Prospectus Supplement
(To Prospectus Dated January 31, 1996)
715,100 MEDSSM
Mandatorily Exchangeable Debt SecuritiesSM)
J.P. Morgan & Co. Incorporated
5.00% Exchangeable Notes Due January 22, 1999
(Subject to Exchange into Shares of Common Stock, Par Value $.01 Per Share,
of Autozone, Inc.)
The initial principal amount of each of the 5.00% Exchangeable Notes Due
January 22, 1999 (each, a "MEDS"), of J.P. Morgan & Co. Incorporated ("J.P.
Morgan") being offered hereby will be $22.375 (the "Initial Price"). The
Initial Price is the last sale price of the Common Stock, par value $.01
per share (the "Autozone Common Stock"), of Autozone, Inc. ("Autozone"), on
January 23, 1997, as reported on the New York Stock Exchange (the "NYSE").
The MEDS will mature on January 22, 1999. Interest on the MEDS, at the rate
of 5.00% of the Initial Price per annum, is payable quarterly on each
January 22, April 22, July 22 and October 22, beginning April 22, 1997.
MEDS are not subject to redemption or any sinking fund prior to maturity.
At maturity (including as a result of acceleration), the principal amount
of each MEDS will be mandatorily exchanged by J.P. Morgan into a number of
shares of Autozone Common Stock (or, at J.P. Morgan's option, cash with an
equal value) at the Exchange Rate. The Exchange Rate is equal to, subject
to certain adjustments, (a) if the Maturity Price per share of Autozone
Common Stock is less than or equal to $32.45 (the "Capped Participation
Price"), one share of Autozone Common Stock per MEDS, and (b) if the
Maturity Price is greater than the Capped Participation Price, a fractional
share of Autozone Common Stock per MEDS so that the value of such
fractional share at the Maturity Price equals the Capped Participation
Price. The "Maturity Price" means the average Closing Price (as defined
herein) per share of Autozone Common Stock on the 3 Trading Days (as
defined herein) ending on the third Trading Day immediately prior to (but
not including) the date of maturity. Accordingly, holders of the MEDS will
not necessarily receive an amount equal to the Initial Price thereof. The
MEDS will be an unsecured obligation of J.P. Morgan ranking pari passu with
all of its other unsecured and unsubordinated indebtedness. See
"Description of the MEDS."
The MEDS will be represented by Global Securities registered in the name of
the nominee of The Depository Trust Company, which will act as the
Depository. Interests in the MEDS represented by Global Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by the Depository and its direct and indirect participants.
Except as described herein, MEDS in definitive form will not be issued.
Settlement for the MEDS will be made in immediately available funds. The
MEDS will trade in the Depository's Same-Day Funds Settlement System and
secondary market trading activity for the MEDS will therefore settle in
immediately available funds. All payments of principal and interest will be
made by J.P. Morgan in immediately available funds or the equivalent.
For a discussion of certain United States federal income tax consequences
for holders of MEDS, see "Certain United States Federal Income Tax
Considerations."
Autozone is not affiliated with J.P. Morgan and has no obligations with
respect to the MEDS. See "Risk Factors--No Affiliation Between J.P. Morgan
and Autozone."
"MEDS" and "Mandatorily Exchangeable Debt Securities" are service marks of
J.P. Morgan.
Autozone Common Stock is traded on the NYSE under the symbol "AZO". The
MEDS will not be listed or traded on any securities exchange or trading
market.
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PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER CAREFULLY THE
INFORMATION CONTAINED UNDER "RISK FACTORS".
THESE SECURITIES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER FEDERAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
J.P. Morgan Securities Inc. (the "Underwriter") proposes to offer
the MEDS from time to time for sale in one or more negotiated
transactions, or otherwise, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at
negotiated prices, in each case plus accrued interest, if any, from
January 30, 1997. The Underwriter has agreed to purchase the MEDS at
100% of their principal amount ($16,000,363 aggregate proceeds to
J.P. Morgan before deducting expenses payable by J.P. Morgan), plus
accrued interest, if any, from January 30, 1997. J.P. Morgan has
agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
See "Underwriting".
The MEDS are offered subject to receipt and acceptance by J.P.
Morgan Securities Inc. (the "Underwriter"), to prior sales and to
the Underwriter's right to reject any order in whole or in part and
to withdraw, cancel or modify the offer without notice. It is
expected that delivery of the MEDS will be made at the office of
J.P. Morgan & Co. Incorporated, 60 Wall Street, New York, New York,
or through the facilities of The Depository Trust Company, on or
about January 30, 1997.
J.P. Morgan & Co.
The date of this Prospectus Supplement is January 24, 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER- ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF
THE MEDS AND THE AUTOZONE COMMON STOCK AT LEVELS ABOVE THOSE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NYSE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
Incorporation of Certain Documents by Reference
J.P. Morgan hereby incorporates by reference in this Prospectus
Supplement J.P. Morgan's Annual Report on Form 10-K for the year ended
December 31, 1995 (included in its Annual Report to Stockholders),
J.P. Morgan's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 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, August 13, 1996, October 10, 1996, December 11, 1996
and January 13, 1997, heretofore filed pursuant to Section 13 of the
1934 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
1934 Act subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the MEDS shall be deemed
to be incorporated by reference into this Prospectus Supplement 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 Supplement 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 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 Supplement.
J.P. Morgan will provide without charge to each person, including any
beneficial owner, to whom this Prospectus Supplement 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) 648-2069.
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Risk Factors
As described in more detail below, the trading price of the MEDS may
vary considerably prior to maturity (including by acceleration or
otherwise, "Maturity") due to, among other things, fluctuations in the
price of Autozone Common Stock and other events that are difficult to
predict and beyond J.P. Morgan's control.
Comparison to Other Debt Securities
The terms of the MEDS differ from those of ordinary debt securities
in that the amount that a holder of the MEDS will receive upon
mandatory exchange of the principal amount thereof at Maturity is
not fixed, but is based on the price of the Autozone Common Stock as
specified in the Exchange Rate (as defined under "Description of the
MEDS"). There can be no assurance that such amount receivable by
such holder upon exchange at Maturity will be equal to or greater
than the Initial Price of the MEDS. For example, if the Maturity
Price of the Autozone Common Stock is less than the Initial Price,
such amount receivable upon exchange will be less than the Initial
Price paid for the MEDS, in which case an investment in MEDS would
result in a loss.
In addition, the opportunity for equity appreciation afforded by an
investment in the MEDS is less than the opportunity for equity
appreciation afforded by an investment in the Autozone Common Stock
because the amount receivable by holders of the MEDS upon exchange at
Maturity will in no event exceed the Capped Appreciation Price (as
defined under "Description of the MEDS") of $32.45, regardless of the
Maturity Price of the Autozone Common Stock, which represents an
appreciation of 45.00% over the Initial Price. Because the price of
the Autozone Common Stock is subject to market fluctuations, the value
of the Autozone Common Stock (or, at the option of J.P. Morgan, the
amount of cash) receivable by a holder of MEDS upon exchange at
Maturity, determined as described herein, may be more or less than the
Initial Price of the MEDS.
Relationship of MEDS and Autozone Common Stock
The market price of MEDS at any time will be affected primarily by
changes in the price of Autozone Common Stock. As indicated in "Price
Range and Dividend History of Autozone Common Stock" herein, the price
of Autozone Common Stock has been volatile during certain recent
periods.
It is impossible to predict whether the price of Autozone Common Stock
will rise or fall. Trading prices of Autozone Common Stock will be
influenced by Autozone's operational results and by complex and
interrelated political, economic, financial and other factors that can
affect the capital markets generally, the stock exchanges or quotation
systems on which Autozone Common Stock is traded and the market
segment of which Autozone is a part. Trading prices of Autozone Common
Stock may also be influenced if J.P. Morgan or other persons hereafter
issue securities with terms similar to those of the MEDS or if J.P.
Morgan otherwise transfers shares of Autozone Common Stock owned by
J.P. Morgan. As of January 24, 1997, a wholly owned subsidiary of J.P.
Morgan held or had the right to acquire approximately 439,900 shares
of Autozone Common Stock, with sole voting and investment power over
all such shares. See "Autozone, Inc." However, the Indenture does not
contain
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any restriction on the disposition of such stock by J.P. Morgan, and
no such shares of Autozone Common Stock will be pledged or otherwise
held in escrow for use at Maturity of the MEDS. See "Description of
the MEDS--General".
Dilution of Autozone Common Stock
The amount that holders of the MEDS are entitled to receive upon the
mandatory exchange at Maturity is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends and
certain other actions of Autozone that modify its capital structure,
such as certain issuances of rights or warrants. See "Description of
the MEDS--Dilution Adjustments." Such amount to be received by such
holders upon exchange at Maturity may not be adjusted for other
events, such as offerings of Autozone Common Stock for cash or in
connection with acquisitions, that may adversely affect the price of
Autozone Common Stock and, because of the relationship of such amount
to be received upon exchange to the price of Autozone Common Stock,
such other events may adversely affect the trading price of the MEDS.
See "Autozone, Inc." There can be no assurance that Autozone will not
make offerings of Autozone Common Stock or take such other action in
the future or as to the amount of such offerings, if any. In addition,
until such time, if any, as J.P. Morgan shall deliver shares of
Autozone Common Stock to holders of the MEDS at Maturity thereof,
holders of the MEDS will not be entitled to any rights with respect to
Autozone Common Stock (including, without limitation, the exercise of
voting rights and the right to receive any dividends or other
distributions in respect thereof).
No Affiliation Between J.P. Morgan and Autozone
As of January 24, 1997, a wholly owned subsidiary of J.P. Morgan held
or had the right to acquire approximately 439,900 shares of Autozone
Common Stock, with sole voting and investment power over all such
shares. However, J.P. Morgan may at any time to the extent legally
permitted purchase, sell or enter into any other transactions related
to Autozone Common Stock without restriction.
J.P. Morgan is not affiliated with Autozone and, although J.P. Morgan
has no knowledge that any of the events described in the preceding
subsection not heretofore publicly disclosed by Autozone are currently
being contemplated by Autozone or of any event that would have a
material adverse effect on Autozone or on the price of Autozone Common
Stock, such events are beyond J.P. Morgan's ability to control and are
difficult to predict.
Autozone has no obligations with respect to the MEDS, including any
obligation to take the needs of J.P. Morgan or of holders of the MEDS
into consideration for any reason. Autozone will not receive any of
the proceeds of the offering of the MEDS made hereby and is not
responsible for, and has not participated in, the determination or
calculation of the amount receivable by holders of the MEDS at
Maturity. Autozone is not involved with the administration or trading
of the MEDS and has no obligations with respect to the amount
receivable by holders of the MEDS at Maturity.
<PAGE>
Possible Illiquidity of the Secondary Market
It is not possible to predict how the MEDS will trade in the secondary
market or whether such market will be liquid or illiquid. MEDS are
novel and innovative securities and there is currently no secondary
market for the MEDS. The Underwriter currently intends, but is not
obligated, to make a market in the MEDS. There can be no assurance
that a secondary market will develop or, if a secondary market does
develop, that it will provide the holders of the MEDS with liquidity
of investment or that it will continue for the life of the MEDS.
The MEDS will not be listed or traded on any securities exchange or
trading market. Thus, pricing information for the MEDS may be more
difficult to obtain than if the MEDS were listed or traded on a
securities exchange or trading market.
Uncertain United States Federal Income Tax Characterization of MEDS
No statutory, judicial or administrative authority directly addresses
the characterization of the MEDS or instruments similar to the MEDS
for U.S. federal income tax purposes. As a result, significant aspects
of the U.S. federal income tax consequences of an investment in the
MEDS are not certain. No ruling is being requested from the Internal
Revenue Service with respect to the MEDS and no assurance can be given
that the Internal Revenue Service will agree with the position taken
b15J. P. Morgan. In particular, a holder of MEDS might be required to
accrue interest income at a rate in excess of the coupon on the MEDS.
See "Certain United States Federal Income Tax Considerations."
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 in the accompanying Prospectus.
As used in this Prospectus Supplement, unless the context otherwise
requires, the term "J.P. Morgan" refers to J.P. Morgan & Co.
Incorporated and its consolidated and unconsolidated subsidiaries.
<PAGE>
Use of Proceeds
The net proceeds (after use of proceeds for hedging purposes described
below) to be received by J.P. Morgan from the sale of the MEDS will be
used for general corporate purposes, including investment in equity
and debt securities and interest-bearing deposits of subsidiaries.
Pending such use, J.P. Morgan may temporarily invest the net proceeds
or may use them to reduce short-term indebtedness.
From time to time after the initial offering and prior to the Maturity
of the MEDS, depending on market conditions (including the market
price of Autozone Common Stock), subsidiaries of J.P. Morgan may use
the remainder of the proceeds to be received by J.P. Morgan from the
sale of MEDS to engage in dynamic hedging techniques and may take long
or short positions in Autozone Common Stock, in listed or
over-the-counter options contracts in, or other derivative or
synthetic instruments related to, the Autozone Common Stock.
Autozone, Inc.
According to publicly available documents, Autozone, Inc., a Nevada
corporation ("Autozone"), is a leading specialty retailer of
automotive parts and accessories, primarily focusing on
"do-it-yourself" customers. Autozone is subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"). Accordingly, Autozone files reports, proxy statements and other
information with the Securities and Exchange Commission (the
"Commission"). Copies of Autozone's registration statements, reports,
proxy statements and other information may be inspected and copied at
certain offices of the Commission.
This Prospectus Supplement relates only to the MEDS offered hereby and
does not relate to the Autozone Common Stock. All disclosures
contained in this Prospectus Supplement regarding Autozone are derived
from the publicly available documents described in the preceding
paragraph. J.P. Morgan has not participated in the preparation of such
documents and has not made any due diligence inquiry with respect to
the information provided therein. There can be no assurance that all
events occurring prior to the date hereof (including events that would
affect the accuracy or completeness of the publicly available
documents described in the preceding paragraph) that would affect the
trading price of Autozone Common Stock have been publicly disclosed.
Because the principal amount of the MEDS payable at maturity is
related to the trading price of Autozone Common Stock, such events, if
any, would also affect the trading price of the MEDS.
J.P. Morgan or one or more affiliates may presently be engaged or may
from time to time engage in business with Autozone, including
extending loans to or making equity investments in Autozone or
providing advisory services (such as merger and acquisition advisory
services) to Autozone. In the course of such actions, J.P. Morgan or
such affiliates may acquire non- public information with respect to
Autozone. Additionally, J.P. Morgan or its affiliates may publish
research reports with respect to Autozone. However, J.P. Morgan does
not make any representation to any purchaser of MEDS with respect to
any matters whatsoever relating to Autozone. Any prospective purchaser
of MEDS should undertake an independent investigation of Autozone to
make an informed decision with respect to a potential investment in
Autozone Common Stock.
<PAGE>
Price Range and Dividend History of Autozone Common Stock
Autozone is listed and traded on the New York Stock Exchange (the
"NYSE") under the symbol "AZO". The following table sets forth, for
the periods indicated, the high and low closing prices of the Autozone
Common Stock on the composite and cash dividends per share of Autozone
Common Stock.
High Low Dividends
1995
First Quarter $26.000 $24.750 0%
Second Quarter 26.000 24.750 0%
Third Quarter 27.625 24.750 0%
Fourth Quarter 30.125 24.750 0%
1996
First Quarter $34.000 $24.125 0%
Second Quarter 37.500 32.375 0%
Third Quarter 34.500 27.000 0%
Fourth Quarter 30.625 22.875 0%
1997
First quarter $25.750 $20.125 0%
(through January 23)
J.P. Morgan makes no representation as to the amount of dividends, if
any, that Autozone will pay in the future. In any event, holders of
MEDS will not be entitled to receive any dividends that may be payable
on Autozone Common Stock until such time as J.P. Morgan, if it so
elects, delivers Autozone Common Stock at Maturity of the MEDS, and
then only with respect to dividends having a record date on or after
the date of delivery of such Autozone Common Stock. See "Description
of the MEDS."
Although historical data with respect to Autozone Common Stock is
included in these offering materials, investors should understand that
historical performance should not be taken as an indication of future
performance, and no assurance can be given, and none is intended to be
given, that the future performance of Autozone Common Stock will
reflect past performance.
Description of the MEDS
The following description of the particular terms of the MEDS
supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of Debt Securities set
forth in the Prospectus, to which description reference is hereby
made.
General
The MEDS are a single series of Debt Securities (as defined in the
Prospectus), to be issued under an indenture dated as of August 15,
1982, and all indentures supplemental thereto,
<PAGE>
including the First Supplemental Indenture dated as of May 5, 1986,
the Second Supplemental Indenture dated as of February 27, 1996 and
the Third Supplemental Indenture dated as of January 30, 1997
(collectively referred to as the "Indenture"), between J.P. Morgan and
First Trust of New York, National Association, successor to Chemical
Bank (formerly Manufacturers Hanover Trust Company), as trustee (the
"Trustee").
The MEDS will be unsecured and will rank on a parity with all other
unsecured and unsubordinated indebtedness of J.P. Morgan. The
aggregate number of MEDS to be issued will be 715,100. The MEDS will
mature on January 22, 1999. In the future J.P. Morgan may issue
additional Debt Securities or other securities with terms similar to
those of the MEDS.
Each MEDS, which will be issued with a principal amount of $22.375,
will bear interest at the annual rate of 5.00% of the Initial Price
per annum (or $1.12 per annum) from January 30, 1997, or from the most
recent Interest Payment Date to which interest has been paid or
provided for until the principal amount thereof is exchanged at
Maturity pursuant to the terms of the MEDS. Interest on the MEDS will
be payable quarterly in arrears on each January 22, April 22, July 22
and October 22, commencing April 22, 1997 (each, an "Interest Payment
Date"), to the persons in whose names the MEDS are registered at the
close of business on the last day of the calendar month immediately
preceding such Interest Payment Date, provided that interest payable
at Maturity shall be payable to the person to whom the principal is
payable. Interest on the MEDS will be computed on the basis of a
360-day year of twelve 30-day months. If an Interest Payment Date
falls on a day that is not a Business Day (as defined below), the
interest payment to be made on such Interest Payment Date will be made
on the next succeeding Business Day with the same force and effect as
if made on such Interest Payment Date, and no additional interest will
accrue as a result of such delayed payment.
At Maturity (including as a result of acceleration or otherwise), the
principal amount of each MEDS will be mandatorily exchanged by J.P.
Morgan into a number of shares of Autozone Common Stock at the
Exchange Rate (as defined below), and, accordingly, holders of the
MEDS will not necessarily receive an amount equal to the Initial Price
thereof. The "Exchange Rate" is equal to, subject to adjustment as a
result of certain dilution events (see "--Dilution Adjustments"
below), (a) if the Maturity Price (as defined below) per share of
Autozone Common Stock is less than or equal to $32.45 per share of
Autozone Common Stock (the "Capped Participation Price"), one share of
Autozone Common Stock per MEDS and (b) if the Maturity Price is
greater than the Capped Participation Price, a fractional share of
Autozone Common Stock per MEDS so that the value of such fractional
share (determined at the Maturity Price) is equal to the Capped
Participation Price. No fractional shares of Autozone Common Stock
will be issued at Maturity, as provided under "--Fractional Shares"
below. Notwithstanding the foregoing, J.P. Morgan may, at its option
in lieu of delivering shares of Autozone Common Stock, deliver cash in
an amount equal to the value at the Maturity Price of such number of
shares of Autozone Common Stock. On or prior to the seventh Business
Day prior to January 22, 1999, J.P. Morgan will notify The Depository
Trust Company and the Trustee stating whether the principal amount of
each MEDS will be exchanged for shares of Autozone Common Stock or
cash. If J.P. Morgan elects to deliver shares of Autozone Common
Stock, the shares which are delivered to the holders of the MEDS which
are not affiliated with Autozone shall be free of any transfer
restrictions, and the holders of the MEDS will be responsible for the
payment of any and all brokerage costs upon the subsequent sale of
such shares.
<PAGE>
The "Maturity Price" is defined as the average Closing Price per share
of Autozone Common Stock on the 3 Trading Days ending on the third
Trading Day immediately prior to (but not including) the Maturity
date. The "Closing Price" of any security on any date of determination
means the closing sale price (or, if no closing price is reported, the
last reported sale price) of such security on the NYSE on such date
or, if such security is not listed for trading on the NYSE on any such
date, as reported in the composite transactions for the principal
United States securities exchange on which such security is so listed,
or if such security is not so listed on a United States national or
regional securities exchange, as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System, or, if such
security is not so reported, the last quoted bid price for such
security in the over- the-counter market as reported by the National
Quotation Bureau or similar organization, or, if such bid price is not
available, the market value of such security on such date as
determined by a nationally recognized independent investment banking
firm retained for such purpose by J.P. Morgan. A "Trading Day" is
defined as a day on which the security the Closing Price of which is
being determined (A) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter market
at the close of business and (B) has traded at least once on the
national or regional securities exchange or association or
over-the-counter market that is the primary market for the trading of
such security. "Business Day" means any day, other than a Saturday or
Sunday, on which banking institutions in The City of New York are open
for business.
For illustrative purposes only, the following chart shows the number
of shares of Autozone Common Stock or the amount of cash that a holder
of MEDS would receive for each MEDS at various Maturity Prices. The
table assumes that there will be no adjustments to the Exchange Rate
described under "--Dilution Adjustments" below. There can be no
assurance that the Maturity Price will be within the range set forth
below. Given the Initial Price of $22.375 per MEDS and the Capped
Participation Price of $32.45, a MEDS holder would receive at Maturity
the following number of shares of Autozone Common Stock or amount of
cash (if J.P. Morgan elects to pay the MEDS in cash):
Maturity Price Number of
of Autozone Shares of Autozone
Common Stock Common Stock Amount of Cash
$15.000 1.0000 $15.000
$22.375 1.0000 22.375
$30.000 1.0000 30.000
$32.450 1.0000 32.450
$40.000 0.8113 32.450
$50.000 0.6490 32.450
Interest on the MEDS will be payable, and delivery of Autozone Common
Stock (or, at the option of J.P. Morgan, its cash equivalent) in
exchange for the MEDS at Maturity will be made upon surrender of such
MEDS, at the office or agency of J.P. Morgan maintained for such
purposes; provided that payment of interest may be made at the option
of J.P. Morgan by check mailed to the persons in whose names the MEDS
are registered at the close of
<PAGE>
business on the last day of the calendar month immediately preceding
the applicable Interest Payment Date. See "--Book-Entry System."
Initially such office will be at the principal corporate trust office
of the Trustee.
The MEDS will be transferable at any time or from time to time at the
aforementioned office. No service charge will be made to the holder
for any such transfer except for any tax or governmental charge
incidental thereto.
The Indenture does not contain any restriction on the ability of J.P.
Morgan to sell, pledge or otherwise convey all or any portion of the
Autozone Common Stock held by it, and no such shares of Autozone
Common Stock will be pledged or otherwise held in escrow for use at
Maturity of the MEDS. Consequently, in the event of a bankruptcy,
insolvency or liquidation of J.P. Morgan, the Autozone Common Stock,
if any, owned by J.P. Morgan will be subject to the claims of the
creditors of J.P. Morgan. In addition, as described herein, J.P.
Morgan will have the option, exercisable in its sole discretion, to
satisfy its obligations pursuant to the mandatory exchange for the
principal amount of each MEDS at Maturity by delivering to holders of
the MEDS either the specified number of shares of Autozone Common
Stock or cash in an amount equal to the value of such number of shares
at the Maturity Price. In the event of such a sale, pledge or
conveyance, a holder of the MEDS may be more likely to receive cash in
lieu of Autozone Common Stock. As a result, there can be no assurance
that J.P. Morgan will elect at Maturity to deliver Autozone Common
Stock or, if it so elects, that it will use all or any portion of its
current holdings of Autozone Common Stock to make such delivery.
Consequently, holders of the MEDS will not be entitled to any rights
with respect to Autozone Common Stock (including, without limitation,
the exercise of voting rights and any right to receive any dividends
or other distributions in respect thereof) until such time, if any, as
J.P. Morgan shall have delivered shares of Autozone Common Stock to
holders of the MEDS at Maturity thereof.
Dilution Adjustments
The Exchange Rate is subject to adjustment if Autozone shall (i) pay a
stock dividend or make a distribution with respect to Autozone Common
Stock in shares of such stock, (ii) subdivide or split its outstanding
shares of Autozone Common Stock, (iii) combine its outstanding shares
of Autozone Common Stock into a smaller number of shares, (iv) issue
by reclassification of its shares of Autozone Common Stock any shares
of common stock of Autozone, (v) issue rights or warrants to all
holders of Autozone Common Stock entitling them to subscribe for or
purchase shares of Autozone Common Stock at a price per share less
than the market price at such time of the Autozone Common Stock (other
than rights to purchase Autozone Common Stock pursuant to a plan for
the reinvestment of dividends or interest) or (vi) pay a dividend or
make a distribution to all holders of Autozone Common Stock of
evidences of its indebtedness or other assets (excluding any dividends
or distributions referred to in clause (i) above and any cash
dividends other than any Extraordinary Cash Dividends) or issue to all
holders of Autozone Common Stock rights or warrants to subscribe for
or purchase any of its securities (other than those referred to in
clause (v) above). In the case of the events referred to in clauses
(i), (ii), (iii) and (iv) above, the Exchange Rate in effect
immediately prior to such event shall each be adjusted so that the
holder of any MEDS shall thereafter be entitled to receive, upon
mandatory exchange of the principal amount of such MEDS at Maturity,
the number of shares of Autozone Common Stock (or cash in lieu
thereof) which such holder would have been entitled to receive
immediately following any such event had such MEDS
<PAGE>
been exchanged immediately prior to such event or any record date with
respect thereto. In the case of the event referred to in clause (v)
above, the Exchange Rate shall be adjusted by multiplying the Exchange
Rate in effect immediately prior to the date of issuance of the rights
or warrants referred to in clause (v) above by a fraction, the
numerator of which shall be the sum of the number of shares of
Autozone Common Stock outstanding on the date of issuance of such
rights or warrants immediately prior to such issuance plus the number
of additional shares of Autozone Common Stock offered for subscription
or purchase pursuant to such rights or warrants, and the denominator
of which shall be the sum of the number of shares of Autozone Common
Stock outstanding on the date of issuance of such rights or warrants
immediately prior to such issuance plus the number of additional
shares of Autozone Common Stock which the aggregate offering price of
the total number of shares of Autozone Common Stock so offered for
subscription or purchase pursuant to such rights or warrants would
purchase at the market price (determined as the average Closing Price
per share of Autozone Common Stock on the 3 Trading Days ending on the
third Trading Day immediately prior to the date such rights or
warrants are issued), which shall be determined by multiplying such
total number of shares by the exercise price of each such right or
warrant and dividing the product so obtained by such market price. To
the extent that shares of Autozone Common Stock are not delivered
after the expiration of such rights or warrants, the Exchange Rate
shall be readjusted to the Exchange Rate which would then be in effect
had such adjustments for the issuance of such rights or warrants been
made upon the basis of delivery of only the number of shares of
Autozone Common Stock actually delivered. In the case of the event
referred to in clause (vi) above, the Exchange Rate shall be adjusted
by multiplying the Exchange Rate in effect on the record date, by a
fraction, the numerator of which shall be the market price per share
of the Autozone Common Stock on the record date for the determination
of stockholders entitled to receive the dividend or distribution
referred to in clause (vi) above (such market price being the average
Closing Price per share of Autozone Common Stock on the 3 Trading Days
ending on the third Trading Day immediately prior to such record date)
and the denominator of which shall be such market price per share of
Autozone Common Stock less the fair market value (as determined by a
nationally recognized independent investment banking firm retained for
such purpose by J. P. Morgan) as of such record date of the portion of
the assets or evidences of indebtedness so distributed or of such
subscription rights or warrants applicable to one share or Autozone
Common Stock. As used herein, an "Extraordinary Cash Dividend" means,
with respect to any one-year period, all cash dividends on the
Autozone Common Stock during such period to the extent such dividends
exceed on a per share basis 10% of the average price of the Autozone
Common Stock over such period (less any such dividends for which a
prior adjustment to the Exchange Rate was previously made). All
adjustments to the Exchange Rate will be calculated to the nearest
1/10,000th of a share of Autozone Common Stock (or if there is not a
nearest 1/10,000th of a share, to the next lower 1/10,000th of a
share). No adjustment in the Exchange Rate shall be required unless
such adjustment would require an increase or decrease of at least one
percent therein; provided, however, that any adjustments which by
reason of the foregoing are not required to be made shall be carried
forward and taken into account in any subsequent adjustment.
In the event of (A) any consolidation or merger of Autozone, or any
surviving entity or subsequent surviving entity of Autozone (an
"Autozone Successor"), with or into another entity (other than a
merger or consolidation in which Autozone is the continuing
corporation and in which the Autozone Common Stock outstanding
immediately prior to the merger or consolidation is not exchanged for
cash, securities or other property of Autozone or another
corporation), (B) any sale, transfer, lease or conveyance to another
corporation of the
<PAGE>
property of Autozone or any Autozone Successor as an entirety or
substantially as an entirety, (C) any statutory exchange of securities
of Autozone or any Autozone Successor with another corporation (other
than in connection with a merger or acquisition) or (D) any
liquidation, dissolution or winding up of Autozone or any Autozone
Successor (any such event, a "Reorganization Event"), the Exchange
Rate used to determine the amount payable upon exchange at Maturity
for each MEDS will be adjusted to provide that each holder of MEDS
will receive at Maturity cash in an amount equal to (a) if the
Transaction Value (as defined below) is less than or equal to the
Capped Participation Price, the Transaction Value, and (b) if the
Transaction Value is greater than the Capped Participation Price, the
Capped Participation Price. As used herein, "Transaction Value" means
(i) for any cash received in any such Reorganization Event, the amount
of cash received per share of Autozone Common Stock, (ii) for any
property other than cash or securities received in any such
Reorganization Event, an amount equal to the market value at Maturity
of such property received per share of Autozone Common Stock as
determined by a nationally recognized independent investment banking
firm retained for such purpose by J.P. Morgan and (iii) for any
securities received in any such Reorganization Event, an amount equal
to the average Closing Price per share of such securities on the 3
Trading Days ending on the third Trading Day immediately prior to
Maturity multiplied by the number of such securities received for each
share of Autozone Common Stock. Notwithstanding the foregoing, in lieu
of delivering cash as provided above, J.P. Morgan may at its option
deliver an equivalent value of securities or other property received
in such Reorganization Event, determined in accordance with clause
(ii) or (iii) above, as applicable. If J.P. Morgan elects to deliver
securities or other property, holders of the MEDS will be responsible
for the payment of any and all brokerage and other transaction costs
upon the sale of such securities or other property. The kind and
amount of securities into which the MEDS shall be exchangeable after
consummation of such transaction shall be subject to adjustment as
described in the immediately preceding paragraph following the date of
consummation of such transaction.
J.P. Morgan is required, within ten Business Days following the
occurrence of an event that requires an adjustment to the Exchange
Rate (or if J.P. Morgan is not aware of such occurrence, as soon as
practicable after becoming so aware), to provide written notice to the
Trustee of the occurrence of such event and a statement in reasonable
detail setting forth the method by which the adjustment to the
Exchange Rate was determined and setting forth the revised Exchange
Rate.
Notwithstanding the foregoing, the principal amount of each MEDS
payable at Maturity will not, under any circumstances, exceed 145% of
the Initial Price of such MEDS.
Fractional Shares
No fractional shares of Autozone Common Stock will be issued if J.P.
Morgan exchanges the MEDS for shares of Autozone Common Stock. In lieu
of any fractional share otherwise issuable in respect of all MEDS of
any holder which are exchanged at Maturity, such holder shall be
entitled to receive an amount in cash equal to the value of such
fractional share at the Maturity Price.
Redemption
The MEDS are not subject to redemption prior to Maturity.
<PAGE>
Merger and Consolidation
J.P. Morgan may consolidate or merge with or into any other
corporation or association, and J.P. Morgan may sell or transfer all
or substantially all of its property or assets to any corporation or
association, provided that (i) the corporation (if other than J.P.
Morgan) or association formed by or resulting from any such
consolidation or merger or which shall have received such property or
assets shall assume the payment at maturity to holders of MEDS and
interest on the MEDS and the performance and observance of all the
terms, covenants and conditions of the MEDS to be performed or
observed by J.P. Morgan and (ii) J.P. Morgan or such successor
corporation shall not immediately thereafter be in default under the
terms of the MEDS.
Modification and Waiver
Modification and amendment of certain provisions of the MEDS may be
effected by J.P. Morgan without the consent of any of the holders of
the outstanding MEDS affected thereby to: (i) evidence succession of
another corporation or association to J.P. Morgan and the assumption
by such a party of the obligations of J.P. Morgan under the MEDS in
the event of a merger, consolidation or sale of assets in accordance
with the terms of the MEDS; (ii) add further covenants, restrictions
or conditions for the protection of holders of the MEDS; or (iii) cure
ambiguities or correct the MEDS in case of defects or inconsistencies
in the provisions thereof or to supplement with such other provisions,
so long as any such cure, correction or supplement does not adversely
affect the interest of the holders of the MEDS in any material
respect. In no event may J.P. Morgan, without the consent of the
holder of each outstanding MEDS affected thereby, extend the maturity
of any MEDS, or reduce the rate or extend the time of payment of
interest thereon, or reduce the payment due at maturity thereof, or
make the payment due at maturity or interest thereon payable in any
coin, currency or property other than as provided in the MEDS.
Events of Default
An Event of Default (as defined in the Indenture) with respect to the
MEDS will be: (a) default for 30 days in payment of any interest on
the MEDS; (b) default in the payment of the amount due at maturity;
(c) default by J.P. Morgan in the performance of any other covenant or
warranty contained in the MEDS, which continues for 90 days after
receipt of written notice given by either the Trustee or the holders
of at least 25% in principal amount of the MEDS outstanding; or (d)
certain events of bankruptcy or reorganization of J.P. Morgan. If an
Event of Default described in clause (a), (b) or (c) above shall have
occurred and be continuing, either the Trustee or the holders of at
least 25% in principal amount of the MEDS outstanding may declare the
principal of all outstanding MEDS and the interest accrued thereon, if
any, to be due and payable immediately. If an Event of Default
described in clause (d) above shall have occurred and be continuing,
either the Trustee or the holders of MEDS that, together with holders
of all other Debt Securities under the Indenture, hold at least 25% in
principal amount (in the case of MEDS, as determined at the time
thereof) of all Debt Securities then outstanding (voting as one class)
may declare the principal of all Debt Securities then outstanding
(including the MEDS) and the interest accrued thereon, if any, to be
due and payable immediately. Upon certain conditions, such
declarations may be annulled
<PAGE>
and past defaults (except for defaults in the payment of principal of,
or interest on, the MEDS) may be waived by the holders of a majority
in principal amount of the MEDS then outstanding.
The holders of a majority in principal amount of the MEDS shall have
the right to direct the time, method and place of conducting any
proceeding for any remedy with respect to the MEDS available to the
Trustee under the Indenture, subject to certain limitations specified
therein, provided that the holders of MEDS shall have offered to the
Trustee reasonable indemnity against expenses and liabilities.
Book-Entry System
It is expected that the MEDS will be issued in the form of one or more
global securities (the "Global Securities") deposited with The
Depository Trust Company (the "Depositary") and registered in the name
of a nominee of the Depositary.
The Depositary has advised J.P. Morgan and the Underwriter as follows:
The Depositary is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to Section
17A of the Exchange Act. The Depositary was created to hold securities
of persons who have accounts with the Depositary ("participants") and
to facilitate the clearance and settlement of securities transactions
among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of certificates. Such
participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the
Depositary's book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly
or indirectly.
Upon the issuance of a Global Security, the Depositary or its nominee
will credit the respective MEDS represented by such Global Security to
the accounts of participants. The accounts to be credited shall be
designated by the Underwriter. Ownership of beneficial interests in
such Global Securities will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained
by the Depositary or its nominee for such Global Securities. Ownership
of beneficial interests in such Global Securities by persons that hold
through participants will be shown on, and the transfer of that
ownership interest within such participant will be effected only
through, records maintained by such participant. The laws of some
jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits
and such laws may impair the ability to transfer beneficial interests
in a Global Security.
So long as the Depositary for a Global Security, or its nominee, is
the registered owner of such Global Security, such depositary or such
nominee, as the case may be, will be considered the sole owner or
holder of the MEDS for all purposes under the Indenture. Except as set
forth below, owners of beneficial interests in such Global Securities
will not be entitled to have the MEDS registered in their names, will
not receive or be entitled to receive physical delivery of the MEDS in
definitive form and will not be considered the owners or holders
thereof under the Indenture.
<PAGE>
Payment of principal of and any interest on the MEDS registered in the
name of or held by the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner
or the holder of the Global Security. None of J.P. Morgan, the
Trustee, any Paying Agent or any securities registrar for the MEDS
will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial
ownership interests in a Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial
ownership interests.
J.P. Morgan expects that the Depositary, upon receipt of any payment
of principal or interest in respect of a permanent Global Security,
will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the
principal amount of such Global Security as shown on the records of
the Depositary. J.P. Morgan also expects that payments by participants
to owners of beneficial interests in such Global Security held through
such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the
accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such participants.
A Global Security may not be transferred except as a whole by the
Depositary to a nominee or a successor of the Depositary. If the
Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by J.P. Morgan
within ninety days, J.P. Morgan will issue MEDS in definitive
registered form in exchange for the Global Security representing such
MEDS.
Notwithstanding the foregoing, J.P. Morgan may at any time (including
at the time of original issuance of the MEDS) and in its sole
discretion determine not to have any MEDS represented by one or more
Global Securities and, in such event, will issue MEDS in definitive
form in exchange for all of the Global Securities representing the
MEDS. Further, if J.P. Morgan so specifies with respect to the MEDS,
an owner of a beneficial interest in a Global Security representing
MEDS may, on terms acceptable to J.P. Morgan and the Depositary for
such Global Security, receive MEDS in definitive form. In any such
instance, an owner of a beneficial interest in a Global Security will
be entitled to physical delivery in definitive form of MEDS
represented by such Global Security equal in number to that
represented by such beneficial interest and to have such MEDS
registered in its name.
Regarding the Trustee
The Trustee, First Trust of New York, National Association, has its
principal corporate trust office at 100 Wall Street, Suite 1600, New
York, New York, 10005.
Certain United States Federal Income Tax Considerations
The following discussion is based upon the advice of tax counsel to
J.P. Morgan, Cravath, Swaine & Moore ("Tax Counsel"), as to certain of
the material U.S. federal income tax consequences that may be relevant
to a citizen or resident of the United States, a corporation,
partnership or other entity created or organized under the laws of the
United States and an estate or trust the income of which is subject to
U.S. federal income taxation regardless of its source (any of the
foregoing, a "U.S. person") who is the beneficial owner of a MEDS (a
<PAGE>
"U.S. Holder"). All references to "holders" (including U.S. Holders)
are to beneficial owners of the MEDS. This summary is based on U.S.
federal income tax laws, regulations, rulings and decisions in effect
as of the date of this Prospectus Supplement, all of which are subject
to change at any time (possibly with retroactive effect). As the law
is technical and complex, the discussion below necessarily represents
only a general summary.
This summary addresses the U.S. federal income tax consequences to
holders who are initial holders of the MEDS, who purchase the MEDS at
par and who will hold the MEDS and, if applicable, the Autozone Common
Stock as capital assets. This summary does not address all aspects of
federal income taxation that may be relevant to a particular holder in
light of his or its individual investment circumstances or to certain
types of holders subject to special treatment under the U.S. federal
income tax laws, such as dealers in securities or foreign currency,
financial institutions, insurance companies, tax-exempt organizations
and taxpayers holding the MEDS as part of a "straddle," "hedge,"
"conversion transaction," "synthetic security," or other integrated
investment. Moreover, the effect of any applicable state, local or
foreign tax laws is not discussed.
No statutory, judicial or administrative authority directly addresses
the characterization of the MEDS or instruments similar to the MEDS
for U.S. federal income tax purposes. As a result, significant aspects
of the U.S. federal income tax consequences of an investment in the
MEDS are not certain. No ruling is being requested from the Internal
Revenue Service (the "IRS") with respect to the MEDS, no opinion
thereon is being given by Tax Counsel and no assurance can be given
that the IRS will agree with the conclusions expressed herein.
ACCORDINGLY, A PROSPECTIVE INVESTOR (INCLUDING A TAX-EXEMPT INVESTOR)
IN THE MEDS SHOULD CONSULT ITS TAX ADVISOR IN DETERMINING THE TAX
CONSEQUENCES OF AN INVESTMENT IN THE MEDS, INCLUDING THE APPLICATION
OF STATE, LOCAL OR OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN FEDERAL OR OTHER TAX LAWS.
Pursuant to the terms of the Indenture, J.P. Morgan and every holder
of a MEDS will be obligated (in the absence of an administrative
determination or judicial ruling to the contrary) to characterize a
MEDS for all tax purposes as a forward purchase contract to purchase
Autozone Common Stock at Maturity (including as a result of
acceleration or otherwise), under the terms of which contract (a) at
the time of issuance of the MEDS the holder deposits irrevocably with
J.P. Morgan a fixed amount of cash equal to the purchase price of the
MEDS to assure the fulfillment of the holder's purchase obligation
described in clause (c) below, which deposit will unconditionally and
irrevocably be applied at Maturity to satisfy such obligation, (b)
until Maturity J.P. Morgan will be obligated to pay interest on such
deposit at a rate equal to the stated rate of interest on the MEDS as
compensation to the holder for J.P. Morgan's use of such cash deposit
during the term of the MEDS, and (c) at Maturity such cash deposit
unconditionally and irrevocably will be applied by J.P. Morgan in full
satisfaction of the holder's obligation under the forward purchase
contract, and J.P. Morgan will deliver to the holder the number of
shares of Autozone Common Stock that the holder is entitled to receive
at that time pursuant to the terms of the MEDS (subject to J.P.
Morgan's right to deliver cash in lieu of the Autozone Common Stock).
(Prospective investors should note that cash proceeds of this offering
will not be segregated by J.P. Morgan during the term of the MEDS, but
instead will be commingled with J.P. Morgan's other assets and applied
in a manner consistent with the "Use of Proceeds" discussion above.)
Consistent with the above characterization, (i) amounts paid to J.P.
Morgan in respect of the original issue of a MEDS will be treated as
allocable in their entirety to the amount of the
<PAGE>
cash deposit attributable to such MEDS and (ii) amounts denominated as
interest that are payable with respect to the MEDS will be
characterized as interest payable on the amount of such deposit,
includible annually in the income of a U.S. Holder as interest income
in accordance with such holder's method of accounting.
Under the above characterization of the MEDS, a holder's tax basis in
a MEDS generally will equal the holder's cost of that MEDS. Upon the
sale of other taxable disposition of a MEDS, a U.S. Holder generally
will recognize gain or loss equal to the difference between the amount
realized on the sale or other taxable disposition and the U.S.
Holder's tax basis in the MEDS. Such gain or loss generally will be
long-term capital gain or loss if the U.S. Holder has held the MEDS
for more than one year at the time of disposition.
Under the above characterization of the MEDS, if J.P. Morgan delivers
Autozone Common Stock at Maturity, a U.S. Holder will recognize no
gain or loss on the purchase of the Autozone Common Stock against
application of the monies received by J.P. Morgan in respect of the
MEDS. A U.S. Holder will have a tax basis in such stock equal to the
U.S. Holder's tax basis in the MEDS (less the portion of the tax basis
of the MEDS allocable to any fractional share, as described in the
next sentence). A U.S. Holder will recognize gain or loss (which will
be short-term capital gain or loss) with respect to cash received in
lieu of fractional shares, in an amount equal to the difference
between the cash received and the portion of the basis of the MEDS
allocable to fractional shares (based on the relative number of
fractional shares and full shares delivered to the holder). If at
Maturity J.P. Morgan pays the MEDS in cash, a U.S. Holder will
recognize capital gain or loss equal to any difference between the
amount of cash received from J.P. Morgan and the U.S. Holder's tax
basis in the MEDS at that time. Such gain or loss generally will be
long-term capital gain or loss if the U.S. Holder has held the MEDS
for more than one year at Maturity.
Due to the absence of authority as to the proper characterization of
the MEDS, Tax Counsel can provide no opinion as to the proper tax
characterization. No assurance can be given that the IRS will accept,
or that a court will uphold, the characterization and tax treatment
described above. In particular, the IRS could seek to analyze the
federal income tax consequences of owning a MEDS under Treasury
regulations governing contingent payment debt instruments (the
"Contingent Payment Regulations"). The Contingent Payment Regulations
are complex, but very generally apply the original issue discount
rules of the Internal Revenue Code to a contingent payment debt
instrument by requiring that original issue discount be accrued every
year at a "comparable yield" for the issuer of the instrument,
determined at the time of issuance of the obligation. In addition, the
Contingent Payment Regulations require that a projected payment
schedule, which results in such a "comparable yield", be determined,
and that adjustments to income accruals be made to account for
differences between actual payments and projected amounts. To the
extent that the comparable yield as so determined exceeds the interest
actually paid on a contingent debt instrument, the owner of that
instrument will recognize ordinary interest income in excess of the
cash the owner receives. In addition, any gain realized on the sale,
exchange or redemption of a contingent payment debt instrument will be
treated as ordinary income. Any loss realized on such sale, exchange
or redemption will be treated as an ordinary loss to the extent the
holder's original issue discount inclusions with respect to the
obligation exceed prior reversals of such inclusions required by the
adjustment mechanism described above. Any loss realized in excess of
such amount generally will be treated as a capital loss.
<PAGE>
J.P. Morgan will take the position that the MEDS are not debt
instruments and therefore that the Contingent Payment Regulations do
not apply to the MEDS. The MEDS are payable by the delivery of
Autozone Common Stock (unless J.P. Morgan exercises its option to
deliver cash at Maturity) and provide economic returns that are
indexed to the performance of Autozone Common Stock. The MEDS
therefore offer no assurance that holder's investment will be returned
to the holder at Maturity. Accordingly, J.P. Morgan's position is that
the MEDS properly are characterized for tax purposes, not as debt
instruments, but as forward purchase contracts in respect of which
holders have deposited a fixed amount of cash with J.P. Morgan, on
which interest is payable at a fixed rate. If, however, the IRS were
successfully to maintain that the Contingent Payment Regulations
applied to the MEDS, then, among other matters, the holder would be
required to accrue interest income on a current basis at the
"comparable yield", which rate would exceed the coupon rate on the
MEDS, gain realized by a holder on the sale or other taxable
disposition of a MEDS (including as a result of payments made at
Maturity) generally would be characterized as ordinary income, rather
than as short- or long-term capital gain (depending on whether the
MEDS had been held for more than one year at the time of such
disposition), and a U.S. Holder would recognize ordinary income, or
ordinary or capital loss (as the case may be, under the rules
summarized above) on the receipt of Autozone Common Stock, rather than
capital gain or loss upon the ultimate sale of such stock.
Even if the Contingent Payment Regulations do not apply to the MEDS,
it is possible that the IRS could seek to characterize the MEDS in a
manner that results in tax consequences to initial holders of the MEDS
different from those reflected in the Indenture and described above.
Under alternative characterizations of the MEDS, it is possible, for
example, that a MEDS could be treated as including a forward contract
and one or more options.
Non-United States Persons
In the case of a holder of the MEDS that is not a U.S. person,
payments made with respect to the MEDS should not be subject to U.S.
withholding tax, provided that such holder complies with applicable
certification requirements. Any capital gain realized upon the sale or
other dispositions of the MEDS by a holder that is not a U.S. person
will generally not be subject to U.S. federal income tax if (i) such
gain is not effectively connected with a U.S. trade or business of
such holder and (ii) in the case of an individual, such individual is
not present in the United States for 183 days or more in the taxable
year of the sale or other disposition or the gain is not attributable
to a fixed place of business maintained by such individual in the
United States.
Backup Withholding and Information Reporting
A holder of the MEDS may be subject to information reporting and to
backup withholding at a rate of 31 percent of certain amounts paid to
the holder unless such holder provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise
complies with applicable requirements of the backup withholding rules.
Any amounts withheld under the backup withholding rules are not an
additional tax and may be refunded or credited against the U.S.
Holder's U.S. federal income tax liability, provided the required
information is furnished to the IRS.
<PAGE>
Underwriting
J.P. Morgan Securities Inc. (the "Underwriter") has agreed, subject to
the terms and conditions set forth in the Underwriting Agreement, to
purchase all the MEDS from J.P. Morgan.
The Underwriter proposes to offer the MEDS from time to time for sale
in one or more negotiated transactions, or otherwise, at market prices
prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. In connection with the sale of
any MEDS, the Underwriter may be deemed to have received an
underwriting discount equal to the difference between the amount
received by the Underwriter upon the sale of such MEDS and the price
at which the Underwriter purchased such MEDS from J.P. Morgan.
J.P. Morgan has agreed in the Underwriting Agreement to indemnify the
Underwriter against certain liabilities, including liabilities under
the Securities Act, or contribute to payments the Underwriter may be
required to make in respect thereof.
J.P. Morgan has been advised by the Underwriter that it may make a
market in the MEDS; however, J.P. Morgan cannot provide any assurance
that a secondary market for the MEDS will develop.
This Prospectus Supplement and the Prospectus may be used by direct or
indirect wholly- owned subsidiaries of J.P. Morgan in connection with
offers and sales related to secondary market transactions in the MEDS.
Such subsidiaries may act as principal or agent in such transactions.
Such sales will be made at prices related to prevailing market prices
at the time of a sale.
The Underwriter is an indirect wholly-owned subsidiary of J.P. Morgan.
The offer and sale of the MEDS by the Underwriter will comply with the
requirements of Section 2720 of the Bylaws of the National Association
of Securities Dealers, Inc. regarding underwriting of securities of an
affiliate.
Legal Opinions
The validity of the MEDS will be passed upon for J.P. Morgan by Gene
A. Capello, Vice President and Assistant General Counsel of J.P.
Morgan. Cravath, Swaine & Moore has represented the Underwriter in
connection with the issuance of the MEDS. Cravath, Swaine & Moore has
represented and continues to represent J.P. Morgan from time to time
in other matters. Mr. Capello owns or has the right to acquire a
number of shares of common stock of J.P. Morgan equal to or less than
0.01% of the outstanding common stock of J.P. Morgan.
Experts
The financial statements incorporated by reference in the Annual
Report on Form 10-K of J.P. Morgan for the year ended December 31,
1995 (included in J.P. Morgan's Annual Report to Stockholders), are
incorporated by reference in this Prospectus Supplement in
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reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in
auditing and accounting.
