<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NOS. 333-01121 AND 333-01121-01
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
J.P. MORGAN & CO. INCORPORATED
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-2625764
(State or other jurisdiction or incorporation of
organization) (I.R.S. Employer Identification No.)
</TABLE>
J.P. MORGAN INDEX FUNDING COMPANY, LLC
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3863618
(State or other jurisdiction of incorporation or
organization) (I.R.S. Employer Identification No.)
</TABLE>
------------------------
60 WALL STREET
NEW YORK, NEW YORK 10260-0060
TEL. NO. (212) 483-2323
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
RACHEL F. ROBBINS, ESQ.
General Counsel and Secretary
J.P. MORGAN & CO. INCORPORATED
60 WALL STREET
NEW YORK, NEW YORK 10260-0060
TEL. NO.: (212) 648-3535
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GENE A. CAPELLO, ESQ. B. ROBBINS KIESSLING, ESQ.
VICE PRESIDENT AND ASSISTANT GENERAL COUNSEL CRAVATH, SWAINE & MOORE
J.P. MORGAN & CO. INCORPORATED WORLDWIDE PLAZA
60 WALL STREET 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10260-0060 NEW YORK, NEW YORK 10019-7475
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement as
determined by market conditions.
If any of the securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(1)(2)(3) (1)(2)(3) FEE(5)
- --------------------------------------------------------------------------------------------------------------------------
Preferred Securities of the Company................... $700,000,000 $241,379.31
- --------------------------------------------------------------------------------------------------------------------------
Guarantees of Preferred Securities of the Company, the
Related Note Guarantee of the Related Note of Morgan
Guaranty by, and certain backup obligations under
the LLC Agreement and the Expense Agreement of, J.P.
Morgan.............................................. (4)
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Total................................................. $700,000,000 $241,379.31
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</TABLE>
- --------------------------------------------------------------------------------
(1) Such indeterminate number of Preferred Securities of the Company as may from
time to time be issued at indeterminate prices.
(2) Estimated pursuant to Rule 457 under the Securities Act of 1933, as amended,
solely for the purpose of calculating the registration fee. The aggregate
public offering price of the Preferred Securities of the Company registered
hereby will not exceed $700,000,000.
(3) Exclusive of accrued interest and distributions, if any.
(4) The back-up obligations of J.P. Morgan, in addition to the Guarantee and the
Related Note Guarantee, consist of the obligations of J.P. Morgan with
respect to the Preferred Securities that are set forth in the LLC Agreement
and the Expense Agreement. No separate consideration will be received for
the Guarantee, the Related Note Guarantee or such backup obligations. See
"Effect of the Obligations Under the Guarantee, the Related Note Guarantee
and the Related Note" in the applicable Prospectus Supplement.
(5) Previously paid. ------------------------
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- --------------------------------------------------------------------------------
<PAGE> 2
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> 3
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> 4
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> 5
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> 6
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> 7
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.
6
<PAGE> 8
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> 9
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:
8
<PAGE> 10
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 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
9
<PAGE> 11
index. Thus, any events which affect the designated contracts underlying such
Excess Return Index may affect the Redemption Value of such ComPS.
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
10
<PAGE> 12
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 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.
11
<PAGE> 13
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 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
12
<PAGE> 14
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 (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> 15
"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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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
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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 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
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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.
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.
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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.
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
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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 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
23
<PAGE> 25
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 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
24
<PAGE> 26
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 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.
25
<PAGE> 27
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.
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).
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<PAGE> 28
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.
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
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<PAGE> 29
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 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.
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<PAGE> 30
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:
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
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<PAGE> 31
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
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> 32
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.
31
<PAGE> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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.
38
<PAGE> 40
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> 41
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> 42
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> 43
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.
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<PAGE> 44
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.
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<PAGE> 45
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.
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<PAGE> 46
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.
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<PAGE> 47
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.........[ ], 20[ ].
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.
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<PAGE> 48
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS.
<TABLE>
<C> <C> <S>
1(a)(1) -- Form of Underwriting Agreement for Preferred Securities*
3(a) -- Certificate of Formation of J.P. Morgan Index Funding Company, LLC*
3(b) -- Amended and Restated Limited Liability Company Agreement of J.P. Morgan
Index Funding Company, LLC*
3(c) -- Restated Certificate of Incorporation of J.P. Morgan & Co.
Incorporated, as amended*
3(d) -- By-Laws of J.P. Morgan & Co. Incorporated as amended through December
11, 1991*
4(a)(1) -- Form of Certificate for Securities for Preferred Securities (included
in Exhibit 3(b))
4(b) -- Form of Guarantee Agreement*
4(c) -- Form of Related Note Guarantee Agreement*
4(d) -- Form of Related Note*
4(e) -- Form of Agreement as to Expenses and Liabilities*
4(f) -- Form of License Agreement between Morgan Guaranty and J.P. Morgan Index
Funding Company, LLC*
4(g) -- Form of Certificate for Securities for Preferred Securities (included
in Exhibit 3(b))
5 -- Opinion of Margaret M. Foran (predecessor to Gene A. Capello)*
12 -- Computation of Consolidated Ratio of Earnings to Fixed Charges and
Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends*
23(a) -- Consent of Price Waterhouse LLP*
23(b) -- Consent of Margaret M. Foran (predecessor to Gene A. Capello) (included
in Exhibit 5)
24 -- Powers of Attorney
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKING.
The Registrants hereby undertake that, for purposes of determining any liability
under the Securities Act, each filing of J.P. Morgan's Annual Report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (and where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that
is incorporated by reference in the Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement.
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) that, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
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<PAGE> 49
(iii) to include any material information with respect to the Plan of
Distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by J.P. Morgan pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York and State of New York, on this 18th day of
November, 1996.
J.P. MORGAN & CO. INCORPORATED
By /s/ GENE A. CAPELLO
------------------------------------
Gene A. Capello
(Vice President and Assistant
General Counsel)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ DOUGLAS A. WARNER III* Chairman of the Board, November 18, 1996
- --------------------------------------------- President and Director,
(Douglas A. Warner III) (Principal Executive
Officer)
/s/ RILEY P. BECHTEL* Director November 18, 1996
- ---------------------------------------------
(Riley P. Bechtel)
/s/ MARTIN FELDSTEIN* Director November 18, 1996
- ---------------------------------------------
(Martin Feldstein)
/s/ HANNA H. GRAY* Director November 18, 1996
- ---------------------------------------------
(Hanna H. Gray)
/s/ JAMES R. HOUGHTON* Director November 18, 1996
- ---------------------------------------------
(James R. Houghton)
/s/ JAMES L. KETELSEN* Director November 18, 1996
- ---------------------------------------------
(James L. Ketelsen)
/s/ ROBERTO G. MENDOZA* Vice Chairman of the Board November 18, 1996
- --------------------------------------------- and Director
(Roberto G. Mendoza)
/s/ MICHAEL E. PATTERSON* Vice Chairman of the Board November 18, 1996
- --------------------------------------------- and Director
(Michael E. Patterson)
/s/ LEE R. RAYMOND* Director November 18, 1996
- ---------------------------------------------
(Lee R. Raymond)
</TABLE>
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<PAGE> 51
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ RICHARD D. SIMMONS* Director November 18, 1996
- ---------------------------------------------
(Richard D. Simmons)
/s/ KURT F. VIERMETZ* Vice Chairman of the Board November 18, 1996
- --------------------------------------------- and Director
(Kurt F. Viermetz)
/s/ DENNIS WEATHERSTONE* Retired Chairman of the November 18, 1996
- --------------------------------------------- Board and Director
(Dennis Weatherstone)
/s/ DOUGLAS C. YEARLY* Director November 18, 1996
- ---------------------------------------------
(Douglas C. Yearly)
/s/ JOHN A. MAYER* Chief Financial Officer November 18, 1996
- --------------------------------------------- (Principal Financial
(John A. Mayer) Officer)
/s/ DAVID H. SIDWELL* Managing Director and November 18, 1996
- --------------------------------------------- Controller (Principal
(David H. Sidwell) Accounting Officer)
*By: /s/ MICHAEL E. PATTERSON
- ---------------------------------------------
(Michael E. Patterson,
Attorney-in-Fact)
</TABLE>
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