess Return Index or a Total Return Index, or
the trading thereof, become subject to any increased cost or additional tax,
whether imposed by any exchange or otherwise, Morgan Guaranty reserves the right
to (x) designate a replacement Benchmark Contract, satisfying both clauses (i)
and (ii) of the second preceding paragraph, which contract is subject to an
amount of cost or tax less than or equal to such increased amount or (y) if no
contract satisfying clause (x) of this paragraph is designated by J.P. Morgan,
to cause, at its option, the Applicable Index Settlement Value of such ComPS to
be determined at such time (in accordance with the methodology set forth in the
applicable Prospectus Supplement) as if the date of such increase in cost or tax
(or, in Morgan Guaranty's discretion, the last calendar day of the month in
which the determination of the Applicable Index Settlement Value is completed)
were the Stated Maturity. However, such ComPS will not be redeemed on such date;
rather, such ComPS will remain outstanding to Stated Maturity thereof, will
continue to be entitled to dividends and will be redeemed at Stated Maturity for
a Redemption Value calculated using the Applicable Index Settlement Value
determined pursuant to the terms of this paragraph. Such ComPS will also be
subject to redemption upon the occurrence of a Special Event and optional
redemption on each Early Redemption Date if specified in the applicable
Prospectus Supplement (treating the Applicable Index Settlement Value determined
pursuant to the terms of this paragraph as the Applicable Index Early Settlement
Value for any such Early Redemption Date). See "Risk Factors With Respect to
ComPS--Potential Modifications to the JPM Indices and/or the Applicable Index."
As discussed below, in order to satisfy the JPMCI Inclusion Criteria, a futures
contract must (i) be priced in U.S. dollars, or if priced in a foreign currency,
the exchange on which the contract is traded must publish an official exchange
rate for conversion of the futures contract price into U.S. dollars and such
currency must be freely convertible into U.S. dollars; (ii) be traded on a
regulated futures exchange located in the United States, Canada, the United
Kingdom, Japan, Singapore or any country which at such time is a member of the
Organization of Economic Cooperation and Development (an "O.E.C.D. country") and
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<PAGE> 58
(iii) have a minimum annual trading volume of 300,000 contracts or $500,000,000
for all contract months.
EARLY REDEMPTION UPON THE OCCURRENCE OF A SPECIAL EVENT
OR AT THE ELECTION OF THE HOLDERS OF THE COMPS
The ComPS will be subject to redemption prior to their Stated Maturity upon the
occurrence of a Special Event (a "Special Event Redemption") or, if so indicated
in the applicable Prospectus Supplement, at the election of the holders of such
series of ComPS (an "Optional Redemption") on any one of the dates set forth in
the applicable Prospectus Supplement (each such date, an "Optional Redemption
Date"; each such date and each date on which a Special Event Redemption or a
Liquidation Distribution shall occur being referred to herein as an "Early
Redemption Date"). In order to effect an Optional Redemption, the holder of such
ComPS will be required to provide notice to DTC (or, in the case of Preferred
Securities which are not solely book-entry securities, the Company's transfer
agent) as specified in the applicable Prospectus Supplement. In the case of
notice provided through DTC, the notice provided by DTC to the Company or its
transfer agent (the "Applicable Notice") shall be final and irrevocable upon
receipt. The redemption value of ComPS redeemed prior to their Stated Maturity
(the "Early Redemption Value") shall be determined during the 10 consecutive
Trading Days which are Business Days on which U.S. Treasury bond markets are
open and on which no Market Disruption Event occurs immediately following the
20th scheduled Business Day prior to the applicable Early Redemption Date (such
ten days, the "Early Determination Period"), provided, however, that the Early
Redemption Period will not begin until the day after the Company has received
the Applicable Notice. The Early Redemption Value shall be equal to the average
for the 10 days of the Early Determination Period of the sum for each such day
of the results of the following (to be calculated with respect to each portion
of the Face Amount of such ComPS which must be redeemed on the same date):
<TABLE>
<C> <C> <C> <S> <C> <C>
IESV
FA X [(Dividend + Unused costs) X AF + ( ----- - Factor ) X PVF]
ICV
</TABLE>
Where "FA" means (i) in the case of Bullion ComPS, each portion of the
Bullion ComPS Principal Amount thereof which must be redeemed on the
same date and (ii) in the case of all other ComPS, each portion of the
Face Amount of the ComPS which must be redeemed on the same date.
In the case of ComPS for which the entire Face Amount matures on the same date,
the average for each day of the Early Determination Period of such equation
shall equal the Early Redemption Value. In the case of ComPS for which portions
of the Face Amount must be redeemed on different dates, the Early Redemption
Value shall equal the average over the Early Redemption Period of the sum of the
results for each day of such equation for each such portion of the Face Amount.
The Company shall pay the Early Redemption Value, together with all accrued but
unpaid dividends from quarterly periods prior to the Early Redemption Date, on
the Early Redemption Date. The Early Redemption Value shall never be less than
zero. Other terms used in the formula above shall have the meanings set forth
below (with each Factor, yield, lease rate, rate and percentage rate expressed
in decimal form (e.g., 3% equals 0.03)):
For all ComPS
"Dividend" means the per annum rate of dividends on the Face Amount (or,
in the case of Bullion ComPS, the Principal Amount), as specified in the
applicable Prospectus Supplement.
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<PAGE> 59
"AF" means the Annuity Factor for the term remaining from the applicable
Early Redemption Date until the mandatory redemption of such portion of
the Face Amount (such remaining term being referred to herein as the
"Remaining Maturity"), which shall be determined in accordance with the
following formula:
(1-V(N))/y
where "V" is equal to (1/(1 + y/4)) and "y" is the yield which shall
be equal to the Base Yield (as defined below) plus the Applicable
Spread (as defined below), converted to an annualized quarterly
compounded rate calculated on the basis of a 360-day year of twelve
30-day months. The "Base Yield" will equal (i) in the case of Bullion
ComPS, the single lowest lease rate obtained by polling three dealers
in such loans for a loan to Morgan Guaranty (or, in the case of a
Liquidation Distribution, to a notional counterparty rated A or
higher) of such bullion in the same notional Bullion ComPS Principal
Amount, terms, amortization and maturity as such ComPS (which may be
the same rate for all days and/or for each Remaining Maturity) or, if
there is no such rate, as calculated by the Calculation Agent in good
faith, and (ii) in the case of any other ComPS, the Constant Maturity
Treasury Rate for the Remaining Maturity among the applicable
Constant Maturity Treasury Rates set forth in Statistical Release
H.15(519) as such appears on Telerate Page 7051 under the heading
"Daily Treasury Constant Maturities from the Economic Bulletin Board"
(or its successor or such other pricing source as the Calculation
Agent may reasonably select) for each date of the Early Determination
Period. If the applicable rate for the Remaining Maturity is not
published on such page, the applicable rate will be determined by
calendar month weighted linear interpolation between one Constant
Maturity Treasury rate with respect to a maturity up to or equal to
the Remaining Maturity and the other Constant Maturity Treasury rate
with respect to a maturity greater than the Remaining Maturity. If
such information ceases to be provided or is not available for any
day of the Early Determination Period by the end of the Business Day
next succeeding the last day of the Early Determination Period, the
Base Yield for such day will be calculated by the Calculation Agent
by calendar month weighted linear interpolation among the rates it
shall have obtained for such applicable date by polling three dealers
of such instruments in New York, New York for the bid side yield to
maturity of the most recently issued on-the-run direct non-callable
fixed rate obligations of the United States Treasury ("U.S.
Government Securities") with a maturity equal to the Remaining
Maturity or, if no such maturity exists, by calendar month weighted
linear interpolation among rates so obtained with a maturity up to or
equal to the Remaining Maturity and a maturity greater than the
Remaining Maturity.
The "Applicable Spread" will equal (i) for all ComPS other than
Bullion ComPS, (a) in the case of a Liquidation Distribution, the
offer side U.S. dollar swap spread for the maturity closest to the
Remaining Maturity as published by International Financing Review
("IFR") Corporate Eye on Telerate Page 42276 (or such successor as
the Calculation Agent may reasonably determine) for each day of the
Early Determination Period (except that, in the case of a
determination for which the Remaining Maturity is one year or less,
"Applicable Spread" will equal the difference between then-current
yields on U.S. dollar LIBOR-based deposits and yields on Treasury
Bills with maturities approximately equal to the Remaining Maturity
as determined by the Calculation Agent) (the "Swap Spread") or (b) in
the case of all other redemptions, the greater of the Swap Spread and
the yield spread between (I) the average of quotations from three
dealers in such instruments chosen in the discretion of the
Calculation Agent for notional issuances of debt securities of Morgan
Guaranty in a notional amount equal to the Face Amount of the ComPS
being redeemed at such time (or, if such notional amount is smaller
than commercially practicable, the smallest commercially practicable
amount) and having a similar maturity and similar subordination
provisions as those contained in the applicable Related Note and (II)
U.S. Government Securities of
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approximately similar maturities, as such yield spread may be
reasonably determined by the Calculation Agent (such yield spread,
the "Funding Spread") or (ii) for Bullion ComPS, (x) in the case of a
Liquidation Distribution, zero, and (y) in all other cases, the
difference between the Funding Spread and the Swap Spread, but never
less than zero. If the Telerate Page (or any successor) referred to
in clause (a) of the preceding sentence is unavailable or ceases to
report such swap spread, the Calculation Agent shall calculate such
spread based on (i) a source supplying the equivalent information or
(ii) if no such source is available, the average quotations from
three dealers in U.S. dollar swaps chosen by the Calculation Agent in
its reasonable discretion. As of the date of this Prospectus, J.P.
Morgan is among the six dealers of such instruments currently polled
for the purpose of calculating the swap spread published by IFR on
Telerate Page 42276.
"PVF" means the Present Value Factor for Remaining Maturity, which shall
be determined as follows:
(1/(1+y/4)(N))
where "y" has the meaning set forth above in the definition of
Annuity Factor.
"ICV" means the Applicable Index Commencement Value, or the value of the
Applicable Index determined on the date of issuance of the applicable
series of ComPS, as specified in the applicable Prospectus Supplement.
"N" means the number of full quarterly periods in the Remaining Maturity
(e.g., one year = N = 4).
For ComPS calculated based on a Price Reference Index:
"Unused costs" means zero.
"IESV" means the Applicable Index Early Settlement Value, which shall be
equal to (i) in the case of Bullion ComPS, the ICV, and (ii) in the case
of all other Price Reference Index ComPS, the Applicable Index for such
day of the Early Determination Period.
For ComPS calculated based on an Excess Return Index:
"Unused costs" means the number specified as such in the applicable
Prospectus Supplement.
"IESV" means the Applicable Index Early Settlement Value, which shall be
equal to the Applicable Index for such day of the Early Determination
Period (which, if an Applicable Index Settlement Value has been
permanently determined for such ComPS prior to such time, shall equal
the value so determined).
"Factor" means the number specified in the applicable Prospectus
Supplement.
For ComPS calculated based on a Total Return Index:
"Unused costs" means the number specified as such in the applicable
Prospectus Supplement.
"IESV" means the product of Applicable Index for such day multiplied by
(ii) the Future Value Factor (which, if an Applicable Index Settlement
Value has been permanently determined for such ComPS prior to such time,
shall equal the value so determined).
"Future Value Factor" shall be determined with reference to the
following formula:
(1 + BY/4)(N)
where BY is the Base Yield (as determined for such day), computed on an
annualized, quarterly compounded basis, expressed in decimal form.
"Factor" means the number specified in the applicable Prospectus
Supplement.
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DETERMINATION PERIOD AND SETTLEMENT DATE
Unless otherwise specified in the applicable Prospectus Supplement, the term
"Determination Period" with respect to Excess Return, Total Return and Price
Reference Indices shall mean the period of ten consecutive Trading Days on which
no Market Disruption Event occurs commencing immediately following the twentieth
scheduled Business Day prior to the Stated Maturity of such ComPS.
The date on which the Early Redemption Value or Redemption Value, as applicable,
will first be payable (the "Settlement Date") in respect of any series of ComPS
will be the later of the date on which such ComPS are eligible for redemption
(the "Redemption Date") or the fifth Business Day after the completion of the
Early Determination Period or the Determination Period, as applicable.
MARKET DISRUPTION EVENTS
As determined by Morgan Guaranty, the occurrence of one or more of the following
events on any Trading Day shall constitute a "Market Disruption Event" with
respect to a relevant commodity (a "Relevant Commodity"), any benchmark contract
underlying the Applicable Index (a "Relevant Contract"), the market participants
or association responsible for determining the price of a commodity (the "Fixing
Association") which determines the price of a Relevant Commodity (a "Relevant
Fixing Association") or an exchange on which a Relevant Contract is traded (a
"Relevant Exchange"): (a) a day on which the fluctuation of the price of the
applicable commodity or commodity futures contract is materially limited by the
rules of the Relevant Exchange or Relevant Fixing Association setting the
maximum or minimum price for such day (a "Limit Price"); (b) a day on which the
Settlement Price is the Limit Price; (c) the failure of the Relevant Exchange or
Relevant Fixing Association to determine, announce or publish the Settlement or
Fixing price with respect to the Relevant Contract or commodity (as the case may
be); (d) the material suspension of trading in the Relevant Commodity by members
of the Relevant Fixing Association or otherwise or any Relevant Contract with
respect to such commodity or in any other futures contract affecting the
Relevant Contract with respect to such commodity on the Relevant Exchange; (e)
the failure of trading to commence, or the permanent discontinuation of trading,
in the Relevant Commodity by the members of the Relevant Fixing Association or
otherwise or any Relevant Contract on the Relevant Exchange and (f) the
imposition of any material limitation on trading in the Relevant Commodity by
the members of the Relevant Fixing Association or otherwise or any Relevant
Contract on the Relevant Exchange.
If a Market Disruption Event occurs and is continuing during the Determination
Period or any Early Determination Period with respect to any series of ComPS,
the Determination Period or such Early Determination Period will be extended,
with the result that the calculation of the Applicable Index Settlement Value
and the settlement of such ComPS may be delayed for an indefinite period of time
including, in the case of an extension of the Determination Period, an
indefinite period of time after the Stated Maturity. With respect to ComPS for
which the Applicable Index is either a Price Reference Index or an Excess Return
Index, in the event that the payment of the Redemption Value is postponed beyond
the Stated Maturity, no distributions or dividends will accrue or be payable
with respect to such ComPS, but interest will accrue on the Face Amount from and
including the Stated Maturity to but excluding the last day of the Determination
Period at a rate equal to the day-weighted average of the Fed Effective Rate
until the end of the Determination Period, as reported on Telerate Page 118 (or
its successor or such other pricing source as the Calculation Agent may
reasonably select), less in each case 0.25%, calculated on the basis of a year
of 360 days and payable for the actual number of days elapsed. Payment of such
interest amount and the Redemption Value will be made on the fifth Business Day
following the last day of the Determination Period. With respect to ComPS for
which the Applicable Index is a Total Return Index, in the event that the
payment of the Redemption Value is postponed beyond the Stated Maturity, no
distributions will be payable, and no interest or dividend in respect of such
ComPS will accrue or be payable, after the Stated Maturity. With respect to all
ComPS, in the event that the payment of the Early Redemption Value is postponed
beyond the applicable Early Redemption Date, no distributions will be payable,
and no interest or dividends in respect of such ComPS will accrue or be payable,
after such Early Redemption Date.
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CALCULATIONS
As discussed above, the Company will appoint Morgan Guaranty as Calculation
Agent for the purpose of determining the Applicable Index Settlement Value, as
described herein, and calculating the Early Redemption Value and Redemption
Value and, if applicable, the dividends payable in respect of any ComPS. The
Calculation Agent will determine the Applicable Index Settlement Value and the
Early Redemption Value and Redemption Value of any ComPS and, if applicable,
dividends payable in good faith, which determination shall be final and binding
on the Company and the holders of such ComPS. Morgan Guaranty as Calculation
Agent will also (i) determine when a Market Disruption Event on any Early
Determination Day or Determination Day is sufficiently material to not use such
day in the applicable calculation and (ii) be responsible for the choice of an
alternative price source (if any) upon a Market Disruption Event of sufficient
length, as described in the applicable Prospectus Supplement. Also, Morgan
Guaranty and its affiliates may from time to time engage in transactions with
and perform services for the Company in the ordinary course of business.
LICENSE OF APPLICABLE INDEX
Morgan Guaranty will enter into a license agreement (the "License Agreement")
granting the Company a non-exclusive license to use the Applicable Index in
connection with each series of ComPS the Applicable Index for which is an Excess
Return Index or a Total Return Index. The License Agreement will provide that,
in the event that Morgan Guaranty fails to provide the Applicable Index to the
Company on a regular basis with the result that the Company is unable to
determine the Applicable Index Settlement Value and the Early Redemption Value
and Redemption Value payable in respect of such ComPS, the Company, its
Calculation Agent or its authorized designee (which shall be a major accounting
firm appointed by the Company) shall be authorized to calculate the Applicable
Index. In such event, Morgan Guaranty will provide the Company, its Calculation
Agent or such accounting firm with any and all information which may be
necessary in order to enable the Company, its Calculation Agent or such
accounting firm to perform such calculations pursuant to the same methodology to
be applied by Morgan Guaranty.
Morgan Guaranty may also enter into license agreements with any or all of the
exchanges on which any Benchmark Contract or commodity is traded with respect to
the information provided by such exchanges. However, no such license agreement
will contain any obligation or liability provisions with respect to provision of
such information by the relevant exchange. Furthermore, no exchange on which any
Benchmark Contract or commodity is traded is or will be an issuer, underwriter
or guarantor of any Preferred Security, nor has any such exchange approved the
Preferred Securities or any terms thereof, nor is any such exchange responsible
for the calculation of any Applicable Index. However, any such exchange may from
time to time change any rule or bylaw or take emergency action under its rules
which could affect settlement prices of the futures contracts or commodities
underlying an Applicable Index. Any such change which causes a decrease in such
settlement prices could adversely effect the value of such Applicable Index.
RISK FACTORS WITH RESPECT TO ALL PREFERRED SECURITIES
LIMITATIONS ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE
RELATED NOTE
The Guarantee will be effective with respect to each series of Preferred
Securities from the time of issuance of such Preferred Securities but will not
apply to any payment of distributions or other amounts due in respect of such
Preferred Securities to the extent Morgan Guaranty has failed to make a payment
of principal or interest on the applicable Related Note. To the extent Morgan
Guaranty were to default on its obligation to pay amounts payable on the
applicable Related Note, the Company would lack available funds for the payment
of distributions on or amounts payable on redemption of such Preferred
Securities and, in such event, holders of such Preferred Securities would not be
able to rely on the Guarantee for payment of such amounts. Instead, holders of
such Preferred Securities would rely on the enforcement by the Company of its
rights as holder of the applicable Related Note against Morgan Guaranty and as
holder
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<PAGE> 63
of the Related Note Guarantee against J.P. Morgan. J.P. Morgan, through its
obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement
and the Expense Agreement, taken together, will provide a full and unconditional
guarantee, on a subordinated basis, of payments due on the Preferred Securities.
See "Description of the Guarantee" and "Description of the Related Note
Guarantee".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, unless waived by Morgan Guaranty or
subject to cure as specified in the applicable Prospectus Supplement, Morgan
Guaranty shall have the right to redeem any or all Related Notes, in whole or in
part, in which event the Company will redeem the related Preferred Securities
and Common Securities on a pro rata basis to the same extent as the Principal
Amount of the Related Notes is redeemed by Morgan Guaranty.
A Special Event is either (i) a Tax Event or (ii) an Investment Company Event. A
Special Event may occur at any time.
In the case of any series of ComPS, upon the occurrence of a Special Event it is
possible that the market price of such ComPS in any existing secondary market
will decline.
LIMITED VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights relating to a
payment default on or adverse change to the Preferred Securities, and will not
be entitled to vote to appoint, remove or replace the Managing Members of the
Company (J.P. Morgan and J.P. Morgan Ventures Corporation, a Delaware
corporation), which voting rights are vested exclusively in the holders of the
Common Securities.
TRADING PRICE MAY NOT REFLECT ACTUAL ECONOMIC VALUE
Preferred Securities are expected to trade at a price that takes into account
the value, if any, of accrued and unpaid distributions; thus, purchasers will
not pay and sellers will not receive any accrued and unpaid interest with
respect to their pro rata interests in the applicable Related Note owned through
the applicable Preferred Securities that is not already included in the trading
price of the applicable Preferred Securities.
POSSIBLE ILLIQUIDITY OF PREFERRED SECURITIES
It is possible that no secondary market will develop and continue to exist with
respect to any series of Preferred Securities. If no such market develops, the
liquidity of such Preferred Securities may be adversely affected. Furthermore,
there can be no assurance as to the market prices for any Preferred Securities
in any secondary market which does develop. Accordingly, any Preferred
Securities that an investor may purchase, whether pursuant to the offer made
hereby or in any such secondary market, may trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
NO RIGHT TO INTEREST ON RELATED NOTE
Because holders of Preferred Securities are essentially investing in a pro rata
share of a Related Note, prospective purchasers of Preferred Securities are also
making an investment decision with regard to such Related Note and should
carefully review all the information regarding the Related Note contained herein
and in the relevant Prospectus Supplement. However, investors in Preferred
Securities have no right to direct interest distributions on the applicable
Related Note.
IMPOSITION OF BANK REGULATORY RESTRICTIONS
The Company's ability to make distributions and other payments on the Preferred
Securities is dependent upon Morgan Guaranty's making interest and other
payments on each Related Note as and when required or collection with respect to
such Related Note under the Related Note Guarantee. As noted herein, Morgan
Guaranty is subject to examination and regulation by U.S. federal and state
banking authorities,
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and although there is no current restriction on Morgan Guaranty's ability to
make payments under any Related Note, certain other transactions with
affiliates, including the Company, are or may in the future become subject to
restrictions imposed by bank regulatory authorities.
RISK FACTORS WITH RESPECT TO COMPS
INDEXATION OF PRINCIPAL AMOUNT
The Principal Amount of each series of ComPS, which is initially equal to the
Face Amount of such series, will vary until Stated Maturity of such ComPS in
relation to an Applicable Index, reduced by the Factor. The Principal Amount
repayable on any Optional Redemption Date, upon the occurrence of any Special
Event Redemption or in connection with any Liquidation Distribution or at Stated
Maturity of such ComPS will be determined, pursuant to the terms described in
the applicable Prospectus Supplement, by comparing the level of the Applicable
Index at the date of issuance of such ComPS with the level determined pursuant
to the terms thereof for any such date of redemption, reduced by the Factor.
Accordingly, the Principal Amount of a series of ComPS to be received upon any
date of redemption will fluctuate based on the Applicable Index for such series
(reduced by the Factor) and may be lower than the Face Amount for such series.
Thus, if the Applicable Index for a series of ComPS decreases over the life of
such ComPS, or if the percentage increase in the Applicable Index for such
series is less than the amount of the Factor for such series, the Redemption
Value for such series will be less than the Face Amount for such series. If the
percentage increase in the Applicable Index for such series is greater than the
amount of the Factor for such series, the Redemption Value for such series will
be greater than the Face Amount for such series.
EFFECT OF TRADING IN THE FUTURES CONTRACTS AND RELATED COMMODITIES AND
INSTRUMENTS
Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively
involved in the trading of the futures contracts or the commodities underlying
the Applicable Index and other instruments and derivative products based
thereon. Morgan Guaranty, in particular, is an active participant in various
commodity markets including the physical petroleum, precious and base metals and
related derivatives markets. JPMSI and other affiliates may also issue or
underwrite, or authorize unaffiliated entities to issue or underwrite, other
securities or financial instruments with returns indexed to the Applicable Index
or one or more of the JPM Indices. Morgan Guaranty has licensed, and may in the
future license, the Applicable Index, the JPM Indices, and related indices and
sub-indices for use by affiliated and unaffiliated parties, for publication in
newspapers and periodicals, for distribution by information and data
dissemination services and for other purposes. Morgan Guaranty currently intends
to publish individual commodity sub-indices for each of the commodities included
in the JPMCI using the same calculation methodology as that described below. The
Applicable Index may be similar or identical to the sub-index having the same
underlying commodity.
Trading in the foregoing contracts and commodities by Morgan Guaranty, its
affiliates (including JPMSI) and unaffiliated third parties could adversely
affect the value of the Applicable Index, which could in turn adversely affect
the return on and the value of the ComPS. See "The Applicable Index".
Furthermore, additional issuances of securities linked or referenced to similar
futures contracts or commodities could adversely affect the value of similar
outstanding ComPS.
POTENTIAL FOR ADVERSE INTERESTS
As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in
trading activities related to the futures contracts or the commodities
underlying the Applicable Index and other instruments or derivatives products on
or related to the Applicable Index, for their accounts where permitted or for
other accounts under their management. Morgan Guaranty, JPMSI and their
affiliates, as well as unaffiliated third parties, may also engage in other
activities related to the Applicable Index, as discussed above. Because Morgan
Guaranty will issue the Related Notes to the Company, all such activities could
create
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interests of Morgan Guaranty adverse to those of the holders of ComPS. For
example, the issuance of other securities indexed to the Applicable Index, i.e.,
the introduction of competing products into the marketplace, could adversely
affect the value of the ComPS. To the extent that J.P. Morgan or its affiliates
serve as issuer, or JPMSI or one of its affiliates serves as agent or
underwriter, for such securities or other instruments, their interests with
respect to such products may be adverse to those of the holders of the ComPS.
Morgan Guaranty will serve as Calculation Agent with respect to the ComPS and,
accordingly, will in good faith calculate the Applicable Index, which could
present certain conflicts of interest (for example, in instances where the
Calculation Agent is required to exercise discretion).
RISK OF CARRYING AND ROLLING COMMODITY FUTURES
As discussed above, if the Applicable Index is an Excess Return Index or a Total
Return Index, the Redemption Value of the ComPS will be calculated with
reference to the Applicable Index (less the applicable Factor), the value of
which is designed to replicate to the extent provided herein the cumulative
return of holding a continuous investment in the futures contracts on the
relevant commodity underlying the Applicable Index. At any given time, the
Applicable Index will be calculated based on the change in value of certain
futures contracts on the relevant commodity for delivery in the near term (the
"shorter-dated contracts"). The Applicable Index will continue to be calculated
based on the change in value of such shorter-dated contracts until they approach
maturity, at which time the Applicable Index will, as described below, cease to
be calculated based on the change in value of such shorter-dated contracts and
begin to be calculated based on the change in value of the subsequent futures
contract (the "longer-dated contracts") on a regular periodic basis so as to be
continuously indexed to the change in value of the futures contracts on the
relevant commodity. The period during which each such replacement of
shorter-dated contracts with longer-dated contracts as the basis for the
calculation of the change in value of the Applicable Index occurs is referred to
herein as the "Rollover Period", as further defined below. If the market for the
commodity futures contract underlying the Applicable Index is in "contango"
(i.e., the prices of longer-dated contracts are above the prices of
shorter-dated contracts), the return on the Applicable Index may be adversely
affected. The Applicable Index would decline if (i) the price of the
longer-dated contracts underlying the Applicable Index during the Rollover
Period were more than the price of the shorter-dated contracts which they will
replace and (ii) the price of the longer-dated contracts were to decline as such
contracts approach maturity (i.e., the price of the longer-dated contracts were
to converge toward the price of the replaced shorter-dated contracts) (only, in
the case of a Total Return Index, if each declines by more than the amount of
the Collateral Return Component). While many of the commodities included in the
JPM Indices have historically exhibited periods of both "backwardation" (i.e.,
the prices of longer-dated contracts are below the prices of shorter-dated
contracts) and contango, there can be no assurance that backwardation will exist
at any or all times. If the Applicable Index is an Excess Return Index or a
Total Return Index, the absence of backwardation in the market for the commodity
underlying the Applicable Index could adversely affect the Applicable Index and,
correspondingly, could adversely affect the value of the ComPS. Additionally,
the issuance and/or the trading of the ComPS could adversely affect the market
for the benchmark contracts underlying such Applicable Index and, accordingly,
could adversely affect the value of such ComPS and could result in a substantial
loss to the holders thereof. See "Description of the ComPS--Calculation of
Redemption Value".
VOLATILITY OF COMMODITY AND COMMODITY FUTURES PRICES
Prices of commodities and commodity futures contracts are extremely volatile and
can be affected by a variety of factors, including weather, governmental
programs and policies, national and international political and economic events,
changes in interest and exchange rates and trading activity in such commodities
and commodity futures contracts. Volatility in the benchmark contracts
underlying any Applicable Index will correlate directly to volatility in such
Applicable Index. Such volatility could lead some investors in the futures
market to withdraw from the applicable futures markets, which could adversely
affect the liquidity of such markets and could adversely affect the value of
such Applicable Index and, correspondingly, the value of the ComPS.
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EFFECT OF ADVERSE CHANGES IN COMMODITY PRICES
The Applicable Index is designed to replicate, to the extent provided herein,
the performance of investing in the markets for the underlying commodity or
futures contracts on the underlying commodity over time. In the event of sudden
disruptions in the supplies of the relevant constituent commodity for the
Applicable Index, such as those caused by war, accidents, weather, or acts of
terrorism, prices of the relevant constituent commodity, and, consequently, the
value of the Applicable Index, could become extremely volatile and
unpredictable. Also, sudden and dramatic declines in commodity and commodity
futures contract prices as may occur, for example, upon a cessation of
hostilities that may exist in countries producing the relevant commodity or upon
the discovery of significant additional sources or reserves of the relevant
commodity or the introduction of new or previously withheld supplies into the
market or the introduction of substitute products or commodities, could have a
significant adverse effect on the value of the Applicable Index and on the value
of any ComPS. In addition, the prices of certain commodities have on occasion
been subject to very rapid short-term changes due to speculative activities
which, if such activities result in a price decrease, may cause the value of
ComPS referenced to such commodities or the related futures contracts to
decrease. See "Calculation of Redemption Value".
CHANGE OF EXCHANGE METHODOLOGY
Any exchange on which any Benchmark Contract or commodity is traded or which
provides information relevant to the calculation of an Applicable Index may from
time to time change any rule or bylaw, or take emergency action under its rules,
which could affect the settlement prices of the futures contracts or commodities
underlying an Applicable Index. Any such change which causes a decrease in such
settlement prices could adversely affect the value of such Applicable Index.
SUSPENSION OR MATERIAL DISRUPTION OF COMPS, FUTURES OR
COMMODITIES TRADING; TEMPORARY DISTORTIONS
The futures markets and the markets for the commodities underlying the
Applicable Index are subject to temporary distortions or other disruptions due
to conditions of illiquidity in the markets, the participation of speculators,
government regulation and intervention and the other factors referred to in the
preceding paragraph. In addition, U.S. futures exchanges have regulations, and
the LME and certain foreign exchanges on which replacement Benchmark Contracts,
if any, may trade (which exchanges must have information-sharing arrangements
with the Securities and Exchange Commission and be regulated exchanges located
in the United States, Canada, the United Kingdom, Japan, Singapore or an
O.E.C.D. country) may have regulations, which limit the amount of fluctuation of
futures contracts prices which may occur during a single trading day or the
settlement spread between adjoining contracts. Such price limits are generally
referred to as "daily price fluctuation limits" or, more commonly, "daily
limits", and such limitations on settlement spreads are generally referred to as
"spread limits", and the maximum or minimum price of a contract on any given
day, as a result of the effect of such limits, is referred to as a "limit
price", as discussed below. In a particular futures contract, once the limit
price has been reached in such a contract, no trades may be made on that day at
a price above or below the limit price, as the case may be. Limit prices may
have the effect of precluding trading in a particular contract for all or a
portion of a trading day or forcing the liquidation of contracts at
disadvantageous times or prices. Such circumstances, particularly if they occur
during the Rollover Period for the Applicable Index (which is an Excess Return
Index or a Total Return Index) or during the Early Determination Period or the
Determination Period (as defined herein) for such ComPS, could adversely affect
the value of the Applicable Index and/or could constitute a Market Disruption
Event (as defined herein) and, therefore, could adversely affect the value of
such ComPS.
Additionally, because it is intended that each series of ComPS will be listed on
a stock exchange, and because ComPS will likely trade as equity securities in
any such secondary market, trading in ComPS may be subject to interruption or
delay due to extreme volatility in the trading prices of equity securities
generally in any such secondary market, notwithstanding the specific price
movements of the ComPS.
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MARKET DISRUPTION EVENTS
Depending on the period of time over which a Market Disruption Event continues,
the correlation between changes in the value of the Applicable Index and changes
in the general level of prices of the relevant commodities may be adversely
affected. Under such circumstances, the value of the Applicable Index (if the
Applicable Index is an Excess Return Index, a Total Return Index or a Price
Reference Index the pricing source for which is one or more futures contract
Settlement Prices), and the value of the ComPS, may be adversely affected.
In the event of a Market Disruption Event during the Early Determination Period
or the Determination Period, the Early Redemption Value or Redemption Value, as
applicable, payable in respect of the ComPS will be calculated using the
Applicable Index on the Trading Day or Days immediately following the
termination of such Market Disruption Event. However, if such Market Disruption
Event remains in effect for longer than 20 consecutive Trading Days and, in the
reasonable judgment of the Calculation Agent such Market Disruption Event is
likely to remain in effect, then the Applicable Index Settlement Value for each
day subject to a Market Disruption Event may be determined in good faith by the
Calculation Agent based on alternative pricing sources reasonably believed by it
to be indicative of then-prevailing prices for notional transactions in futures
contracts or commodities equal in size to the Applicable Index Settlement Value.
Because Morgan Guaranty's obligations under the related Related Note will also
be based on the Applicable Index Settlement Value, Morgan Guaranty may have an
adverse interest with respect to such determination.
HISTORICAL CORRELATIONS MAY NOT PREVAIL IN THE FUTURE
Although historically the JPMCI and many of the commodities underlying it have
shown a positive correlation with inflation, some positive correlation with
industrial growth and negative correlations with stock and bond returns (in each
case for the United States), there can be no assurance that such correlations
will prevail in the future. As a result, investors who invest in ComPS in
reliance on these correlations should individually assess the likelihood of such
correlations continuing.
CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS THEREOF
Prices of commodities and commodity futures contracts may be adversely affected
by the promulgation of new laws or regulations or by the reinterpretation of
existing laws or regulations (including, without limitation, those relating to
taxes and duties on commodities or commodity components) by one or more
governments, governmental agencies or instrumentalities, courts or other
official bodies. Any such event could adversely affect the value of the
Applicable Index and, correspondingly, could adversely affect the value of the
ComPS.
EXTENSION OF SETTLEMENT DATE OR STATED MATURITY
If any futures contract or constituent commodity included in the Applicable
Index were to be affected by a Market Disruption Event during any Early
Determination Period or the Determination Period, the applicable Settlement Date
would be postponed until the fifth Business Day after the last day of the
applicable Early Determination Period or the Determination Period. Such delay
could be of indefinite duration, during which time a holder of ComPS will not
receive the Early Redemption Value or Redemption Value thereof, as applicable.
With respect to ComPS for which the Applicable Index is either a Price Reference
Index or an Excess Return Index, in the event that payment of the Redemption
Value is postponed beyond the Stated Maturity, interest will accrue on the Face
Amount in the manner described herein, but no distributions will be payable on
such ComPS after the Stated Maturity thereof. With respect to ComPS for which
the Applicable Index is a Total Return Index, in the event that the payment of
the Redemption Value is postponed beyond the Stated Maturity, no interest,
dividends or distributions in respect of such ComPS will accrue or be payable
after the Stated Maturity. With respect to all ComPS, no distributions will be
payable, and no interest will accrue or be payable, if payment of the ComPS
Early
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Redemption Price is postponed beyond any applicable Early Redemption Date. See
"Market Disruption Event" above.
DISCONTINUANCE OF PUBLISHING OF THE RELEVANT JPM INDEX
In the event that Morgan Guaranty discontinues publication of the JPM Indices or
the relevant sub-index, the Calculation Agent will continue to calculate in good
faith the Applicable Index for each series of ComPS during the remaining term of
such ComPS, based on the methodology described herein under "Description of the
ComPS". However, such change of calculation methodology may result in a ComPS
Redemption Price for such ComPS which is less than the ComPS Redemption Price
for such ComPS had it been calculated on the basis of the JPM Indices or the
relevant sub-index.
POTENTIAL MODIFICATIONS TO THE JPM INDICES AND/OR THE APPLICABLE INDEX
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As described above under "Description of the ComPS--Early Determination of
Applicable Index Settlement Value and Redemption Value", if the Benchmark
Contract for any series of ComPS becomes less liquid or representative, the
JPMCI Policy Committee could recommend a replacement Benchmark Contract. Such a
change from a less liquid to a more liquid contract may result in a lower
Redemption Value for such ComPS than would have been the case if the less liquid
contract had remained the benchmark.
If at any time no replacement contracts can be found to serve as a Benchmark
Contract with respect to the Applicable Index for any series of ComPS the
Applicable Index for which is an Excess Return Index or a Total Return Index,
the Applicable Index Settlement Value of such ComPS will be determined at such
time as described above under "Description of the ComPS--Early Determination of
Applicable Index Settlement Value and Redemption Value". Such an early
determination of the Applicable Index Settlement Value with respect to any
series of ComPS may result in the holders of such ComPS receiving an amount that
is less than what indicative commodity and futures prices prevailing at any
Early Redemption Date or at the Stated Maturity thereof would otherwise imply.
Because Morgan Guaranty will be the Calculation Agent, such early determination
may raise adverse interests.
Additionally, if at any time the Benchmark Contracts then serving as the basis
for calculating the Applicable Index with respect to any series of ComPS, or the
trading thereof, become subject to any increased cost or additional tax, Morgan
Guaranty reserves the right to designate a replacement Benchmark Contract or, if
no such contract is designated, to cause, at its option, the Applicable Index
Settlement Value of such ComPS to be determined at such time as described above
under "Description of the ComPS-- Early Determination of Applicable Index
Settlement Value and Redemption Value". Because Morgan Guaranty will, at the
time any Benchmark Contract then serving as the basis for calculating any
Applicable Index becomes subject to such increased cost or tax, in its
discretion decide whether or not to cause an early determination of the
Applicable Settlement Value of any such ComPS, exercise of such option may raise
an adverse interest. Such a change in contracts due to the imposition of any
increased cost or additional tax may result in a lower Redemption Value for such
ComPS than would have been the case if the contract on which such increased cost
or additional tax were imposed had remained the benchmark.
Any early determination of the Applicable Index Settlement Value may cause the
trading price of ComPS in any secondary market which then exists to decline.
EARLY REDEMPTION
All ComPS may be redeemed by the Company prior to their Stated Maturity upon the
occurrence of a Special Event or, if so specified in the applicable Prospectus
Supplement, redeemed at the option of the holders thereof at certain times. In
the case of a redemption upon the occurrence of a Special Event, the Early
Redemption Value paid by the Company at such time may be significantly less than
the Redemption Value that would otherwise have been payable had such ComPS not
been redeemed prior to their Stated Maturity and the occurrence of such Special
Event may cause the market price of such ComPS in any
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<PAGE> 69
existing secondary market to decline. In the case of an optional redemption by
holders of any ComPS subject to such provisions, it is likely, under prevailing
market conditions, that the Early Redemption Value paid by the Company will be
less than the amount such holder could have realized by selling such ComPS in an
existing secondary market, if any. Delay in payment of the ComPS Early
Redemption Price due to the occurrence of a Market Disruption Event will not
entitle holders of such ComPS to additional distributions on such ComPS or the
accrual of any interest on such ComPS Early Redemption Price.
SECONDARY TRADING IN THE COMPS; POSSIBLE ILLIQUIDITY OF THE COMPS
It is intended that each series of ComPS be listed on a stock exchange; however,
it is not possible to predict whether the necessary number of holders will
purchase and, for the remaining term of each series of ComPS, continue to hold
such ComPS in order that a secondary market for each series of ComPS will
develop and remain in existence, or how any ComPS will trade in any such market
which does develop. The Underwriters of any issuance of ComPS will not obligated
to make a market for such ComPS; therefore, it is possible that no active
secondary market for any ComPS will develop.
VALUE OF THE COMPS
The value of any series of ComPS at any time will depend upon the interaction of
at least two key factors: (i) the value of the Applicable Index and (ii) the
credit quality of Morgan Guaranty and J.P. Morgan. As discussed above under
"Description of the ComPS", adverse changes in the Applicable Index will
directly correlate to adverse changes in the value of the ComPS. A decline in
the credit quality of Morgan Guaranty and J.P. Morgan could cause the trading
price of any ComPS in any secondary market then existing to decline. Also, an
increase in the prevailing interest rates could cause the trading price of
Excess Return ComPS which pay a fixed rate dividend in any secondary market then
existing to decline.
CERTAIN CONSIDERATIONS REGARDING HEDGING
Prospective purchasers of ComPS who intend to hedge against the risks associated
with the market for commodity futures or commodities should recognize the
complexities of utilizing ComPS in this manner. The formula under which the
Principal Amount is calculated is not guaranteed to produce distributions to
holders having readily definable relationships with other commodity futures and
commodity instruments and products. As described above, in the case of ComPS for
which the Applicable Index is an Excess Return Index or a Total Return Index,
the value of such ComPS will reflect not only the price of the benchmark
contracts or the relevant commodity but also, in the case of an Applicable Index
based on futures contracts, the state of the market in which such futures
contracts are traded (i.e., whether such market is in "backwardation" or
"contango" over time), all reduced by the Factor. Also, under certain
circumstances, amounts payable on the ComPS may be based on the good faith
determination of Morgan Guaranty and not on the Applicable Index. For these
reasons, investors should be cautious in using ComPS in a hedging program. The
risks associated with utilizing the ComPS in a hedging program may be magnified
in periods of substantial futures or commodities price volatility, since
properly correlating such ComPS either as a hedge of other assets or correlating
such ComPS to the hedge thereof may become more difficult.
THE UNDERLYING MARKETS
FUTURES MARKETS
An exchange-traded futures contract is a bilateral agreement providing for the
purchase and sale of a specified type and quantity of a commodity or financial
instrument during a stated delivery month for a fixed price or, in the case of a
futures contract on an index, providing for the payment and receipt of a cash
settlement. By its terms, a futures contract provides for a specified settlement
month in which the commodity or financial instrument is to be delivered by the
seller (whose position is therefore described as "short") and acquired by the
purchaser (whose position is therefore described as "long") or in which the cash
settlement amount is required to be paid. Prior to the date on which delivery is
to be made under a
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futures contract, the exchange clearing house will require the holders of short
positions to state their intentions with respect to delivery and, to the extent
that such holders elect to make delivery (as opposed to cash settlement), the
clearing house will match them with holders of long positions, who will then be
required to accept delivery.
No purchase price is paid or received on the purchase or sale of a futures
contract. Instead, an amount of cash or cash equivalents, which varies based on
the requirements imposed by the exchange clearing houses, but which may be as
low as 5% or less of the value of the contract, must be deposited with broker as
"initial margin". This margin deposit collateralizes the obligations of the
parties to the futures contract to perform their obligations under such
contract. Subsequent payments to and from the broker, referred to as "variation
margin", are then normally made on a daily basis as the price of the futures
contract fluctuates, thereby making existing positions in the futures contract
more or less valuable, a process known as "marking to the market". By depositing
and/or receiving margin in the most advantageous form (which may vary depending
on the exchange, clearing house or broker involved), a market participant may be
able to earn interest on its margin funds, thereby increasing the potential
total return which may be realized from an investment in futures contracts.
Futures contracts are traded on organized exchanges, known as "contract markets"
in the U.S., through the facilities of a centralized clearing house and a
brokerage firm which is a member of the clearing house (a "clearing member").
The clearing house guarantees the performance of each clearing member which is a
party to a futures contract by, in effect, taking the opposite side of the
transaction. At any time prior to the expiration of a futures contract, subject
to the availability of a liquid secondary market, a trader may elect to close
out its position by taking an opposite position on the exchange on which the
position entered into, which operates to terminate the position and fix the
trader's profit or loss. U.S. contract markets, as well as brokers and market
participants, are subject to regulation by the Commodity Futures Trading
Commission. Futures markets outside the U.S. are generally subject to regulation
by comparable regulatory authorities.
The principal non-U.S. futures market on which the futures contracts which may
underlie the Applicable Index are traded is the London Metal Exchange (the
"LME"). The LME, which is subject to the regulation of the Securities and
Investments Board and the Securities and Futures Authority (a self-regulatory
organization), is a primary international exchange for futures contracts on
aluminum, copper, nickel and zinc (which are included in the JPMCI) and for lead
and tin. Unlike most other futures exchanges (including those in the U.S.), the
LME is a "principal's market". This means that when a clearing member of the LME
enters into a trade with a client or non-clearing member, there will not
necessarily be an offsetting contract on the exchange. Rather, such clearing
member remains liable on such trade, though it may then enter into an offsetting
contract with another member having substantially similar, if not necessarily
identical, terms. In addition, official LME trading is conducted by open outcry
during two daily trading sessions of short duration rather than by means of
continuous trading, as used on most exchanges. In addition to such open outcry
trading, trading takes place during the rest of the day directly between members
by means of a telephone trading system. Settlement prices for contracts with
specified settlement dates are determined by a committee selected by the
directors of the LME (the "Quotations Committee") promptly following the morning
trading session, based on the last bid and offer prices for the relevant
commodity at such trading session or, if the Quotations Committee determines
there were no such prices, at such other level as the Quotations Committee may
in its discretion determine at the end of each LME trading day. The Quotations
Committee is similarly responsible for determining LME closing prices. If the
Quotations Committee fails to determine such closing prices on any LME trading
day, such closing prices shall be determined by the London Clearing House, which
is the clearinghouse for the LME.
United States commodity futures exchanges typically have similar procedures for
determining end-of-day settlement prices, although each exchange or type of
commodity may have slightly different procedures. All exchanges have quotations
or settlement price committees which determine the settlement prices using
prescribed formulaic methodologies. However, such committees may, if they
believe the application of the formulaic methodology would yield a settlement
price which is inappropriate, in their own discretion determine a settlement
price which is appropriate.
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For precious metals futures contracts, exchanges typically determine the
settlement price for the most active month contract as the average of the
highest and lowest prices of trades reported in the closing period. All other
contracts settlement prices are determined as a spread from this active contract
using spreads determined in the closing range. For energy contracts, exchanges
typically determine the settlement prices for the "more active contracts" (i.e.,
contracts which meet certain open interest percentage thresholds) as the average
price of all outright transactions during the closing range for such contract.
In all other contracts, the settlement prices are usually determined as spread
relationships to the more active contracts.
PRECIOUS METALS SPOT MARKETS
In the case of Bullion ComPS, it may be the case that the value of the Bullion
ComPS Principal Amount and the Applicable Index (and thus the Redemption Value
of and distributions on such ComPS) will be determined with reference to the
Fixing Price of the relevant Fixing Association. The relevant Fixing Association
for gold and silver is the London Bullion Market Association (the "LBMA"); in
the case of platinum and palladium, the relevant Fixing Association is the
London Platinum and Palladium Market (the "LPPM"). The Fixing Price represents
the spot price for the relevant underlying commodity as determined in accordance
with the procedures of the relevant Fixing Association. The fixing procedures
for the LBMA and the LPPM are similar. Fixings occur twice each trading day for
gold, platinum and palladium and once each trading day for silver. At the
commencement of the fixing, an opening price is announced by the presiding
official. This price is relayed to the dealing rooms of the members or the
relevant Fixing Association. The price is in turn relayed to the customers of
such members and on the basis of orders received, such members declare as a
buyer or a seller. Provided that both buying and selling interests are declared,
members are then asked to state the amount they wish to trade. If the amounts of
buying and selling do not balance, the same procedure is followed again at
higher or lower prices until a balance is achieved. The chairperson of the
relevant Fixing Association may exercise some discretion in determining the
final Fixing Price. Because members of the LBMA must submit fixed orders for
silver (i.e., no additional attempts at buying or selling occur as described in
the second preceding sentence), trade imbalances may arise from time to time in
the determination of the Fixing Price for silver.
The London Bullion Market Association is regulated by the Bank of England in
accordance with the provisions of the London Code of Conduct. The London Code of
Conduct is issued by the Bank of England and sets out the standards that firms
are expected to meet when trading in the London wholesale bullion and money
markets. In addition, all market marking members of the LBMA, in common with all
U.K.-based banks, are subject to capital adequacy and liquidity requirements and
regular supervisory meetings to consider the adequacy of their management,
systems and controls. The Bank of England takes an active role in the LBMA gold
market, including holding certain gold for delivery in its vaults and holding
gold in accounts.
INVESTING IN THE COMMODITIES AND COMMODITY FUTURES MARKETS
Investments in commodities and commodity futures markets offer potential returns
from several sources and strategies, two of which are as follows: (i) the change
in price of the underlying commodity or commodity futures contract ("Price
Return") and (ii) the cumulative return created by a continuous investment in
the same type of futures contract by buying, holding and then selling such
contracts as they approach expiration and reinvesting the notional proceeds of
such sale in the same type of contract with a more distant expiration date (such
cumulative return, "Excess Return", is the sum of the price returns for all such
contracts held during their holding period, and such Excess Return is often
described or accounted for as the sum of Spot Return plus Roll Return).
Price Return. Price Return is the return that arises from changes over
time in prices of futures contracts or in the prices of the commodities
themselves, as applicable. Thus, if on the first day of a given month the
price of the futures contract is $15.00, and on the 30th day of such month
the price of the futures contract is $15.50, the investor in such contract
has earned a price return of 3.33% on the initial notional amount of
$15.00.
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Excess Return. Excess Return is the cumulative return of holding a
continuous investment in commodity futures contracts. Excess Return is just
the cumulative return of the individual Price Returns of the contracts held
during their holding period. Thus, Excess Return is calculated as the
return of holding a certain contract and, as it nears expiration, selling
such contract and reinvesting the notional proceeds of the sale into
another contract with a more distant expiration date. Commodity market
participants often describe Excess Return as the sum of Spot Return plus
Roll Return. Describing Excess Return as Spot Return plus Roll Return helps
describe the cumulative price returns of the contracts held in terms of (a)
overall trends in the spot or nearby futures prices (Spot Return) and (b)
the average shape of the forward curve during the roll days over the
holding period (Roll Return).
"Spot Return" is defined as the change in the price of the nearest to expiration
contract underlying the Excess Return calculation from the beginning of the
calculation period to the end of the calculation period (without regard to the
actual underlying contract referenced).
"Roll Return" is the number that, when added to the Spot Return, gives the true
Excess Return. Roll Return represents the portion of return on a continuous
investment in nearby futures that one might attribute to the average shape over
the holding period of the forward curve during the roll days (i.e., whether the
forward contracts that were rolled into were so rolled at a premium or a
discount to the nearer to expiration contracts).
EXAMPLE
The following table illustrates the calculation of the Excess Return of a
continuous investment in nearby futures over a 2 period holding period and shows
how Spot Return plus Roll Return are defined and calculated so that the sum
thereof equals the actual Excess Return calculation.
<TABLE>
<CAPTION>
END OF END OF
DAY 1 PERIOD 1 PERIOD 2 TOTAL
------ -------- -------- -----
<S> <C> <C> <C> <C>
Futures #1................................. $15.00 $ 15.00
Futures #2................................. $14.75 $ 14.50 $ 15.00
Return on Futures #1....................... 0.00%
Return on Futures #2....................... NA 3.45%
Return on Excess Return.................... 0.00%(a) 3.45%(b) 3.45%
</TABLE>
- ---------------
(a) return on Futures #1 for first month holding period, rounded to two
decimal places
(b) return on Futures #2 for second month holding period, rounded to two
decimal places
In the preceding example, if the change in value of an index had been calculated
entirely based on Futures #1 beginning on day 1, had ceased to be based on such
contract at the end of Period 1 and had begun to be calculated entirely based on
Futures #2 on such day, and had continued to be based entirely on such contract
to expiration at the end of Period 2, the index would have appreciated by 3.45%,
despite the fact that the price of Futures #1 on day 1 and the price of Futures
#2 at the end of Period 2 were equal (i.e. Spot Return was 0.00%). Thus, while
Futures #1 yielded no price return, Futures #2 yielded a price return of 3.45%
during its holding period. Such a continuous investment in nearby futures
contracts produced a return of 3.45% over the two period holding period, which
can be accounted for as a Spot Return of 0.00% plus a Roll Return of 3.45%. Spot
Return is (($15.00/$15.00) -1) or 0.00%, since the beginning price of Futures #1
is $15.00 and the ending price of Futures #2 is $15.00 over the total holding
period. Because Roll Return is the number that, when added to the Spot Return
calculation, gives the true Excess Return, and because Excess Return is 3.45% in
the above example, Roll Return must be Excess Return minus Spot Return
(3.45%-0.00%), or 3.45%. However, this is only one example of a possible futures
market alignment; in any market, Excess Return, or the sum of Spot Return plus
Roll Return, could be positive or negative over any given holding period.
The price of the longer-dated position may be higher or lower than the price of
the shorter-dated position based on a variety of factors, including the cost of
borrowing, transportation, storage and insurance of
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commodities, the expectations of market participants with respect to future
price trends and general inventory, supply and demand trends.
Investors may also calculate the "total return" from an unlevered, continuous
investment in nearby commodity futures contracts by adding to the futures return
a component of return calculated based on the notional amount of their
investment in commodity futures, as it changes from time to time, would earn if
invested as cash. Such return (the "Collateral Return Component") can be added
to (and thus reinvested in) the futures return component to calculate the "total
return" from such an unlevered, continuous investment.
The following table illustrates a simplified calculation of the total return of
a continuous investment in nearby commodity futures contracts over a 2 period
holding period. The example uses the futures return from the table above and
assumed Collateral Return Components:
Total Return Example
<TABLE>
<CAPTION>
PERIOD 1 PERIOD 2 TOTAL
-------- -------- -----
<S> <C> <C> <C>
Return attributable to change in value of futures contracts...... 0.00% 3.45%
Return attributable to Collateral Yield Component................ 0.50% 0.55%
Total Return..................................................... 0.50% 4.00% 4.52%*
</TABLE>
- ---------------
* 4.52% equals the total return from compounding: (1 + 0.005) X (1 + 0.04) - 1
In the above example, if the futures return had been as calculated in the Excess
Return Example and the Collateral Yield Component was as specified, the total
return over the two period holding period would be 4.52%.
THE JPM INDICES
The JPM Indices have been developed and are calculated by Morgan Guaranty as
indices proprietary to J.P. Morgan. The JPMCI, the primary commodities index
calculated by Morgan Guaranty, is the arithmetic weighted average of the
cumulative returns afforded by notional investments in exchange-traded futures
contracts on certain non-financial "hard" (i.e., industrial non-edible)
commodities (including base metals, energy products and precious metals). Each
of the JPM Indices is designed as a measure of the performance over time of the
markets for the applicable commodities.
Morgan Guaranty calculates two investable versions of the JPM Indices, the
Excess Return Indices and the Total Return Indices. Subject to the specific
terms of each methodology set forth below, each methodology represents a method
for determining the cumulative change in value of notional positions in certain
commodities or commodity futures contracts, and does not represent an actual
investment in commodities or commodity futures contracts. Calculations for the
JPM Indices are based on end-of-day futures settlement prices for energy and
precious metal indices and on LME end-of-day closing prices for third Wednesday
dates for base metal indices. JPM Indices which are based upon only one
underlying commodity (whether computed on an excess return or total return
basis) are referred to as "JPM Individual Indices".
As long as any series of ComPS is outstanding, Morgan Guaranty will cause the
Applicable Index relating to such series of ComPS to be published by one or more
public reporting entities as a JPM Individual Index. At the date of this
Prospectus, such information is available on both Reuters and Bloomberg.
EXCESS RETURN METHODOLOGY
The actual methodology applied by Morgan Guaranty in calculating Excess Return
JPM Individual Indices is set forth below. If the Applicable Index of any series
of ComPS is an Excess Return Index, the following methodology will be applied by
the Calculation Agent in calculating the Applicable Index:
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The value of the relevant Excess Return Index on any Trading Day not subject to
a Market Disruption Event will be determined with reference to the following
formula:
I(t) = I(t-1) + Change(t)
Where "I(t)" is the value of the relevant Excess Return Index on the
date of determination (such date being referred to as "(t)"); "I(t-1)"
is the value of the relevant Excess Return Index on the Trading Day not
subject to a Market Disruption Event immediately preceding the date of
determination (such date being referred to as "(t-1)"); and "Change(t)"
is equal to the product of (i) I(t-1) and (ii) the sum of the weighted
percentage changes on the date of determination of the U.S. dollar
prices of the futures contracts underlying the Applicable Index. Each
such weighted percentage change shall be equal to the product of (a) the
U.S. dollar percentage gain or loss on such underlying contracts to the
date of determination from the immediately preceding Trading Day that is
not subject to a Market Disruption Event multiplied by (b) the
applicable futures contract's weight in the Applicable Index for such
date of determination. The methodology behind the weighting of the
futures contracts is set forth under the caption "Rebalance of JPM
Indices".
For example, to calculate the value of an Excess Return Index (I(t)) on a
Trading Day not subject to a Market Disruption Event for which I(t-1) equals 100
and on which the only Benchmark Contract moves in value from $14.50 to $15.00
(resulting in an Index change of 3.4482759%),
I(t) = 100 + (100 X 0.034482759)
I(t) = 100 + 3.4482759
I(t) = 103.4482759
TOTAL RETURN METHODOLOGY
The methodology applied by Morgan Guaranty in calculating Total Return JPM
Individual Indices is set forth below. If the Applicable Index of any series of
ComPS is a Total Return Index, the following methodology will be applied by the
Calculation Agent in calculating the Applicable Index:
The value of the relevant Total Return Index for any Trading Day not subject to
a Market Disruption Event will be determined with reference to the following
formula:
I(t) = I(t-1) + Change(t) + R(t)
Where "I(t)" is the value of the relevant Total Return Index on the date
of determination (such date being referred to as "(t)"); "I(t-1)" is the
value of the relevant Total Return Index on the Trading Day not subject
to a Market Disruption Event immediately preceding the date of
determination (such date being referred to as "(t-1)"); and "Change(t)"
is equal to the product of (i) I(t-1) and (ii) the sum of the weighted
percentage changes on the date of determination of the U.S. dollar
prices of the futures contracts underlying the Applicable Index. Each
such weighted percentage change shall be equal to the product of (a) the
U.S. dollar percentage gain or loss on such underlying contracts to the
date of determination from the immediately preceding Trading Day that is
not subject to a Market Disruption Event multiplied by (b) the
applicable futures contract's weight in the Applicable Index for such
date of determination. Also, "R(t)" is the return arising for the period
from (t-1) to (t) from interest payable on the nominal value of the
Applicable Index, which shall be based on the rate determined with
reference to the following formula:
R(t) = I(t-1) X Y(t)
Where "I(t-1)" has the meaning set forth in the preceding paragraph and
Y(t) = [1/(1-Q)](Days/91) - 1
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Where "Q" equals the most recently available noncompetitive discount
rate on 13-week U.S. Treasury Bills (updated on weekly auction), as
found in the H.15(519) report published by the Board of Governors of the
Federal Reserve System (or, if unavailable, a successor rate with a
maturity equal to or less than three months, as Morgan Guaranty may
determine in its reasonable discretion), multiplied by the quotient of
91/360, and "Days" equals the number of calendar days from Trading Day
(t-1) to (t).
For example, to calculate the value of a Total Return Index for any Trading Day
not subject to a Market Disruption Event for which I(t-1) equals 100, on which
the only Benchmark Contract moves from $14.50 to $15.00, on which the Q (the
applicable discount rate (5.00%) multiplied by 91/360) equals 1.26388889% and
for which "Days" equals 1,
I(t) = 100 + (100 X 0.0344827586) + 100 X [(1/(1-0.0126388889)](1/91) - 1)
I(t) = 100 + 3.44827586 + (100 X 0.0001397838)
I(t) = 100 + 3.44827586 + .01397838
I(t) = 103.46225424
REBALANCE OF JPM INDICES
Because the JPM Indices are measures of a continuous investment in commodity
futures contracts, and because most futures contracts have maturities (generally
from one to three months) which are shorter than the life of any ComPS, the
futures contracts serving as bases from which to calculate the change in value
of the JPM Indices must be replaced on a periodic basis during the applicable
Rollover Period (as defined below) for each. If the Applicable Index for any
series of ComPS is an Excess Return Index or Total Return Index, the futures
contracts on the commodity underlying the Applicable Index will similarly be
replaced during the Rollover Period. The "Rollover Period" is the period of five
consecutive Trading Days commencing on the fifth Trading Day of the month in
which such replacement occurs. During each day of the Rollover Period, a portion
of change in value of the Applicable Index ceases as of the end of such day to
be based on the change in value of existing contracts (the "Old Contracts") and
begins as of the beginning of the next day to be based on the change in value of
the New Contracts. The "New Contracts" are those contracts which are the nearest
designated futures contract which (i) have a termination of trading at least ten
Trading Days into the month following the Rollover Period and (ii) have a first
"notice day" at least ten Trading Days into the month following the Rollover
Period. The "notice day" is the first day on which persons holding a short
position on such futures contract must inform the exchange on which such
contract is traded that they will deliver under such contract.
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<PAGE> 76
In the case of energy products for which there exist designated futures
contracts for delivery in each month of the year, the New Contracts will be
different from the Old Contracts. As indicated in the table below, which lists
each of the designated contracts, the rebalancing procedure will occur on a less
frequent basis for precious metals and base metals, and as a result the New
Contracts and Old Contracts for any Rollover Period may be the same.
TABLE: BENCHMARK CONTRACTS UNDERLYING EXCESS RETURN AND TOTAL RETURN INDICES
<TABLE>
<CAPTION>
APPLICABLE
NO. COMMODITY NAME/UNITS DELIVERY EXCHANGE UNITS PER CONTRACT DESIGNATED CONTRACT
- --- ------------------------------ --------------- ------- ------------------ --------------------------------
<C> <S> <C> <C> <C> <C>
1 Aluminum $/MT (Metric Tonne) LME Warehouses LME 25 tonnes Third Wednesday of every March,
(High Grade Primary Aluminum) Worldwide June, September, December(1)
2 Copper $/MT LME Warehouses LME 25 tonnes Third Wednesday of every March,
(Copper Grade A) Worldwide June, September, December
3 Nickel $/MT LME Warehouses LME 6 tonnes Third Wednesday of every March,
(Primary Nickel) Worldwide June, September, December
4 Zinc $/MT LME Warehouses LME 25 tonnes Third Wednesday of every March,
(Special High Grade Zinc) Worldwide June, September, December
5 Heating Oil #2, c/gal New York Harbor NYMEX 42,000 gallons Every month
6 Natural Gas $/MM BTU Henry Hub, NYMEX 10,000 MM BTU Every month
Louisiana
7 Unleaded Gasoline, c/gal New York Harbor NYMEX 42,000 gallons Every month
8 Light "Sweet" Crude Oil $/BBL Cushing, NYMEX 1,000 bbl Every month
Oklahoma
9 Gold $/troy oz COMEX- approved COMEX 100 troy oz February, April, June, August,
(.995 fineness) vaults December
10 Silver c/troy oz COMEX- approved COMEX 5,000 troy oz March, May, July, September,
(.999 fineness) vaults December
11 Platinum $/troy oz NYMEX-approved NYMEX 50 troy oz January, April, July, October
vaults
</TABLE>
Additional underlying futures contracts may from time to time be added to the
JPM Indices and may thereafter serve as Applicable Indices. Information
substantially similar to that disclosed in the preceding table will be disclosed
in any Prospectus Supplement relating to such additional Applicable Indices.
As discussed above, for JPM Individual Indices and for the Applicable Indices,
the replacement of the contracts serving as the basis for the calculation of
index change will be effected on a proportionate basis over the five day
Rollover Period in order to avoid the risks of effecting such replacement
entirely on a single day (e.g., a day on which the applicable market displays
unusual volatility).
As a result of such process of replacement, the weighting of contracts in the
Applicable Indices shall be such that for the Trading Days in any month up to
and including the first day of the Rollover Period for such month, the Change(t)
(as described above) will be calculated as 100% of the daily change of the
underlying Old Contracts. The Change(t) for the second Trading Day of the
Rollover Period (assuming no Market Disruption Event) shall be calculated based
80% on the change attributable to the Old Contracts plus 20% on the change for
the New Contacts, with similar adjustments made for each day of the Rollover
Period.
- ---------------
(1) The LME trades contracts on every business day for three months and monthly
contracts maturing on the third Wednesday of each of the next 12 or more
months. The most actively traded contracts are the 3-month forward, the
cash, and the contract maturing the third Wednesday of each month.
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<PAGE> 77
Accordingly, the relative weights of the Old Contracts and the New Contacts
during any given day of a calendar month for calculation of the Change(t) on
such day will be as follows:
STANDARD ROLLOVER PERIOD
<TABLE>
<CAPTION>
TRADING DAY OLD CONTRACT NEW CONTRACT
OF MONTH WEIGHT % WEIGHT %
---------------------------------------- ------------ ------------
<S> <C> <C>
Roll-over Period
1-4................................ 100 0
5.................................. 100 0
6.................................. 80 20
7.................................. 60 40
8.................................. 40 60
9.................................. 20 80
10................................... 0 100
11-month end......................... 0 100
</TABLE>
The occurrence of a Rollover Period does not, by itself, create a change in the
value of the Applicable Index. The occurrence of a Rollover Period merely causes
the index change calculation, over the course of the Rollover Period, to be
calculated using a new underlying futures contract. For example, assuming a
constant Old Contract value of $15.00 and a constant New Contract value of
$14.00 throughout the Rollover Period (and thus a daily percentage change for
each day of 0%) and a starting Applicable Index value of 100, the following
indicates the change in the futures-related portion of the value of the
Applicable Index (I(t)) during such Rollover Period:
<TABLE>
<CAPTION>
OLD CONTRACT NEW CONTRACT
------------------- ------------------- INDEX
TRADING DAY WEIGHT % % CHANGE WEIGHT % % CHANGE CHANGE(T)*
- ----------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
5................. 100 0 0 0 0
6................. 80 0 20 0 0
7................. 60 0 40 0 0
8................. 40 0 60 0 0
9................. 20 0 80 0 0
10................. 0 0 100 0 0
</TABLE>
* Index change(t) is zero for each day because the percentage price change
of the underlying futures contracts is zero for each day
However, if a Market Disruption Event occurs during a Rollover Period (i.e., on
any day on which a replacement is otherwise scheduled to take place), such
replacement will be postponed until the next Trading Day of the Rollover Period
on which the Market Disruption Event ceases to be in effect. On the Trading Day
such Market Disruption Event ceases to be in effect, the replacement for that
day and for all preceding days during which such Market Disruption Event was
continuing will be effected. The Change(t) for all Trading Days from the day
first subject to a Market Disruption Event to the first Trading Day not subject
to a Market Disruption Event shall use the contract weights for the Trading Day
on which the Market Disruption Event began. If the Market Disruption Event
remains in effect for the remainder of the Rollover Period, the Old Contract
will be replaced by the New Contract to the full extent not previously replaced
at the end of the next succeeding Trading Day on which such Market Disruption
Event ceases to be in effect. The following chart illustrates the replacement
process for a Rollover Period including the occurrence of a Market Disruption
Event (indicated as an "MDE") on the seventh Trading Day of the month:
32
<PAGE> 78
EXAMPLE OF ROLLOVER PERIOD WITH MARKET DISRUPTION EVENT
<TABLE>
<CAPTION>
TRADING DAY OLD CONTRACT NEW CONTRACT
OF MONTH WEIGHT % WEIGHT %
------------- ------------ ------------
<S> <C> <C>
1-4................................... 100 0
5..................................... 100 0
6..................................... 80 20
7 (MDE)............................... 60 40
8..................................... 60 40
9..................................... 20 80
10..................................... 0 100
11-month end........................... 0 100
</TABLE>
For an Applicable Index which is an Excess Return Index or a Total Return Index,
because of the occurrence of the Market Disruption Event on Trading Day 7, the
Index would not be officially calculated and no roll would occur. Since no
Market Disruption Event occurs on Trading Day 8, an index value is determined
for Trading Day 8, and the Change(t) is calculated using the relative contract
weights applicable to the Trading Day first subject to the Market Disruption
Event (in this example, Trading Day 7) using the index level on Trading Day 6
(the immediately preceding Trading Day not subject to a Market Disruption Event)
as I(t-1).
THE JPMCI POLICY COMMITTEE
Morgan Guaranty has established the JPMCI Policy Committee to advise and make
recommendations with respect to the determination of the JPM Indices and, to the
extent appropriate, the Applicable Indices. The JPMCI Policy Committee meets on
an ad hoc basis at the request of Morgan Guaranty in order to discuss policy
matters relating to the operation of the JPM Indices and, to the extent
appropriate, the Applicable Indices. The JPMCI Policy Committee will advise
Morgan Guaranty with respect to, among other things, the effectiveness of the
JPMCI as an appropriate commodity investment benchmark; the effectiveness of the
JPMCI as a measure of commodity market performance; the need for changes in the
weights, composition, price sources or calculation methodology of the JPMCI or
the Applicable Indices; the need for creation or elimination of sub-indices of
the JPMCI or other commodity indices, drawing either from the existing
components of the JPMCI or new commodity components and the treatment of issues
relating to market disruptions issues. Morgan Guaranty may at any time act at
its discretion to make any modifications to the JPMCI based on recommendations
of the JPMCI Policy Committee. Membership of the JPMCI Policy Committee will be
subject to change from time to time, and no member will be permitted to purchase
or hold any ComPS during his or her term on the Committee. At the time of this
Prospectus, the JPMCI Policy Committee consists of the following members:
33
<PAGE> 79
JPMCI POLICY COMMITTEE
<TABLE>
<CAPTION>
NAME TITLE FUNCTION
- ------------------------------ -------------------------- --------------------------
<S> <C> <C>
John Fullerton (Chairman)..... Managing Director, J.P. Head of Global Commodities
Morgan
Victor S. Filatov............. President, Smith Barney Chief Investment Officer
Global Capital Management
Inc.
Martin B. Greenberg........... Chairman of the Board and Former Chairman of the
President of Sterling Commodities Exchange, Inc
Commodities
Philip K. Verleger, Jr........ Vice President, Charles Economic Consultant and
River Associates former Visiting Fellow,
Institute of International
Economics
Jeanne Feldhusen.............. Managing Director, J.P. Head of Fixed Income
Morgan Research
</TABLE>
Each of the futures contracts included in the JPM Indices must satisfy each of
the following JPMCI Inclusion Criteria: the futures contracts must (i) be priced
in U.S. dollars, or if priced in a foreign currency, the exchange on which the
contract is traded must publish an official exchange rate for conversion of the
futures price into U.S. dollars and such currency must be freely convertible
into U.S. dollars; (ii) be traded on a regulated futures exchange located in the
United States, Canada, the United Kingdom, Japan, Singapore or an O.E.C.D.
country and (iii) have a minimum annual trading volume of 300,000 contracts or
$500,000,000 for all contract months. If a contract included in the JPM Indices
ceases to satisfy the JPMCI Inclusion Criteria, the JPMCI Policy Committee shall
meet to consider the substitution of a replacement futures contract for such
contract. If no appropriate replacement contract can be found, the JPMCI Policy
Committee may recommend the removal of such contract from the JPM Indices.
Morgan Guaranty reserves the right to act at its discretion to make any
modifications to the JPM Indices based on the recommendations of the JPMCI
Policy Committee.
CHANGES IN JPM INDICES DESIGNATED CONTRACTS
Before implementing a change in definition or price sources for a designated
contract in the JPM Indices, the JPMCI Policy Committee shall consider the
following: (i) the effectiveness of the JPMCI and JPM Indices as appropriate
commodity investment benchmarks, (ii) the effectiveness of the JPMCI and JPM
Indices as a measure of commodity market performance and (iii) the respective
contract volumes, U.S. dollar volumes, open interest, liquidity and transaction
costs of the proposed replacement and existing benchmark contracts.
The JPMCI Policy Committee may recommend a change in one or more of the
benchmark contracts underlying the JPM Indices if, in the majority opinion of
the committee members, the proposed replacement benchmark contract better meets
the objectives set forth in clauses (i) and (ii) above and has higher annual
contract volumes or U.S. dollar volumes. However, as noted above, Morgan
Guaranty may cause a change in one or more of such contracts if any increased
cost or tax is imposed on holding or trading such contracts if such contract
meets the applicable inclusion rules even though such contract does not have
higher annual contract volumes or U.S. dollar volumes.
After consideration of the above (and other) issues the JPMCI Policy Committee
may recommend to Morgan Guaranty a change in the composition of the JPM Indices.
Morgan Guaranty reserves the right to act at its discretion to make any
modifications to the JPMCI based on recommendations of the policy committee.
Such changes, including the implementation date and details, shall be published
and disseminated by Morgan Guaranty through its usual research distribution
network.
34
<PAGE> 80
THE APPLICABLE INDEX
The Prospectus Supplement for any series of ComPS will specify and provide
details with respect to the Applicable Index and the commodity underlying the
Applicable Index. As discussed above, the Applicable Index will be an Excess
Return Index calculated in the same manner as those of the Excess Return JPM
Indices, a Total Return Index calculated in the same manner as those of the
Total Return JPM Indices or a Price Reference Index. Each such Prospectus
Supplement will also contain information with regard to the historical
performance of the Applicable Index.
DESCRIPTION OF THE RELATED NOTES
The Related Notes may be issued from time to time in respect of one or more
series of Preferred Securities. The following description sets forth certain
general terms and provisions of each Related Note to which any series of
Preferred Securities may relate. The particular terms of the Related Note
included in any Prospectus Supplement and the extent, if any, to which such
general provisions may apply to such Related Note will be described in the
Prospectus Supplement relating to such Related Note. The following description
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, any Prospectus Supplement relating to any Related Note
and the other documents incorporated by reference herein. Certain capitalized
terms are used herein as defined in the relevant Related Note.
GENERAL
Each Related Note will be an unsecured, unsubordinated obligation of Morgan
Guaranty. No Related Note will limit the principal amount of Related Notes that
may be issued by Morgan Guaranty. The financial terms of the Related Notes,
including, among other things, the maturity and principal of and interest and
any premium on any Related Note (or the method of calculating any of the
foregoing), will be set forth in the Prospectus Supplement related thereto and
will mirror the aggregate financial terms of the related series of Preferred
Securities, including as to timing and amount of payments. References made
herein to the Related Note refer to each Related Note that may be issued from
time to time.
No Related Note will contain any provisions that would limit the ability of
Morgan Guaranty to incur indebtedness. Reference is made to any Prospectus
Supplement relating to the Related Note offered thereby for information with
respect to any deletions from, modifications of or additions to the events of
default or covenants of Morgan Guaranty applicable to the Related Note that is
referred to therein.
Under terms of each Related Note, Morgan Guaranty will have the ability to issue
Related Notes with terms different from those of Related Notes previously issued
without the consent of the holders of previously issued Related Notes, in an
aggregate principal amount determined by Morgan Guaranty.
SUBORDINATION
The Related Notes will be subordinated and junior in right of payment to certain
other indebtedness of subsidiaries of Morgan Guaranty to the extent set forth in
each Prospectus Supplement that will accompany this Prospectus.
RELATED NOTE EVENTS OF DEFAULT
If any Related Note Event of Default shall occur with respect to any Related
Note and be continuing, the Company will have the right to declare the principal
of and the interest on such Related Note and any other amounts payable under the
applicable Related Note to be forthwith due and payable and to enforce its other
rights as a creditor with respect to such Related Note as applicable. A "Related
Note Event of Default" with respect to any Related Note is defined as: (i)
default for 30 days in the payment of interest on such Related Note; (ii)
default in payment of the principal amount at Stated Maturity or any amount
payable upon any redemption of such Related Note; (iii) failure by Morgan
Guaranty for 90 days after receipt of notice to it by the Company to comply with
any of its covenants or agreements contained in the
35
<PAGE> 81
relevant Related Note; and (iv) certain events of bankruptcy, insolvency,
receivership or reorganization involving Morgan Guaranty or certain affiliates.
If any Related Note Event of Default described in clause (i), (ii) or (iii)
above occurs and is continuing, the Company may declare the relevant Related
Note to be due and payable and, upon any such declaration, the relevant Related
Note shall become immediately due and payable along with any accrued and unpaid
interest. If any Related Note Event of Default described in clause (iv) above
occurs and is continuing, all Related Notes shall become immediately due and
payable along with any accrued and unpaid interest. Under certain conditions the
Company may waive certain past defaults and their consequences with respect to
such Related Note. Pursuant to the LLC Agreement, the holders of Preferred
Securities in certain circumstances have the right to direct the Company to
exercise certain of its rights as the holder of the relevant Related Note.
MODIFICATION OF ANY RELATED NOTE
Morgan Guaranty and the Company may, without the consent of the holders of any
Preferred Securities, enter into senior notes supplemental to any Related Note
for, among others, one or more of the following purposes: (i) to evidence the
succession of another person to, and the assumption by such successor of, Morgan
Guaranty's obligations under such Related Note; (ii) to add covenants of Morgan
Guaranty, or surrender any rights of Morgan Guaranty, for the benefit of the
Company; and (iii) to cure any ambiguity, or correct any inconsistency in, such
Related Note.
Each Related Note will contain provisions permitting Morgan Guaranty and the
Company, with the consent of the holders of the not less than a majority in
Principal Amount of the outstanding Preferred Securities relating to such
Related Note, to modify such Related Note; provided that no such modification
may, without the consent of the holders of all outstanding Preferred Securities
affected thereby, (i) reduce the amount of Preferred Securities of such series
the holders of which must consent to any amendment, supplement or waiver of such
Related Note; (ii) reduce the rate of or extend the time for the payment of
interest on the Related Note; (iii) alter the method of calculation of, or
reduce, the amount paid at Stated Maturity or extend the Stated Maturity of such
Related Note (other than pursuant to the terms of such Related Note) or (iv)
make any Related Note payable in money or property other than that stated in the
Related Note.
GOVERNING LAW
Each Related Note will be construed in accordance with the laws of the State of
New York.
MISCELLANEOUS
Related Notes will not be deposits or other obligations of a bank and will not
be insured by the Federal Deposit Insurance Corporation or any other federal
agency.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee that will
be executed and delivered by J.P. Morgan for the benefit of the holders, from
time to time, of Preferred Securities. The terms of the Guarantee will be those
set forth in the Guarantee. The summary set forth herein does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the form of Guarantee, which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
Pursuant to the Guarantee, J.P. Morgan will irrevocably and unconditionally
agree, on a subordinated basis to the extent set forth therein, to pay in full
to the holders of the applicable Preferred Securities the Guarantee Payments (as
defined herein), without duplication of amounts paid by the Company, as and when
due, regardless of any defense, right of set-off or counterclaim that the
Company may have or assert.
36
<PAGE> 82
The following payments with respect to Preferred Securities (the "Guarantee
Payments"), to the extent not paid by the Company, will be subject to the
Guarantee (without duplication): (i)(A) any accrued and unpaid distributions
that are required to be paid on such Preferred Securities and (B) in the case of
ComPS, the ComPS Early Redemption Price or the ComPS Redemption Price, as
applicable, and in the case of all other Preferred Securities, the Preferred
Redemption Price, in each case including all accrued and unpaid distributions,
but if and only if to the extent that, in each case, Morgan Guaranty has made
payment to the Company of interest or principal on the Related Note underlying
such Preferred Securities, and (ii) upon a voluntary or involuntary dissolution,
winding-up or termination of the Company (other than in connection with the
redemption of all of the Preferred Securities upon maturity or redemption of the
applicable Related Note) the lesser of (A) the Liquidation Distribution to the
extent the Company has funds available therefor and (B) the amount of assets of
the Company remaining available for distribution to holders of such Preferred
Securities upon such liquidation, dissolution, winding-up or termination of the
Company. J.P. Morgan's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required amounts by J.P. Morgan to the holders of
Preferred Securities or by causing the Company to pay such amounts to such
holders.
The Guarantee will be a guarantee with respect to each series Preferred
Securities issued by the Company from the time of issuance of such Preferred
Securities, but will not apply to any payment of distributions except to the
extent Morgan Guaranty has made the related payment on the Related Note
underlying such Preferred Securities. If Morgan Guaranty does not make interest
payments on the applicable Related Note, the Company will not pay distributions
on the related Preferred Securities and will not have funds available therefor.
See "Description of the Related Notes".
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
holders of the applicable Preferred Securities (in which case no vote will be
required), the Guarantee may be amended only with the prior approval of the
holders of not less than a majority in aggregate Principal Amount of the
affected outstanding Preferred Securities, voting as a single class. The manner
of obtaining any such approval of holders of such Preferred Securities will be
set forth in an accompanying Prospectus Supplement. All guarantees and
agreements contained in the Guarantee shall bind the successors, assignees,
receivers, trustees and representatives of J.P. Morgan and shall inure to the
benefit of the holders of the applicable Preferred Securities then outstanding.
REMEDIES OF HOLDERS
Upon the failure of J.P. Morgan to perform any of its payments or other
obligations with respect to any Preferred Securities under the Guarantee, any
holder of such Preferred Securities may institute a legal proceeding directly
against J.P. Morgan without first instituting a legal proceeding against the
Company. Subject to the award by a court of competent jurisdiction of legal fees
in connection with any such legal proceeding, each holder will be required to
bear its own costs in connection with instituting a legal proceeding directly
against J.P. Morgan, which cost may be significant.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to the applicable Preferred Securities upon full
payment of the ComPS Early Redemption Price, the ComPS Redemption Price, the
Preferred Redemption Price of all such Preferred Securities or upon full payment
of the amounts payable upon liquidation of the Company, as applicable. The
Guarantee will continue to be effective or will be reinstated as to any
Preferred Securities, as the case may be, if at any time any holder of the
applicable Preferred Securities must restore payment of any sums paid under such
Preferred Securities or the Guarantee (e.g., upon a subsequent bankruptcy of
Morgan Guaranty or J.P. Morgan).
37
<PAGE> 83
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of J.P. Morgan and will
rank (i) subordinate and junior in right of payment to all other liabilities of
J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock
outstanding as of the date hereof of J.P. Morgan and (iii) senior to J.P.
Morgan's common stock. The terms of the Preferred Securities provide that each
holder of Preferred Securities by acceptance thereof agrees to the subordination
provisions and other terms of the applicable Guarantee.
The Guarantee will constitute a guarantee of payment and not of collection (that
is, the guaranteed party may institute a legal proceeding directly against the
guarantor to enforce its rights under the Guarantee without instituting a legal
proceeding against any other person or entity).
GOVERNING LAW
The Guarantee will be governed by and construed and interpreted in accordance
with the laws of the State of New York.
DESCRIPTION OF THE RELATED NOTE GUARANTEE
Set forth below is a summary of information concerning the Related Note
Guarantee that will be executed and delivered by J.P. Morgan in respect of each
Related Note for the benefit of the Company as the holder of the Related Notes.
The terms of the Related Note Guarantee will be those set forth in the Related
Note Guarantee. The summary set forth herein does not purport to be complete and
is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the form of the Related Note Guarantee, which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. The Related Note Guarantee will be held by the Company.
GENERAL
Pursuant to the Related Note Guarantee, J.P. Morgan will irrevocably and
unconditionally agree, on a subordinated basis to the extent set forth therein,
to pay in full to the Company, as the holder of each Related Note, the Related
Note Guarantee Payments (as defined herein), without duplication of amounts paid
by Morgan Guaranty, as and when due, regardless of any defense, right of set-off
or counterclaim that Morgan Guaranty may have or assert with respect to the
obligation to make such Related Note Guarantee Payments. The following payments
with respect to the applicable Related Note (the "Related Note Guarantee
Payments"), to the extent not paid by Morgan Guaranty, will be subject to the
Related Note Guarantee (without duplication): (i) any accrued and unpaid
distributions that are required to be paid on such Related Note and (ii) any
principal payable by Morgan Guaranty, as and when payable by Morgan Guaranty.
J.P. Morgan's obligation to make a Related Note Guarantee Payment may be
satisfied by direct payment of the required amounts by J.P. Morgan to the
Company or by causing Morgan Guaranty to pay such amounts to the Company.
The Related Note Guarantee will be a full and unconditional guarantee with
respect to each Related Note issued by Morgan Guaranty from the time of issuance
of such Related Note.
MODIFICATION OF THE RELATED NOTE GUARANTEE; ASSIGNMENT
The Related Note Guarantee may be amended only with the prior approval of the
Company. All guarantees and agreements contained in the Related Note Guarantee
shall bind the successors, assignees, receivers, trustees and representatives of
J.P. Morgan and shall inure to the benefit of the Company as the holder of each
Related Note then outstanding.
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<PAGE> 84
REMEDIES OF THE COMPANY AND HOLDERS OF COMPS
The Company has the sole right to direct the time, method and place of
conducting any proceeding providing for any remedy available to it in respect of
the Related Note Guarantee. Pursuant to the LLC Agreement, the holders of
Preferred Securities in certain circumstances (including a payment default under
the Related Note by J.P. Morgan) have the right to direct the Company to
exercise certain of its rights as the holder of the Related Note Guarantee.
TERMINATION OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will terminate as to any Related Note upon full
payment of the Related Note Redemption Price (as defined below) of such Related
Note. The Related Note Guarantee will continue to be effective or will be
reinstated with respect to any Related Note, as the case may be, if at any time
the Company must restore payment of any sums paid under the Related Note or
under the Related Note Guarantee with respect to such Related Note (e.g., upon a
subsequent bankruptcy of J.P. Morgan).
STATUS OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will constitute an unsecured obligation of J.P.
Morgan and will rank (i) subordinate and junior in right of payment to all other
liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or
preference stock outstanding as of the date hereof of J.P. Morgan, and (iii)
senior to J.P. Morgan's common stock. The terms of the Preferred Securities
provide that each holder of Preferred Securities by acceptance thereof agrees to
the subordination provisions and other terms of the Related Note Guarantee.
The Related Note Guarantee will constitute a guarantee of payment and not of
collection (that is, the Company may institute a legal proceeding directly
against J.P. Morgan to enforce its rights under the Related Note Guarantee
without instituting a legal proceeding against Morgan Guaranty).
GOVERNING LAW
The Related Note Guarantee will be governed by and construed and interpreted in
accordance with the laws of the State of New York.
PLAN OF DISTRIBUTION
The Company may sell the Preferred Securities in one or more of the following
ways from time to time: (i) to or through underwriters or dealers, (ii) directly
to purchasers or (iii) through agents. The Prospectus Supplement with respect to
any Offered Securities will set forth (a) the terms of the offering of the
Offered Securities, including the name or names of any underwriters, dealers or
agents, (b) the purchase price of the Offered Securities and the proceeds to the
Company from such sale, (c) any underwriting discounts and commissions or agency
fees and other items constituting underwriters' or agents' compensation, (d) any
initial public offering prices, (e) any discounts or concessions allowed or paid
to dealers and (f) any securities exchange on which such Offered Securities may
be listed. Any initial public offering price, discounts or concessions allowed
or reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale, the Offered Securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The Offered
Securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of Offered Securities will be named in the
Prospectus Supplement relating to such offering and, if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of such Prospectus Supplement. Unless otherwise set forth in the
Prospectus Supplement relating thereto, the obligations of the underwriters to
39
<PAGE> 85
purchase the Offered Securities will be subject to certain conditions precedent,
and the underwriters will be obligated to purchase all the Offered Securities if
any are purchased.
If dealers are utilized in the sale of Offered Securities, the Company will sell
such Offered Securities to the dealers as principals. The dealers may then
resell such Offered Securities to the public at varying prices to be determined
by such dealers at the time of resale. The names of the dealers and the terms of
the transaction will be set forth in the Prospectus Supplement relating thereto.
Any series of Preferred Securities may be sold from time to time either directly
by the Company or by agents of the Company designated by the Company. Any agent
involved in the offer or sale of the Offered Securities with respect to which
this Prospectus is delivered will be named, and any commissions payable by the
Company to such agent will be set forth, in the applicable Prospectus Supplement
relating thereto. Unless otherwise indicated in the applicable Prospectus
Supplement, any such agent will be acting on a best efforts basis for the period
of its appointment.
The Preferred Securities may be sold directly by the Company to institutional
investors or others who may be deemed to be underwriters within the meaning of
the Securities Act with respect to any resale thereof. The terms of any such
sales will be described in the Prospectus Supplement relating thereto.
If so indicated in the Prospectus Supplement, the Company will authorize agents,
underwriters or dealers to solicit offers from certain types of institutions to
purchase Offered Securities from the Company at the public offering price set
forth in the Prospectus Supplement pursuant to delayed delivery contracts
providing for payment and delivery on a specified date in the future. Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commission payable
for solicitation of such contracts.
Agents, dealers and underwriters may be entitled under agreements with J.P.
Morgan or the Company to indemnification by J.P. Morgan or the Company against
certain civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments that such agents, dealers or underwriters
may be required to make in respect thereof. Agents, dealers and underwriters may
be customers of, engage in transactions with, or perform services for J.P.
Morgan or the Company in the ordinary course of business.
Each series of Offered Securities will be a new issue of securities and will
have no established trading market. Any underwriters to whom Offered Securities
are sold for public offering and sale may make a market in such Offered
Securities, but such underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. The Offered Securities
may or may not be listed on a national securities exchange. No assurance can be
given that there will be a market for the Offered Securities.
This Prospectus and the related Prospectus Supplement may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and
sales related to secondary market transactions in the ComPS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon by Gene A.
Capello, Vice President and Assistant General Counsel of J.P. Morgan, and by
Cravath, Swaine & Moore, New York, New York, counsel for any underwriters,
selling agents and certain other purchasers. Mr. Capello owns or has the right
to acquire a number of shares of common Stock of J.P. Morgan equal to or less
than 0.01% of the outstanding common stock of J.P. Morgan.
40
<PAGE> 86
EXPERTS
The audited financial statements contained in J.P. Morgan's Annual Report on
Form 10-K for the year ended December 31, 1995 (included in J.P. Morgan's Annual
Report to Stockholders), are incorporated by reference in this Prospectus in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
41
<PAGE> 87
ANNEX I
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used in
the Prospectus Supplement. The LLC Agreement, the Guarantee, the Related Note
Guarantee and any Related Note may contain more complete definitions of certain
of the terms defined herein, as well as definitions of certain other terms not
defined herein, and reference should be made to the LLC Agreement, the
Guarantee, the Related Note Guarantee and the relevant Related Note, as
applicable, for complete definitions of such terms.
BENCHMARK CONTRACTS.....with respect to any Applicable Index, the futures
contracts on the relevant commodity the change in value
of which serve as the basis for calculating the change
in value of such Applicable Index.
BULLION COMPS...........ComPS for which the Applicable Index is a Price
Reference Index in which all distributions and the
Bullion ComPS Principal Amount are indexed to the value
at such time in U.S. dollars (the "Dollar Equivalent
Value") of bullion (i.e., gold, silver, platinum or
palladium).
BULLION COMPS
PRINCIPAL AMOUNT........the Dollar Equivalent Value of the applicable portion of
the applicable fixing price for the applicable amount of
the applicable bullion commodity at such time.
BUSINESS DAY............any day other than a Saturday, Sunday or any other day
on which banking institutions in New York, New York, are
permitted or required by any applicable law to close.
CODE....................the Internal Revenue Code of 1986, as amended.
COLLATERAL RETURN
COMPONENT...............with respect to any Total Return ComPS, a component of
the value of the Applicable Index computed on the
fluctuating index value of the Applicable Index at the
most recent auction rate for 3-month U.S. Treasury Bills
or any successor rate thereto with a maturity of 3
months or less or, if no such rate has been determined
in the 13 days prior to the date of determination, as
Morgan Guaranty may determine in its reasonable
discretion.
COMMISSION..............the Securities and Exchange Commission.
COMMON SECURITIES.......the common securities of the Company representing voting
limited liability company interests in the Company, to
be directly or indirectly owned by J.P. Morgan.
DISTRIBUTIONS...........if any, as specified in the applicable Prospectus
Supplement.
DTC.....................the Depository Trust Company.
EARLY REDEMPTION
VALUE...................The average for the 10 days of the Early Determination
Period of the discounted present value of the indexed
Principal Amount of the ComPS, as set forth under
"Description of ComPS--Early Redemption Upon the
Occurrence of a Special Event or at the Election of the
Holders of the ComPS".
ERISA...................the Employee Retirement Income Security Act of 1974.
EXCHANGE ACT............the Securities Exchange Act of 1934, as amended.
A-1
<PAGE> 88
FACE AMOUNT.............as set forth in the applicable Prospectus Supplement.
FACTOR..................as specified in the applicable Prospectus Supplement,
the amount by which the Redemption Value is reduced to
account for certain costs of issuing Excess Return or
Total Return ComPS.
GUARANTEE...............the Guarantee Agreement executed by J.P. Morgan on
behalf of the holders of each series of Preferred
Securities.
GUARANTEE PAYMENTS......without duplication, (i)(A) any accrued and unpaid
distributions that are required to be paid on the
Preferred Securities and (B) the Preferred Redemption
Price, but if and only to the extent that, in each of
case, Morgan Guaranty has made a payment of interest or
principal, as the case may be, on the Related Note and
(ii) upon a Liquidation Event (other than in connection
with the redemption of all the Preferred Securities upon
the maturity or redemption of the applicable Related
Note), the lesser of (A) the Liquidation Distribution to
the extent the Company has funds available therefor, and
(B) the amount of assets of the Company remaining
available for distribution to holders of the Preferred
Securities upon such Liquidation Event.
INITIAL HOLDERS.........holders who purchase any Preferred Securities upon
original issuance.
INTEREST PAYMENT DATE...with respect to any Related Note, as specified in the
applicable Prospectus Supplement.
INVESTMENT COMPANY
EVENT...................the receipt by the Company of an opinion of a nationally
recognized independent counsel experienced in such
matters to the effect that, as a result of the
occurrence of a change in law or regulation, a written
change in interpretation or application of law or
regulation by any legislative body, court, governmental
agency or regulatory authority or the expiration or
revocation of any applicable exemption obtained by the
Company (a "Change in 1940 Act Law"), there is more than
an insubstantial risk that the Company is or will be
considered an "investment company" that is required to
be registered under the 1940 Act, which Change in 1940
Act Law becomes effective on or after the date of this
Prospectus.
IRS.....................Internal Revenue Service.
ISSUE DATE..............as set forth in the applicable Prospectus Supplement.
LLC AGREEMENT...........the limited liability company agreement among J.P.
Morgan, JPM Ventures and holders of Preferred Securities
subsequently becoming members thereof dated February 16,
1996, and effective as of November 21, 1995.
LIQUIDATION
DISTRIBUTION............in respect of any Liquidation Event, the sum of (a) the
Early Redemption Value or stated liquidation preference,
as applicable, plus (b) the amount of accrued and unpaid
distributions on such Preferred Security to but
excluding the date of payment.
LIQUIDATION EVENT.......any liquidation, dissolution, winding-up or termination
of the Company, whether voluntary or involuntary.
NASDAQ..................The Nasdaq Stock Market.
1940 ACT................the Investment Company Act of 1940, as amended.
A-2
<PAGE> 89
PREFERRED
REDEMPTION
PRICE...................On any date of redemption, an amount equal to (i) the
Principal Amount per Preferred Security plus (ii)
accrued and unpaid distributions to but excluding the
date of redemption.
PREFERRED SECURITIES....Preferred Securities of J.P. Morgan Index Funding
Company, LLC.
PRINCIPAL AMOUNT........at any time, (i) in the case of any Preferred Security,
the Bullion ComPS Principal Amount, Redemption Value,
Early Redemption Value or stated liquidation preference
thereof, as applicable, as if determined as of such
time, and (ii) in the case of any Related Note, the
principal amount thereof at such time determined
pursuant to the terms thereof.
REDEMPTION DATE.........either the Stated Maturity or an Early Redemption Date,
as applicable.
REDEMPTION VALUE........with respect to any series of ComPS, the average for the
Determination Period of the Principal Amount thereof, as
described under "Description of ComPS--Calculation of
Redemption Value".
RELATED NOTE............an unsecured, unsubordinated debt obligation of Morgan
Guaranty, as described in the applicable Prospectus
Supplement.
RELATED NOTE
EVENT OF DEFAULT........(i) default for 30 days in the payment of interest on
the applicable Related Note; (ii) default in payment of
principal amount at the Stated Maturity or any amount
payable upon any redemption of the applicable Related
Note; (iii) failure by Morgan Guaranty for 90 days after
receipt of notice to it to comply with any of its
covenants or agreements contained in the applicable
Related Note; and (iv) certain events of bankruptcy,
insolvency, receivership or reorganization involving
Morgan Guaranty or certain affiliates.
SECURITIES..............the Common Securities and the Preferred Securities.
SECURITIES ACT..........the Securities Act of 1933.
SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, as specified in the
applicable Prospectus Supplement.
SPECIAL EVENT...........either a Tax Event or an Investment Company Event.
SPECIAL REDEMPTION......if specified in the applicable Prospectus Supplement,
upon the occurrence and during the continuation of a
Special Event, Morgan Guaranty will have the right to
redeem the applicable Related Note for cash at the
Related Note Redemption Price, with the result that the
Company will redeem Preferred Securities on a Pro Rata
Basis for cash at the Preferred Redemption Price.
SPECIAL REDEMPTION
DATE....................any date in respect of which upon the occurrence and
continuation of a Tax Event or an Investment Company
Event, Morgan Guaranty shall have called for redemption
in whole or in part the Related Notes, and the Company
shall have called for redemption in whole or in part the
Preferred Securities.
STATED MATURITY.........with respect to any series of Preferred Securities, as
set forth in the applicable Prospectus Supplement.
TAX COUNSEL.............Cravath, Swaine & Moore, special tax counsel to J.P.
Morgan and the Company.
A-3
<PAGE> 90
TAX EVENT...............the receipt by the Company of an opinion of nationally
recognized independent tax counsel experienced in such
matters (a "Tax Opinion") to the effect that, as a
result of (a) any amendment to, or change (including any
announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or
therein, (b) any amendment to, or change in, an
interpretation or application of such laws or
regulations by any legislative body, court, governmental
agency or regulatory authority (including the enactment
of any legislation and the publication of any judicial
decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a
position with respect to such laws or regulations that
differs from the theretofore generally accepted position
or (d) any action taken by any governmental agency or
regulatory authority, which amendment or change is
enacted, promulgated, issued or announced or which
interpretation or pronouncement is issued or announced
or which action is taken, in each case on or after the
date of this Prospectus Supplement, that there is more
than an insubstantial risk that at such time or within
90 days of the date thereof (i) the Company is or would
be subject to United States Federal income tax with
respect to income accrued or received on any Related
Note, (ii) the interest payable on any Related Note is
not or would not be deductible by Morgan Guaranty for
United States Federal income tax purposes, (iii) the
contingent principal in excess of the Face Amount of any
series of Preferred Securities (if any) payable on any
Related Note is not or would not be deductible by Morgan
Guaranty for United States Federal income tax purposes
or (iv) the Company is or would be subject to more than
a de minimis amount of other taxes, duties or other
governmental charges.
TRADING DAY.............any day on which open-outcry trading on either the NYMEX
or the LME is scheduled to occur or occurs.
A-4
<PAGE> 91
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE COMPANY OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF J.P. MORGAN, OR THE
COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Summary of the Offering......................... S-4
The Offering.................................... S-5
Risk Factors.................................... S-10
J.P. Morgan & Co. Incorporated.................. S-18
J.P. Morgan Index Funding Company, LLC.......... S-19
Use of Proceeds................................. S-19
Description of the ComPS........................ S-20
Description of the Related Note................. S-29
Description of the Guarantee.................... S-32
Description of the Related Note Guarantee....... S-33
Effect of Obligations Under the Guarantee, the
Related Note Guarantee and the Related Note... S-34
United States Federal Income Taxation........... S-35
ERISA Considerations............................ S-39
Underwriting.................................... S-39
Legal Matters................................... S-40
Experts......................................... S-40
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms............................... A-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 2
J.P. Morgan & Co. Incorporated.................. 3
J.P. Morgan Index Funding Company, LLC.......... 5
Use of Proceeds................................. 6
Consolidated Ratios of J.P. Morgan.............. 6
Description of All Preferred Securities......... 7
Description of the ComPS........................ 7
Risk Factors with Respect to All Preferred
Securities.................................... 17
Risk Factors with Respect to ComPS.............. 19
The Underlying Markets.......................... 24
The JPM Indices................................. 28
Description of the Related Notes................ 35
Description of the Guarantee.................... 36
Description of the Related Note Guarantee....... 38
Plan of Distribution............................ 39
Legal Matters................................... 40
Experts......................................... 41
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms............................... A-1
</TABLE>
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SERIES [A]
COMMODITY-INDEXED
PREFERRED SECURITIES
INDEXED TO THE
JPMCI ALUMINUM
TOTAL RETURN INDEX
J.P. MORGAN INDEX
FUNDING COMPANY, LLC
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
J.P. MORGAN & CO.
INCORPORATED
PROSPECTUS SUPPLEMENT
[ ]
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