<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
REGISTRATION NOS. 333-38633 AND 333-38633-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
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 I
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3964134
(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
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING PRICE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1)(2)(3) (1)(2)(3) REGISTRATION FEE(5)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Securities of the Trust(1)............. $0 $0.00(5)
- ---------------------------------------------------------------------------------------------------------------------------------
Guarantees of Preferred Securities of the Trust,
the Related Note Guarantee of the Related Note
of Morgan Guaranty by, and certain backup
obligations under the Declaration of, J.P.
Morgan(4)......................................
- ---------------------------------------------------------------------------------------------------------------------------------
Total............................................ $0 $0.00(5)
=================================================================================================================================
</TABLE>
Pursuant to Rule 429(b) under the Securities Act, the Prospectus and
Prospectus Supplements included in this Registration Statement also relate to
the Preferred Securities of J.P. Morgan Index Funding Company, LLC (the
"Company") and the Guarantees thereof by J.P. Morgan previously registered under
J.P. Morgan's and the Company's Registration Statement on Form S-3 (Nos.
333-01121 and 333-01121-01). This Registration Statement constitutes
Post-Effective Amendment No. 4 to such Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a) MAY DETERMINE.
------------------------
(1) Such indeterminate number of Preferred Securities of the Trust 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 Trust registered
hereby will not exceed $650,000,000.
(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 Declaration.
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) A filing fee aggregating $224,138 was previously paid in connection with a
registration statement (nos. 333-01121 and 333-01121-01) filed earlier
relating to the registration of in the aggregate $650,000,000 of preferred
securities of the Trust.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED [ ], 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE [ ], 1998)
$[ ]
COMMODITY-INDEXED PREFERRED SECURITIES (COMPS(R)), SERIES [B]
J.P. MORGAN INDEX FUNDING COMPANY I
SERIES [B] PREFERRED SECURITIES AT $[25] PER SHARE
INDEXED TO THE JPMCI CORN TOTAL RETURN INDEX
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
J.P. MORGAN & CO. INCORPORATED
------------------------
The Series [B] Preferred Securities (each, a "Series [B] Preferred Security",
and collectively, the "ComPS") offered hereby are being issued by J.P. Morgan
Index Funding Company I, a statutory business trust formed under the laws of the
State of Delaware (the "Trust"). No dividends on the ComPS will be paid. The
ComPS represent undivided beneficial preferred interests in certain assets of
the Trust consisting of the Related Note (as defined below) and the proceeds
thereof. Each Series [B] Preferred Security will have an initial principal
amount of [$25] (the "Face Amount"), and thereafter, the change in value of the
principal amount per Series [B] Preferred Security will be indexed to the change
in value of the JPMCI Corn Total Return Index (the "Applicable Index"), which is
calculated based on the change in value of certain corn futures contracts
included from time to time in the JPM Indices (such contracts, from time to
time, the "Benchmark Corn Contracts") plus a component of collateral yield
computed on such fluctuating index value at the most recent auction rate for
3-month U.S. Treasury Bills or certain successor rates thereto (the "Collateral
Yield Component"), reduced by a factor designed to offset the costs of issuing
and hedging the indexation of the ComPS (the "Factor"). J.P. Morgan & Co.
Incorporated, a Delaware corporation ("J.P. Morgan"), will own all the common
securities (the "Series [B] Common Securities" and together with the ComPS, the
"Series [B] Securities") representing undivided beneficial interests in certain
assets of the Trust consisting of the Related Note and the proceeds thereof. The
Trust exists for the sole purpose of issuing the Series [B] Securities and
investing the proceeds thereof in a Related Note Due , [2001] (the
"Related Note") of Morgan Guaranty Trust Company of New York, a trust company
with full banking powers organized under the laws of the State of New York and a
wholly-owned subsidiary of J.P. Morgan ("Morgan Guaranty"), and issuing similar
preferred securities (the "Preferred Securities") and common securities (the
"Common Securities" and, together with the Preferred Securities, the
"Securities") of separate series and investing the proceeds thereof in similar
notes in the future.
SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE COMPS. THE COMPS ARE NOT FUTURES CONTRACTS AND DO NOT
REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS
DEFINED BELOW) OF THE COMPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI
CORN TOTAL RETURN INDEX, REDUCED BY THE FACTOR. AS A RESULT, THE REDEMPTION
VALUE PER SERIES [B] PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT
AND MAY BE MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE
BENCHMARK CORN CONTRACTS. SEE "DESCRIPTION OF THE COMPS".
"ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are registered service
marks of J.P. Morgan & Co. Incorporated.
The ComPS have been approved for listing on the American Stock Exchange (the
"Amex") under the symbol [" "], subject to official notice of issuance.
Trading of the ComPS on the Amex is expected to commence within a 30-day period
after the date of this Prospectus Supplement. See "Underwriting".
THE SERIES [B] 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 SERIES [B] SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price $[25] per Series [B] Preferred Security plus accrued dividends, if any.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSIONS(2) THE TRUST(3)(4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series [B] Preferred Security.......... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
Total...................................... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein).
(2) The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(3) Because the proceeds of the sale of the ComPS will be invested in the
Related Note, Morgan Guaranty has agreed to pay to the Underwriters a
commission of $ per Series [B] Preferred Security (or $ in
the aggregate). See "Underwriting".
(4) Expenses of the offering which are payable by the Trust and J.P. Morgan are
estimated to be $ .
------------------------
The ComPS offered hereby are offered by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the ComPS will be
made on or about , 1998, through the book-entry facilities of The
Depository Trust Company, against payment therefor in same-day funds.
J.P. MORGAN & CO.
[ ], 1998.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES [B] SECURITIES
OFFERED HEREBY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR AND PURCHASE THE SERIES [B] SECURITIES ON THE
AMERICAN STOCK EXCHANGE OR IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
S-2
<PAGE> 4
STRUCTURAL OVERVIEW
[DIAGRAM]
1. THE TRUST. The issuer of the ComPS is a Delaware statutory business trust
formed by J.P. Morgan for the sole purpose of issuing the Series [B] Securities
and other securities of separate series and lending the proceeds thereof to
Morgan Guaranty. J.P. Morgan will own 100% of the Series [B] Common Securities.
The Trust will be disregarded for United States Federal income tax purposes.
J.P. Morgan Index Funding Company, LLC (the "Company"), a Delaware limited
liability company, has been merged into the Trust. As a result of such merger,
the Trust has succeeded to all rights and obligations of the Company, including
any rights and obligations in respect of any securities that were issued by the
Company prior to the merger (including the 2.5% Series A Securities (the "Series
A Securities")) and any related notes and related note guarantees executed and
delivered in connection therewith.
2. THE COMPS. The ComPS issued by the Trust represent undivided beneficial
preferred interests in the assets of the Trust consisting of the Related Note
and the proceeds thereof. The ComPS Redemption Price and the ComPS Early
Redemption Price are indexed to the JPMCI Corn Total Return Index, reduced by
the Factor. The ComPS Early Redemption Price or the ComPS Redemption Price may
be more or less than the Face Amount of the ComPS. The Trust intends to issue
more than one series of Securities. No holder of Securities of any series shall
have any claim on, or any right to, any assets allocated to, or associated with,
Securities of any other series (except if, and to the extent that, such holder
is also a holder of Securities of such other series).
3. COMPS PROCEEDS LOANED TO MORGAN GUARANTY. Proceeds of ComPS and related
Series [B] Common Securities will be used by the Trust on behalf of holders of
the Series [B] Securities to purchase from Morgan Guaranty the Related Note with
a maturity of [, 2001] and having the same economic terms as the
ComPS.
4. REPAYMENT OF RELATED NOTE. Morgan Guaranty will repay the Related Note in
whole or part to the extent required to repay Series [B] Securities upon any
Early Redemption Date and in whole at the Stated Maturity (subject to extension
in case of a Market Disruption Event).
5. RELATED NOTE GUARANTEE. J.P. Morgan will guarantee to the Trust, on a
subordinated basis, the payment of any distributions on and principal of the
Related Note as provided pursuant to the terms of the Related Note, at such
times and in such amounts as provided therein.
6. GUARANTEE. J.P. Morgan will guarantee to the holders of ComPS, on a
subordinated basis, the payment of (i) the ComPS Early Redemption Price or the
ComPS Redemption Price, as applicable, but if and only if and to the extent
that, in each case, Morgan Guaranty has made payment of principal on the Related
Note and (ii) upon liquidation, the lesser of (a) the sum of the Early
Redemption Value and (b) the amount of assets of the Trust consisting of the
Related Note and the proceeds thereof available for distribution to holders of
ComPS.
7. MORGAN GUARANTY. Morgan Guaranty, a trust company with full banking powers
organized under the laws of the State of New York, is a wholly-owned subsidiary
of J.P. Morgan.
S-3
<PAGE> 5
SUMMARY OF THE OFFERING
SECURITIES OFFERED......Series [B] Preferred Securities ("ComPS") indexed to the
JPMCI Corn Total Return Index.
ISSUER..................J.P. Morgan Index Funding Company I (the "Trust"), a
Delaware statutory business trust and a subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan").
GUARANTOR...............J.P. Morgan, on a subordinated basis, (i) of payments to
holders of ComPS of amounts received on the Related Note
by the Trust on behalf of holders of Series [B]
Securities and (ii) of payments to the Trust on behalf
of holders of Series [B] Securities on the Related Note
by Morgan Guaranty, a wholly-owned subsidiary of J.P.
Morgan.
INITIAL OFFERING PRICE
PER SERIES [B] PREFERRED
SECURITY ("FACE
AMOUNT")................[$25].
AGGREGATE FACE
AMOUNT..................$[50,000,000].
COMPS REDEMPTION
PRICE...................Redemption Value at Stated Maturity plus accrued and
unpaid dividends.
STATED MATURITY......... , [2001], subject to extension in the case of a
Market Disruption Event.
REDEMPTION VALUE PER
SERIES [B] PREFERRED
SECURITY................Face Amount X (Applicable Index Settlement Value)
(------------------------------- -Factor)
(Applicable Index Commencement Value)
APPLICABLE INDEX........JPMCI Corn Total Return Index.
APPLICABLE INDEX
COMMENCEMENT VALUE......[Set on date of pricing].
APPLICABLE INDEX
SETTLEMENT VALUE........The average (rounded to four digits following the
decimal point) of the Applicable Index over the 10
consecutive Trading Days meeting certain conditions
immediately following the 20th Business Day prior to
redemption (as described herein), unless such value has
been permanently fixed prior to such time as described
under "Description of ComPS -- Early Determination of
Applicable Index Settlement Value and Redemption Value."
CALCULATION AGENT.......Morgan Guaranty.
DIVIDENDS...............No dividends on the ComPS will be paid.
CASH REDEMPTION PRIOR TO
STATED MATURITY
OPTIONAL
REDEMPTION............At the holders' option, on each prior to the Stated
Maturity, for the ComPS Early Redemption Price.
SPECIAL EVENT
REDEMPTION............Under certain circumstances, upon the occurrence of a
Tax Event or an Investment Company Event, for the ComPS
Early Redemption Price.
EARLY DETERMINATION OF
APPLICABLE INDEX
SETTLEMENT VALUE........Upon the occurrence of certain events affecting the
liquidity or increasing the cost of holding or trading
the Benchmark Corn Contracts and the inability to find a
suitable replacement Benchmark Corn Contract, the
Applicable Index Settlement Value may be fixed, and such
fixed value will be used upon any subsequent Early
Redemption and at Stated Maturity.
COMPS EARLY REDEMPTION
PRICE...................The Early Redemption Value (as defined in the
Prospectus), which represents the payment of the
discounted present value of Principal Amount on the
applicable Early Redemption Date. See "Description of
the ComPS -- Optional Redemption" and "-- Special Event
Redemption".
VOTING RIGHTS...........Holders of ComPS will have limited voting rights but
will not be entitled to vote to appoint, remove or
replace the Trustees of the Trust or to increase or
decrease the number of Trustees (as defined in the
Declaration). See "Description of the ComPS--Voting
Rights".
USE OF PROCEEDS.........The proceeds to the Trust from the sale of ComPS and
related Series [B] Common Securities will be used to
purchase a note of Morgan Guaranty (the "Related Note"),
and Morgan Guaranty will use such proceeds for general
corporate purposes and for hedging its obligations under
the Related Note. See "Use of Proceeds".
FACTOR..................[0.095 (9.5 percent)] [set on date of pricing], which is
designed to offset the costs of issuing and hedging the
indexation of the ComPS.
FEDERAL INCOME
TAX TREATMENT...........Morgan Guaranty and the holders of ComPS will agree to
treat the Related Note as a cash settled forward
purchase contract. Under this approach, under current
law holders should not be required to report original
issue discount ("OID") income and would have capital
gain or loss on the sale or redemption of the ComPS.
However, other tax results, including OID income and
ordinary income on a sale or redemption of the ComPS,
might arise.
S-4
<PAGE> 6
THE OFFERING
The information in this Prospectus Supplement concerning J.P. Morgan, Morgan
Guaranty, the Trust, the ComPS, the Guarantee, the Related Note Guarantee and
the Related Note supplements, and should be read in conjunction with, the
information contained in the accompanying Prospectus. THE FOLLOWING SUMMARY OF
PROVISIONS RELATING TO THE COMPS IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION CONTAINED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT (THIS "PROSPECTUS SUPPLEMENT") AND THE PROSPECTUS OF WHICH
THIS PROSPECTUS SUPPLEMENT CONSTITUTES A PART (THE "PROSPECTUS"). Prospective
purchasers of ComPS should carefully review such information. Certain
capitalized terms used in this Prospectus Supplement have the meanings ascribed
to them under the "Glossary of Terms" in Annex I hereto.
GENERAL
Subject to the more specific discussion of each item elsewhere in this
Prospectus Supplement or in the Prospectus (including the effect of a Market
Disruption Event, as defined herein), following is a general summary of the
ComPS:
The ComPS do not pay dividends and are principal-at-risk securities linked
directly to the performance of the JPMCI Corn Total Return Index (the
"Applicable Index"), reduced by the Factor. As described herein, the Applicable
Index will change based on the daily percentage change in value of the Benchmark
Corn Contracts plus a component of collateral yield computed on such fluctuating
index value at the most recent auction rate for 3-month U.S. Treasury Bills or
certain successor rates thereto (the "Collateral Yield Component"). At maturity,
an investor will receive a principal amount determined by the following formula:
Face Amount x (the 10-day average of the Applicable Index/the Applicable Index
set on the day of pricing, minus the Factor). In no circumstances will the
Redemption Value of the ComPS be less than zero, but the Redemption Value could
be more or less than the Face Amount. Thus, the Redemption Value is linked
directly to the performance of the Applicable Index, reduced by the Factor
(e.g., if the average ending value of the Applicable Index is twice the
beginning value, the Redemption Value will be twice the Face Amount, reduced by
the Factor). If the Applicable Index decreases over the life of the ComPS, or if
the percentage increase in the Applicable Index is less than the amount of the
Factor, the Redemption Value will be less than the Face Amount. If the
percentage increase in the Applicable Index over the life of the ComPS is
greater than the amount of the Factor, the Redemption Value will be greater than
the Face Amount. The Factor, 9.5%, is designed to offset the costs of issuing
and hedging the ComPS which are charged to the holders of the ComPS in the
Redemption Value.
The Applicable Index (the JPMCI Corn Total Return Index) is a Total Return
Index. A Total Return Index, which is described more fully in the attached
Prospectus under "The JPM Indices -- Total Return Methodology", represents the
cumulative return of holding an unlevered position in the designated nearby
commodity futures contracts underlying such Applicable Index, plus the
Collateral Yield Component. Generally, since the Total Return Index is linked
directly (i.e., on a one-to-one basis) to the underlying futures contracts, a 1%
change on any day in the value of the specific underlying designated futures
contract will create a 1% change in the value of the Applicable Index for such
day (not including any change in value resulting from the Collateral Yield
Component). Because the designated futures contracts underlying the Total Return
Indices have maturities (generally less than three months) which are shorter
than the maturity of the ComPS, the index calculation methodology replaces the
underlying contract used to determine the daily change in the value of the
Applicable Index with the next designated contract of the same commodity on a
periodic basis. This process of replacement is called "rolling", and the 5-day
period during which the replacement occurs is called the "Rollover Period". For
any month during which a roll occurs, the daily change in value of a Total
Return Index solely as a result of the change in value of the designated future
contracts ("Change(t)") for all days prior to the Rollover Period is calculated
as 100% of the daily change of the existing ("old") underlying designated
contract. Beginning with the first day after the beginning of the Rollover
Period, the daily Change(t) in a Total Return Index is calculated based 80% on
the percentage change of the old contract and 20% on the percentage change in
the replacement ("new") designated contract. Similar 20% adjustments are made in
the weights attributable to each
S-5
<PAGE> 7
contract's change for each of the next four days of the Rollover Period such
that, by the day after the Rollover Period ends and for all subsequent days
until the next Rollover Period, 100% of the daily Change(t) is attributable to
the percentage change of the new designated contract. Because the change in the
Applicable Index is linked directly to the percentage change in the designated
contracts underlying such index, plus the Collateral Yield Component, any events
which affect the designated contracts underlying the Applicable Index may affect
the Early Redemption Value and Redemption Value of the ComPS.
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary over the life of the ComPS in relation to the Applicable
Index, reduced by the Factor. The Principal Amount repayable on any Early
Redemption Date, upon the occurrence of any Special Event Redemption or at
Stated Maturity will be determined, pursuant to the terms described herein
(including, without limitation, the averaging of the Applicable Index over the
Early Determination Period or Determination Period, as applicable, and the
present-valuing of the dividends and Principal Amount in connection with early
redemptions), by comparing the level of the Applicable Index set on the date of
issuance of the ComPS with the level determined pursuant to the terms hereof for
any such date of redemption, reduced by the Factor.
The ComPS represent undivided beneficial preferred interests in certain assets
of the Trust consisting of the Related Note and the proceeds thereof. The
Related Note, in which the proceeds of the ComPS and the related Series [B]
Common Securities will be invested, matures on , [2001] (which is the
"Stated Maturity"), subject to extension in the case of a Market Disruption
Event, and is redeemable at certain times, from time to time, at the option of
the Trust upon an optional redemption by one or more holders of ComPS in an
amount sufficient to fund such redemption and the redemption of the related
Series [B] Common Securities and at any time by Morgan Guaranty in whole or in
part upon the occurrence of a Special Event. The ComPS will be redeemed at
Stated Maturity at the ComPS Redemption Price, which is equal to the Redemption
Value (as defined below) per Series [B] Preferred Security. In addition, if, as
a result of a Special Event, Morgan Guaranty redeems the Related Note in whole
or in part prior to Stated Maturity, the Trust must redeem ComPS and related
Series [B] Common Securities having an aggregate Principal Amount equal to the
Principal Amount of the Related Note so redeemed at the ComPS Early Redemption
Price. See "Description of the ComPS -- Redemption at Stated
Maturity"; -- Special Event Redemption". For purposes of this Prospectus
Supplement, "Principal Amount" means (i) in the case of any Series [B] Preferred
Security, the Early Redemption Value thereof or the Redemption Value thereof (as
if determined as of such time), as applicable, and (ii) in the case of the
Related Note, the principal amount thereof at such time determined pursuant to
the terms thereof.
DIVIDENDS
The holders of ComPS are not entitled to receive dividends.
REDEMPTION AT STATED MATURITY
Unless previously redeemed pursuant to the optional or special redemption
provisions described below, each of the outstanding ComPS will be redeemed by
the Trust, in cash, on , [2001] which is the Stated Maturity of the
Related Note, subject to extension in the case of a Market Disruption Event (as
defined herein), at the ComPS Redemption Price, which is equal to the Redemption
Value per Series [B] Preferred Security. See "Description of the
ComPS -- Redemption at Stated Maturity"; "Risk Factors -- Extension of
Settlement Date or Stated Maturity".
CALCULATION OF REDEMPTION VALUE
The Principal Amount of each Series [B] Preferred Security is indexed to the
difference of (i) the Applicable Index, which is calculated based on the change
in value of certain corn futures contracts included from time to time in the JPM
Indices (such contracts, from time to time, the "Benchmark Corn Contracts") plus
the Collateral Yield Component, and (ii) the Factor. On the date of this
Prospectus Supplement, the
S-6
<PAGE> 8
Benchmark Corn Contract is the No. 2 Yellow Corn contract traded on the Chicago
Board of Trade (the "CBOT"). Any contracts for forward delivery on the CBOT
shall be referred to herein as "futures contracts" or "contracts." In summary,
and subject to the complete definitions and formulae contained herein and in the
Prospectus, the Principal Amount of each Series [B] Preferred Security at Stated
Maturity, subject to extension in the case of a Market Disruption Event (the
"Redemption Value"), shall be determined by multiplying the Face Amount of each
Series [B] Preferred Security by the difference between (a) a fraction, the
numerator of which is the Applicable Index Settlement Value and the denominator
of which is the Applicable Index Commencement Value, and (b) the Factor.
However, the Redemption Value may not be less than zero. Subject to the more
complete definitions contained herein and in the accompanying Prospectus,
"Applicable Index Settlement Value" means the arithmetic average of the values
of the Applicable Index during the Determination Period (as defined below), and
"Applicable Index Commencement Value" means [value set on date of issuance]. See
"Description of ComPS--Calculation of Redemption Value" herein and "Description
of ComPS--Determination Period and Settlement Date" in the Prospectus.
The Factor, 9.5%, is designed to offset the costs of issuing and hedging the
ComPS which are charged to the holders of the ComPS in the Redemption Value.
EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE
Upon the occurrence of certain events affecting the liquidity or increasing the
cost of holding or trading the Benchmark Corn Contracts and the inability to
find a suitable replacement Benchmark Corn Contract, Morgan Guaranty has the
right to cause the Applicable Index Settlement Value to be fixed. Following such
an event, the Applicable Index Settlement Value will remain fixed and will be
used in calculating the Applicable Index Early Settlement Value for the
computation of any Early Redemption Value and as the Applicable Index Settlement
Value at Stated Maturity. See "Description of the ComPS--Early Determination of
Applicable Index Settlement Value and Redemption Value".
OPTIONAL REDEMPTION
Each holder of ComPS may, by giving notice as specified herein before
[anniversary of Stated Maturity] of each year prior to Stated Maturity (each, an
"Optional Redemption Date"), cause the Trust to redeem some or all of such
holder's ComPS at the ComPS Early Redemption Price, which is equal to the Early
Redemption Value (as defined in the Prospectus) per Series [B] Preferred
Security as determined at such time. See "Description of the ComPS--Optional
Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event or an Investment
Company Event (each as defined herein and each a "Special Event"), Morgan
Guaranty will have the right to redeem the Related Note in whole or, if
redemption of less than all the ComPS will result in the discontinuance of such
Special Event, in part in an amount sufficient to cause such discontinuance, in
each case for cash, with the result that the Trust will redeem a Principal
Amount of ComPS and related Series [B] Common Securities equal to the Principal
Amount of the Related Note so redeemed for cash at the ComPS Early Redemption
Price. However, in the case of a Tax Event, Morgan Guaranty may allow the
Related Note and the Trust may allow the ComPS and related Series [B] Common
Securities to remain outstanding upon the receipt of indemnification by J.P.
Morgan of the Trust for all taxes payable by it as a result of such Tax Event.
See "Description of the ComPS--Special Event Redemption".
UNCONDITIONAL GUARANTEE BY J.P. MORGAN
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee and the Declaration, taken together, will provide a full and
unconditional guarantee, on a subordinated basis, of payments due on the ComPS.
See "Risk Factors--Limitation on Rights Under the Guarantee, the Related Note
S-7
<PAGE> 9
Guarantee and the Related Note", "Description of the Related Note Guarantee" and
"Effect of Obligations Under the Guarantee, the Related Note Guarantee and the
Related Note".
THE GUARANTEE
The Guarantee by J.P. Morgan guarantees to the holders of the ComPS the payment
of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as
applicable, but if and only if and to the extent that, in each case, Morgan
Guaranty has made payment of principal on the Related Note, and (ii) upon a
Liquidation Event (as defined herein) (other than in connection with the
redemption of all the ComPS upon maturity or redemption in whole of the Related
Note), the lesser of (A) the Early Redemption Value of such ComPS (the
"Liquidation Distribution"), to the extent the Trust has funds available
therefor, and (B) the amount of assets of the Trust consisting of the Related
Note and the proceeds thereof remaining available for distribution to holders of
the ComPS upon such Liquidation Event. J.P. Morgan's obligations under the
Guarantee will be subordinated and junior in right of payment to all liabilities
of J.P. Morgan, pari passu with the most senior preferred stock outstanding as
of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan.
THE RELATED NOTE GUARANTEE
The Related Note Guarantee by J.P. Morgan guarantees to the Property Trustee on
behalf of holders of Series [B] Securities the payment of principal of the
Related Note as provided pursuant to the terms of the Related Note, at such
times and in such amounts as provided therein. J.P. Morgan's obligations under
the Related Note Guarantee will be subordinated and junior in right of payment
to all liabilities of J.P. Morgan, pari passu with the most senior preferred
stock outstanding as of the date hereof of J.P. Morgan and senior to the common
stock of J.P. Morgan.
RELATED NOTE
The Related Note will be issued as an unsecured obligation of Morgan Guaranty,
limited in initial Principal Amount to approximately $ , such amount being the
aggregate Face Amount of the ComPS and the related Series [B] Common Securities.
The Related Note will mature on the Stated Maturity (subject to extension in the
case of a Market Disruption Event), and will not bear interest. The Principal
Amount of the Related Note at any time will be the aggregate Principal Amount of
the outstanding ComPS and related Series [B] Common Securities at such time. The
amount payable upon maturity of the Related Note will be the Related Note
Redemption Price. The timing and amount of payments on the Related Note mirror
the aggregate financial terms of the ComPS.
The obligations of Morgan Guaranty under the Related Note will be pari passu
with all present and future Senior Indebtedness of Morgan Guaranty. Morgan
Guaranty's obligations under the Related Note are effectively subordinated to
all liabilities (including indebtedness) of its consolidated and unconsolidated
subsidiaries.
VOTING RIGHTS
Holders of ComPS will have certain voting rights but will not be entitled to
vote to appoint, remove or replace the Trustees (as defined below) of the Trust
or to increase or decrease the number of Trustees. See "Description of the
ComPS--Voting Rights".
USE OF PROCEEDS
The Trust, on behalf of holders of Series [B] Securities, will invest the
proceeds from the sale of the ComPS offered hereby and the related Series [B]
Common Securities in the Related Note, the proceeds of which will be used by
Morgan Guaranty for general corporate purposes and for hedging its obligations
under the Related Note. See "Use of Proceeds".
S-8
<PAGE> 10
LISTING
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering, there has been no market for the ComPS.
S-9
<PAGE> 11
RISK FACTORS
INDEXATION OF PRINCIPAL AMOUNT
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary until Stated Maturity of the ComPS in relation to the
Applicable Index (the JPMCI Corn Total Return Index), reduced by the Factor. The
Principal Amount repayable on any Optional Redemption Date, upon the occurrence
of any Special Event Redemption or in connection with any Liquidation
Distribution (each such redemption date, an "Early Redemption Date") or at
Stated Maturity will be determined, pursuant to the terms described herein
(including, without limitation, the averaging of the Applicable Index over the
Early Determination Period or Determination Period, as applicable, and the
present-valuing of the Principal Amount in connection with early redemptions),
by comparing the level of the Applicable Index at the date of issuance of the
ComPS with the level determined pursuant to the terms hereof for any such date
of redemption, reduced by the Factor. Accordingly, the Principal Amount to be
received upon any date of redemption will fluctuate based on the Applicable
Index (reduced by the Factor) and may be lower than the Face Amount. If the
Applicable Index decreases over the life of the ComPS, or if the percentage
increase in the Applicable Index is less than the amount of the Factor, the
Redemption Value will be less than the Face Amount. If the percentage increase
in the Applicable Index is greater than the amount of the Factor, the Redemption
Value will be greater than the Face Amount.
LIMITATION ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE
RELATED NOTE
The Guarantee will be effective with respect to the ComPS from the time of
issuance of the ComPS but will not apply to any payment of amounts due in
respect of the ComPS to the extent Morgan Guaranty has failed to make a payment
of principal of the Related Note. To the extent Morgan Guaranty were to default
on its obligation to pay amounts payable on the Related Note, the Trust, on
behalf of holders of the Series [B] Securities, would lack available funds for
the payment of distributions of the Principal Amount of or amounts payable on
redemption of the ComPS and, in such event, holders of the ComPS would not be
able to rely on the Guarantee for payment of such amounts. Instead, holders of
the ComPS would rely on the enforcement by the Trust, on behalf of holders of
the Series [B] Securities, of its rights as holder of the Related Note against
Morgan Guaranty and of its rights as holder of the Related Note Guarantee
against J.P. Morgan. In addition, upon the occurrence and during the continuance
of a Note Event of Default that is attributable to the failure of Morgan
Guaranty to pay principal on the Related Note on the date such principal is
otherwise payable (or in the case of a redemption, on the redemption date), any
holder of the outstanding ComPS may directly institute a proceeding under the
Related Note Guarantee with respect to the ComPS against J.P. Morgan for
enforcement of payment to such holder of the related principal amount of the
ComPS of such holder (a "Direct Action") on or after the date of the occurrence
of such Note Event of Default without first instituting a legal proceeding
against the Trust, the Property Trustee or any other person or entity.
Notwithstanding any payments made to such holder of ComPS by J.P. Morgan in
connection with a Direct Action, J.P. Morgan shall remain obligated to pay the
principal of the ComPS, and the rights of J.P. Morgan, as Guarantor, shall be
subrogated to the rights of such holder of ComPS with respect to payments on the
ComPS to the extent of any payment made by J.P. Morgan to such holder of ComPS
in such Direct Action. J.P. Morgan, through its obligations under the Guarantee,
the Related Note Guarantee and the Declaration, taken together, will provide a
full and unconditional guarantee, on a subordinated basis, of payments due on
the ComPS. See "Description of the Guarantee" and "Description of the Related
Note Guarantee".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, unless waived by Morgan Guaranty or
subject to cure as specified herein, Morgan Guaranty shall have the right to
redeem the Related Note, in whole or in part, in which event the Trust will
redeem the ComPS and related Series [B] Common Securities on a pro rata basis to
the same extent as the Principal Amount of the Related Note is redeemed by
Morgan Guaranty.
S-10
<PAGE> 12
As described in more detail below, a Special Event is either (i) a Tax Event or
(ii) an Investment Company Event. A Special Event may occur at any time. See
"Description of the ComPS--Special Event Redemption".
It is possible that the occurrence of a Special Event could cause the market
price of the ComPS in any existing secondary market to decline.
LIMITED VOTING RIGHTS
Holders of ComPS will have certain voting rights relating to a payment default
on or an adverse change to the ComPS, but will not be entitled to vote to
appoint, remove or replace the Trustees of the Trust or to increase or decrease
the number of Trustees, which voting rights are vested exclusively in the
holders of the Series [B] Common Securities and other Common Securities. See
"Description of the ComPS--Voting Rights".
TRADING PRICE MAY NOT REFLECT ACTUAL ECONOMIC VALUE
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering there has been no market for the ComPS. It is
not possible to predict whether the necessary number of holders will purchase
and, for the remaining term of the ComPS, continue to hold ComPS in order that
any secondary market which does develop will continue to exist. The Underwriters
(as defined in "Underwriting") are not obligated to make a market for the ComPS,
and although J.P. Morgan Securities Inc. ("JPMSI") as lead Underwriter, intends
to use its reasonable efforts to do so, it is possible that no active secondary
market for the ComPS will develop and remain in existence.
There can be no assurance as to the market prices for the ComPS in any secondary
market which does develop. Accordingly, the ComPS that an investor may purchase,
whether pursuant to the offer made hereby or in the secondary market, may trade
at a discount to the price that the investor paid to purchase such ComPS.
VALUE OF THE COMPS
The value of the ComPS at any time will depend upon the interaction of at least
two key factors: (i) the level of the Applicable Index and (ii) the credit
quality of Morgan Guaranty and J.P. Morgan. As discussed under "Description of
the ComPS", adverse changes in the Applicable Index will directly correlate to
adverse changes in the value of the ComPS. Also, a decline in the credit quality
of Morgan Guaranty and J.P. Morgan could cause the trading price of the ComPS in
any secondary market then existing to decline.
IMPOSITION OF BANK REGULATORY RESTRICTIONS
The Trust's ability to make distributions and other payments on the ComPS is
dependent upon Morgan Guaranty's making payments on the Related Note as and when
required or collection by the Trust, on behalf of holders of Series [B]
Securities, under the Related Note Guarantee. As noted in the accompanying
Prospectus under "J.P. Morgan & Co. Incorporated--Regulation", Morgan Guaranty
is subject to examination and regulation by U.S. federal and state banking
authorities, and although there is no current restriction on Morgan Guaranty's
ability to make payments under the Related Note, certain transactions with
affiliates, including the Trust, are or may in the future become subject to
restrictions imposed by bank regulatory authorities.
EFFECT OF TRADING IN THE BENCHMARK CORN CONTRACTS AND RELATED COMMODITIES AND
INSTRUMENTS
Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively
involved in the trading of the Benchmark Corn Contracts, U.S. Treasury Bills and
other instruments and derivative products based thereon. Morgan Guaranty, in
particular, is an active participant in various commodity markets including
S-11
<PAGE> 13
the physical petroleum, precious and base metals and related derivatives
markets. JPMSI and other affiliates may also issue or underwrite, or authorize
unaffiliated entities to issue or underwrite, other securities or financial
instruments with returns indexed to the Applicable Index, the Benchmark Corn
Contracts, U.S. Treasury Bills, one or more of the JPM Indices or to another
commodity. Morgan Guaranty has licensed, and may in the future license, the
Applicable Index, the JPM Indices, and related indices and sub-indices for use
by affiliated and unaffiliated parties, for publication in newspapers and
periodicals, for distribution by information and data dissemination services and
for other purposes. Morgan Guaranty currently intends to publish individual
commodity sub-indices for each of the commodities included in the JPMCI using
the same calculation methodology as that described below. The Applicable Index
on the date hereof is identical to the sub-index having the same underlying
commodity.
Trading in the foregoing contracts, U.S. Treasury Bills and commodities by
Morgan Guaranty, its affiliates (including JPMSI) and unaffiliated third parties
could adversely affect the value of the Applicable Index, which would in turn
adversely affect the return on and the value of the ComPS. See "Description of
the ComPS". Furthermore, additional issuances of securities linked or referenced
to the Benchmark Corn Contracts, similar corn futures contracts or corn could
adversely affect the value of the ComPS.
POTENTIAL FOR ADVERSE INTERESTS
As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in
trading activities related to the Benchmark Corn Contracts and U.S. Treasury
Bills and other instruments or derivative products based on or related to the
Applicable Index, for their accounts where permitted or for other accounts under
their management. Morgan Guaranty, JPMSI and their affiliates, as well as
unaffiliated third parties, may also engage in other activities related to the
Applicable Index, as discussed above. Because Morgan Guaranty will issue the
Related Note issued to the Trust on behalf of holders of Series [B] Securities,
all such activities could create interests of Morgan Guaranty adverse to those
of the holders of ComPS. For example, the issuance of other securities indexed
to the Applicable Index, i.e., the introduction of competing products into the
marketplace, could adversely affect the value of the ComPS. To the extent that
J.P. Morgan or one of its affiliates serves as issuer, or JPMSI or one of its
affiliates serves as agent or underwriter, for such securities or other
instruments, their interests with respect to such products may be adverse to
those of the holders of the ComPS. Morgan Guaranty will serve as Calculation
Agent with respect to the ComPS and, accordingly, will in good faith calculate
the Applicable Index, which could also raise certain adverse interests (e.g., in
instances where Morgan Guaranty as the Calculation Agent is required to exercise
discretion).
RISK OF CARRYING AND ROLLING BENCHMARK CORN CONTRACTS
As discussed below, the Early Redemption Value and the Redemption Value of the
ComPS will be calculated with reference to the Applicable Index, the value of
which is designed to replicate to the extent provided herein the cumulative
return of holding a continuous investment in the Benchmark Corn Contracts, plus
the Collateral Return Component. At any given time, the Applicable Index will be
calculated based on the change in value of certain Benchmark Corn Contracts for
delivery in the near term (the "shorter-dated contracts"), plus the Collateral
Return Component thereon. The Applicable Index will continue to be calculated
based on the change in value of such shorter-dated contracts until they approach
maturity, at which time the Applicable Index will, as described below, cease to
be calculated based on the change in value of such shorter-dated contracts and
begin to be calculated based on the change in value of the subsequent Benchmark
Corn Contracts (the "longer-dated contracts") plus the Collateral Return
Component thereon on a regular periodic basis so as to be continuously indexed
to the change in value of Benchmark Corn Contracts. The period during which each
such replacement of shorter-dated contracts with longer-dated contracts as the
basis for the calculation of the change in value of the Applicable Index occurs
is referred to herein as the "Rollover Period", as further defined below. If the
market for Benchmark Corn Contracts is in "contango" (i.e., the prices of
longer-dated contracts are above the prices of shorter-dated contracts), the
return on the Applicable Index may be adversely affected. The Applicable Index
would decline if (i) the price of the longer-dated Benchmark Corn Contracts
during the
S-12
<PAGE> 14
Rollover Period were more than the price of the shorter-dated contracts which
they will replace and (ii) the price of the longer-dated contracts were to
decline as such contracts approach maturity (i.e., the price of the longer-dated
contracts were to converge toward the price of the replaced shorter-dated
contracts), in each case in an amount greater than the Collateral Return
Component accruing during such period. While many of the commodities included in
the JPM Indices have historically exhibited periods of both "backwardation"
(i.e., the prices of longer-dated contracts are below the prices of
shorter-dated contracts) and contango, there can be no assurance that
backwardation will exist at any or all times. The absence of backwardation in
the market for Benchmark Corn Contracts could adversely affect the Applicable
Index and, correspondingly, could adversely affect the value of the ComPS.
Additionally, the issuance and/or the trading of the ComPS could adversely
affect the market for Benchmark Corn Contracts and the extent to which such
markets are in backwardation or contango and, correspondingly, could adversely
affect the value of the Applicable Index and the value of the ComPS. See
"Description of ComPS--Calculation of Redemption Value".
The following table sets forth the simulated month-end level of the JPMCI Corn
Total Return Index (the Applicable Index) for the months from January, 1984
through May 1996, and the actual level of the JPMCI Corn Total Return Index
thereafter. Because Morgan Guaranty did not commence actual calculation and
publication of the JPMCI Corn Total Return Index using the rules described
herein until May 31, 1996, the levels prior to such date are simulated levels
only, derived by applying the rules of the JPMCI Corn Total Return Index as
described herein to historical crude oil contract settlement values and using as
a given the level of 100 for the JPMCI Corn Total Return Index on May 31, 1996,
as the basis for calculation:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
LEVEL OF THE APPLICABLE INDEX AS OF THE END OF:
YEAR JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1984 51.42 51.68 55.38 54.58 56.38 58.96 53.55 54.43 53.91 53.63 53.38 52.02
1985 53.01 51.65 53.93 53.86 53.20 52.71 48.05 46.43 48.00 50.02 51.24 52.52
1986 51.94 48.57 50.51 49.78 53.25 49.92 46.80 45.70 49.11 48.35 47.34 42.83
1987 42.22 39.76 42.23 47.15 48.53 47.38 43.14 41.62 45.17 45.35 48.44 45.77
1988 48.98 50.89 51.26 50.09 53.47 76.66 61.08 66.60 64.58 64.19 60.51 64.07
1989 62.34 62.09 60.32 60.92 59.18 62.39 54.82 59.26 58.69 60.23 60.77 60.65
1990 60.70 63.41 65.84 71.40 70.61 75.33 67.35 61.88 60.84 61.59 61.58 60.39
1991 63.99 63.77 64.51 63.39 61.62 56.21 65.80 63.97 62.87 63.59 60.60 61.81
1992 65.16 65.79 63.80 59.19 61.75 60.26 52.07 50.92 50.58 48.82 49.99 49.00
1993 48.67 48.11 50.66 50.01 48.40 48.73 49.57 48.83 50.45 53.26 57.52 61.81
1994 58.79 58.52 54.90 53.81 52.95 50.58 46.57 46.92 45.62 45.82 45.18 47.03
1995 46.96 48.15 49.99 49.94 52.32 53.75 56.56 59.35 63.26 67.79 67.71 74.34
1996 74.63 78.17 82.46 100.50 100.00 100.87 89.71 96.85 83.99 75.61 77.13 73.17
1997 76.91 84.68 88.74 84.27 78.14 73.42 82.87 83.67 80.45 87.69 85.31 81.26
1998 84.07 80.90 77.88 73.71
</TABLE>
Additionally, the level of the Applicable Index as of the close of business on
[the date of pricing] was [ ].
S-13
<PAGE> 15
The following is a graph of such simulated and actual month-end values:
LEVELS OF JPMCI CORN TOTAL RETURN INDEX, JANUARY 1984-APRIL, 1998
<TABLE>
<CAPTION>
'LEVELS OF JPMCI CORN TOTAL
MEASUREMENT PERIOD RETURN INDEX, JANUARY 1984-
(FISCAL YEAR COVERED) APRIL, 1998'
<S> <C>
1/31/84 51.42
51.68
55.38
54.58
56.38
58.96
53.55
54.43
53.91
53.63
53.38
52.02
1/31/85 53.01
51.65
53.93
53.86
53.20
52.71
48.05
46.43
48.00
50.02
51.24
52.52
1/31/86 51.94
48.57
50.51
49.78
53.25
49.92
46.80
45.70
49.11
48.35
47.34
42.83
1/30/87 42.22
39.76
42.23
47.15
48.53
47.38
43.14
41.62
45.17
45.35
48.44
45.77
1/29/88 48.98
50.89
51.26
50.09
53.47
76.66
61.08
66.60
64.58
64.19
60.51
64.07
1/31/89 62.34
62.09
60.32
60.92
59.18
62.39
54.82
59.26
58.69
60.23
60.77
60.65
1/31/90 60.70
63.41
65.84
71.40
70.61
75.33
67.35
61.88
60.84
61.59
61.58
60.39
1/31/91 63.99
63.77
64.51
63.39
61.62
56.21
65.80
63.97
62.87
63.59
60.60
61.81
1/31/92 65.16
65.79
63.80
59.19
61.75
60.26
52.07
50.92
50.58
48.82
49.99
49.00
1/29/93 48.67
48.11
50.66
50.01
48.40
48.73
49.57
48.83
50.45
53.26
57.52
61.81
1/31/94 58.79
58.52
54.90
53.81
52.95
50.58
46.57
46.92
45.62
45.82
45.18
47.03
1/31/95 46.96
48.15
49.99
49.94
52.32
53.75
56.56
59.35
63.26
67.79
67.71
74.34
1/31/96 74.63
78.17
82.46
100.50
100.00
100.87
89.71
96.85
83.99
75.61
77.13
73.17
1/31/97 76.91
84.68
88.74
84.27
78.14
73.42
82.87
83.67
80.45
87.69
85.31
81.26
1/31/98 84.07
80.90
77.88
73.71
</TABLE>
Source: Morgan Guaranty
Using the year-end levels noted above as hypothetical ending values for the
Applicable Index Settlement Values and the three-year prior year-end levels as
hypothetical beginning values for the Applicable Index Commencement Values, the
hypothetical Redemption Value of a Series [B] Preferred Security as if maturing
at the end of each of the past ten years for a Series [B] Preferred Security
priced three years prior, with a hypothetical Face Amount of $25.00 and a
hypothetical Factor of 0.15 would be as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Hypothetical Applicable Index
Commencement Value Hypothetical Applicable Index ComPS Hypothetical
Year (3 years prior) Settlement Value Redemption Value
---- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
1987................. 52.02 45.77 $19.62
1988................. 52.52 64.07 $28.12
1989................. 42.83 60.65 $33.03
1990................. 45.77 60.39 $30.61
1991................. 64.07 61.81 $21.74
1992................. 60.65 49.00 $17.82
1993................. 60.39 61.81 $23.21
1994................. 61.81 47.03 $16.65
1995................. 49.00 74.34 $35.55
1996................. 61.81 73.17 $27.22
1997................. 47.03 81.26 $40.82
</TABLE>
WITH RESPECT TO THE FOREGOING MONTH-END VALUES AND HYPOTHETICAL REDEMPTION
VALUES, PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE AND VALUES.
The following table illustrates, for a range of hypothetical changes in the
Applicable Index over the life of the ComPS, the (i) hypothetical value of the
ending index over the beginning index, (ii) the ComPS'
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<PAGE> 16
hypothetical redemption value as a percentage of the original face amount, (iii)
the ComPS' hypothetical redemption value in $ per share, (iv) the cumulative
total return on the ComPS and (v) the total pretax annualized rate of return on
the ComPS. The table assumes a hypothetical ComPS with a term of 3 years and a
factor of 9.5%.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ComPS Hypothetical
Percentage Change Hypothetical Settlement Redemption Total Pretax
Over the Starting Value Divided --------------------- Total Cumulative Annualized Rate of
Value of Index by Commencement Value As % of Par As $/sh Return on the ComPS Return on the ComPS
- ----------------- ----------------------- ----------- ------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
(60)% 40% 30.5% 7.63 (69.50)% (37.69)%
(50)% 50% 40.5% 10.13 (59.50)% (29.02)%
(40)% 60% 50.5% 12.63 (49.50)% (22.14)%
(30)% 70% 60.5% 15.13 (39.50)% (16.04)%
(20)% 80% 70.5% 17.63 (29.50)% (11.48)%
(10)% 90% 80.5% 20.13 (19.50)% (7.17)%
0 % 100% 90.5% 22.63 (9.50)% (3.31)%
10% 110% 100.5% 25.13 0.50% 0.17%
20% 120% 110.5% 27.63 10.50% 3.34%
30% 130% 120.5% 30.13 20.50% 6.26%
40% 140% 130.5% 32.63 30.50% 8.97%
50% 150% 140.5% 35.13 40.50% 11.50%
60% 160% 150.5% 37.63 50.50% 13.86%
</TABLE>
- ---------------
(a) Annualized rate of return computed on a quarterly bond equivalent basis.
VOLATILITY OF AND ADVERSE CHANGES TO CORN AND CORN FUTURES PRICES
Corn prices can fluctuate widely and may be affected by numerous factors. These
include general economic and demographic trends, technical developments,
substitution issues, regulation and farm support programs, as well as specific
factors such as weather.
The U.S. is the world's largest corn producer with roughly 40% of world
production. The U.S. is also the largest exporter of corn in the world, with
about three-quarters of the export market. The U.S. exports about 20% of its
production each year. Other larger producers of corn include China, the EU
(European Union countries) and Brazil/Argentina/Mexico.
Corn is a crop that has many uses, such as the production of sweeteners, starch,
alcohol, cereal, and other products. However, corn's primary use is as a feed
grain. Corn accounts for about 60% of the domestic feed concentrate fed to
livestock and poultry in the U.S.; the remainder goes to food, seed and
industrial uses. U.S. corn production is concentrated in the "corn belt" (Ohio,
Indiana, Illinois, Missouri, and Iowa) with significant contribution also from
the Lake State (Michigan, Wisconsin, and Minnesota) and Northern Plain State
(Kansas, Nebraska, North & South Dakota) regions. Corn yields (bushels harvested
per acre) fluctuate annually and by growing region depending upon weather and
other factors, including the amount of inputs used such as fertilizers and
chemicals. Historically, lower yields have occurred in years subject to adverse
weather, such as droughts, floods, or early freezes, or those years subject to
damage by pests or disease. However, in most years, U.S. corn production has
been plentiful.
The United States Department of Agriculture show the following data on U.S. corn
production, yield, exports and ending inventory levels. And although the fall
1997 corn crop has been harvested, the USDA's final production and export
figures are estimated and subject to change as the USDA revises its final
figures.
S-15
<PAGE> 17
<TABLE>
<CAPTION>
U.S. CORN SUPPLY AND ENDING STOCKS
--------------------------------------------------------------------------
CROP HARVESTED MARKETING YEAR YIELD PRODUCTION EXPORTS ENDING STOCKS
IN FALL OF (SEPT - AUG) (BSHL/ACRE) (MM BSHLS) (MM BSHLS) (MM BSHLS)
-------------- -------------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1992...................... 92/93 131.5 9,477 1,663 2,113
1993...................... 93/94 100.7 6,337 1,328 850
1994...................... 94/95 138.6 10,103 2,178 1,558
1995...................... 95/96 113.5 7,347 2,228 426
1996...................... 96/97 127.1 9,293 1,795 884
1997...................... 97/98 126.4est 9,360est 1,925est 929est
Production, Exports and Stocks are in millions of bushels
Yield is in Bushels per Acre
</TABLE>
Source: USDA Foreign Agricultural Service: World Agricultural Production
(January 1998); Grain: World Markets and Trade (Nov 1997).
The following table shows the year-end levels of the Benchmark Corn Contract
from 1984 (rounded to 2 decimals expressed in cents per bushel):
<TABLE>
<CAPTION>
-------------------------
CBOT
1st Nearby Corn
Futures Price at Year End
-------------------------
<S> <C>
1984........................................................ 269.25
1985........................................................ 248.25
1986........................................................ 160.00
1987........................................................ 184.75
1988........................................................ 284.50
1989........................................................ 239.75
1990........................................................ 231.75
1991........................................................ 251.50
1992........................................................ 216.50
1993........................................................ 306.00
1994........................................................ 231.00
1995........................................................ 369.25
1996........................................................ 258.25
1997........................................................ 265.00
</TABLE>
The supply of and demand for corn influence the corn price in the
medium-to-longer term. In the event of sudden disruptions in the supplies of
corn, such as those caused by war, accidents, weather or acts of terrorism,
prices of Benchmark Corn Contracts and, consequently, the value of the
Applicable Index, could become extremely volatile and unpredictable. Also,
sudden and dramatic declines in Benchmark Corn Contract prices as may occur, for
example, upon a cessation of a drought affecting the market, 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 the ComPS. In addition,
the price of corn has on occasion been subject to very rapid and significant
short-term changes due to speculative activities which, if such activities
result in a price decrease, may cause the value of the ComPS to decrease. In any
case, all such volatility in the Benchmark Corn Contracts will correlate
directly to volatility in the Applicable Index. Such volatility could lead some
investors in the Benchmark Corn Contracts to withdraw from the applicable
futures markets, which could adversely affect the liquidity of such markets and
could adversely affect the value of the Applicable Index and, correspondingly,
the value of the ComPS. See "Description of the ComPS--Calculation of Redemption
Value".
Because U.S. corn supply is seasonal, with a large harvest in the fall, but with
demand continuing throughout the year; corn must be harvested and then stored
(and eventually sold) through the year until the next crop is harvested.
Generally, these seasonal periods of inventory storage tend to exhibit contango
S-16
<PAGE> 18
curves in the futures markets which price in some or all of the costs of
carrying the inventory, while time periods which cross from one crop year to
another may tend to exhibit periods of either backwardation in the futures
markets (i.e., the new crop's price is lower than the old crop's nearby price)
or contango (i.e., the new crop's price is higher than the old crop's nearby
price).
As described previously, the daily change in the Applicable Index is based on
the daily percentage change in the Benchmark Corn Contract plus the daily
Collateral Yield Component. Therefore the volatility of the Applicable Index
will be very similar to the Benchmark Corn Contract. The following graph shows
both the Applicable Index and Benchmark Corn Contract month-end indexed values,
both indexed to 329.25, the price of the Benchmark Corn Contract at the start
(01/31/84). The difference between the two indexed series is the cumulative
effect of the collateral yield component and the average carrying costs implied
in the Benchmark Corn Contracts curve during each roll period. As noted above,
historically, the corn market has been in seasonally driven periods of contango
and backwardation, the cumulative effect of which is that the average carrying
costs implied in rolling the Benchmark Corn Contracts have not offset the
collateral yield component of the index (i.e., the Applicable Index series'
cumulative return is greater than the cumulative return of the Benchmark Corn
Contract series in the graph below). However, there can be no assurance that
backwardation will exist at any or all times in the future.
INDEXED LEVELS OF CORN BENCHMARK CONTRACTS AND JPMCI CORN TOTAL RETURN
BOTH INDEXED TO 329.25 AT START (JANUARY 31, 1984)
<TABLE>
<CAPTION>
Measurement Period 'Indexed JPMCI Corn,
(Fiscal Year Covered) CBOT Corn TR'
<S> <C> <C>
1/31/84 329.25 329.25
330.75 330.91
353.25 354.61
341.50 349.48
350.50 361.01
312.75 377.53
281.50 342.89
283.50 348.52
278.50 345.19
274.50 343.40
265.75 341.80
269.25 333.09
1/31/85 272.50 339.43
264.25 330.72
281.25 345.32
283.25 344.87
274.50 340.65
251.50 337.51
227.75 307.67
218.75 297.30
224.75 307.35
232.75 320.29
244.00 328.10
248.25 336.29
1/31/86 244.00 332.58
228.00 311.00
234.75 323.42
238.25 318.75
237.00 340.97
182.25 319.65
170.00 299.67
165.25 292.62
176.75 314.46
173.25 309.59
168.75 303.13
160.00 274.25
1/31/87 157.00 270.34
147.25 254.59
162.50 270.41
179.00 301.91
188.75 310.74
191.50 303.38
173.50 276.23
166.50 266.50
179.75 289.23
179.50 290.38
188.75 310.17
184.75 293.07
1/31/88 196.75 313.63
203.75 325.86
209.75 328.23
202.25 320.73
224.25 342.38
345.50 490.87
283.75 391.10
296.50 426.45
285.75 413.52
282.25 411.02
261.25 387.45
284.50 410.25
1/31/89 274.75 399.17
272.50 397.57
268.50 386.24
269.25 390.08
260.75 378.94
252.75 399.49
220.50 351.02
236.75 379.45
233.00 375.80
237.50 385.66
238.25 389.12
239.75 388.35
1/31/90 238.25 388.67
247.00 406.02
261.25 421.58
281.25 457.18
278.00 452.13
287.75 482.35
255.50 431.25
233.25 396.23
228.00 389.57
229.25 394.37
227.75 394.31
231.75 386.69
1/31/91 244.25 409.74
241.25 408.33
252.75 413.07
246.50 405.90
245.75 394.56
226.00 359.92
263.25 421.33
254.75 409.61
249.25 402.57
251.00 407.18
238.75 388.03
251.50 395.78
1/31/92 264.25 417.23
264.75 421.26
264.25 408.52
244.00 379.00
259.50 395.39
258.50 385.85
222.75 333.41
217.25 326.05
215.25 323.87
207.25 312.60
212.50 320.09
216.50 313.75
1/31/93 214.50 311.64
211.25 308.06
230.25 324.38
228.00 320.22
224.50 309.91
238.25 312.03
241.75 317.40
237.50 312.67
244.75 323.04
257.75 341.03
279.50 368.31
306.00 395.78
1/31/94 290.25 376.44
285.50 374.71
274.75 351.53
269.00 344.55
278.75 339.05
242.00 323.87
222.00 298.19
222.75 300.44
215.75 292.11
215.75 293.39
213.00 289.29
231.00 301.14
1/31/95 229.50 300.69
234.25 308.31
250.00 320.09
249.00 319.77
266.00 335.01
280.50 344.17
281.25 362.16
293.75 380.03
311.75 405.06
332.50 434.07
330.75 433.56
369.25 476.01
1/31/96 369.00 477.87
395.00 500.53
409.00 528.00
462.50 643.52
477.25 640.32
361.25 645.89
319.75 574.43
343.75 620.15
296.75 537.80
266.00 484.14
270.75 493.87
258.25 468.52
1/31/97 270.25 492.47
296.75 542.22
310.00 568.22
295.00 539.59
270.75 500.34
238.25 470.12
267.75 530.63
269.25 535.75
257.75 515.13
279.75 561.49
271.50 546.25
265.00 520.32
1/31/98 273.00 538.31
270.25 518.01
259.00 498.68
252.25 471.98
</TABLE>
Source: Morgan Guaranty
WITH RESPECT TO THE FOREGOING GRAPH OF INDEXED MONTH-END VALUES, PAST
PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE AND VALUES.
Although the above graph shows that the Applicable Index has outperformed the
Benchmark Corn Contract since 1984, there have been periods during which the
Applicable Index has underperformed the Benchmark Corn Contract. The following
table shows year-end levels for both the Benchmark Corn Contracts and the
Applicable Index along with their respective year-on-year percentage changes.
The percent change of the Benchmark Corn Contract is calculated by taking the
price of nearby Benchmark Corn Contract at year-end (the March contract) and
then comparing it the price of the new March contract
S-17
<PAGE> 19
at the next year-end. Thus, the Benchmark Corn Contract percent change is not
necessarily an investable return (as it compares different March contract prices
from one year to another and does not include either the cost of rolling a
continuous futures position or the collateral yield component included in the
Applicable Index), but it does give a sense of the "spot" change in the
Benchmark Corn Contract.
Again, the difference between the percent change in the Benchmark Corn Contract
and the Applicable Index is the cumulative affect for each year of the
Applicable Index's collateral yield component plus the average carrying costs
implied in the Applicable Index's rolling of the Benchmark Corn Contracts during
each roll periods during that year. If the Benchmark Corn Contracts are in
backwardation (i.e. -- the further forward contract prices are less than the
nearby forward contract prices), the implied carrying costs on the rolling of
the contracts are actually a benefit; if the Benchmark Corn Contracts are in
contango (i.e. -- the further forward contract prices are more than the nearby
forward contract prices), the implied carrying costs on the rolling of the
contracts are a cost. If the implied average carrying costs on the Applicable
Index rolls are greater than the average Treasury bill rate then the Applicable
Index will underperform the stated annual percentage change in the Benchmark
Corn Contracts. If the implied average carrying costs on the Applicable Index
rolls are less than the average Treasury bill rate then the Applicable Index
will outperform the stated annual percentage change in the Benchmark Corn
Contracts.
Table of Benchmark Corn Contract and Applicable Index levels and Annual Percent
Change.
<TABLE>
<CAPTION>
--------------------------------------------
CBOT Corn
Benchmark Contract Applicable Index
------------------ ------------------
Year End Level % Change Level % Change
-------- ------ -------- ------ --------
<S> <C> <C> <C> <C>
1984.......................... 269.25 52.02
1985.......................... 248.25 (7.8)% 52.52 1.0%
1986.......................... 160.00 (35.5)% 42.83 (18.5)%
1987.......................... 184.75 15.5% 45.77 6.9%
1988.......................... 284.50 54.0% 64.07 40.0%
1989.......................... 239.75 (15.7)% 60.65 (5.3)%
1990.......................... 231.75 (3.3)% 60.39 (0.4)%
1991.......................... 251.50 8.5% 61.81 2.4%
1992.......................... 216.50 (13.9)% 49.00 (20.7)%
1993.......................... 306.00 41.3% 61.81 26.1%
1994.......................... 231.00 (24.5)% 47.03 (23.9)%
1995.......................... 369.25 59.8% 74.34 58.1%
1996.......................... 258.25 (30.1)% 73.17 (1.6)%
1997.......................... 265.00 2.6% 81.26 11.1%
</TABLE>
WITH RESPECT TO THE FOREGOING TABLE OF PERCENT CHANGES, PAST PERFORMANCE IS NOT
INDICATIVE OF FUTURE PERFORMANCE.
CHANGE OF EXCHANGE METHODOLOGY
Any exchange on which any Benchmark Corn Contract is traded or which provides
information relevant to the calculation of the Applicable Index may from time to
time change any rule or bylaw or take emergency action under its rules, any of
which could affect the settlement prices of the Benchmark Corn Contracts
underlying an Applicable Index. Any such change which causes a decrease in such
settlement prices could adversely affect the value of the Applicable Index.
SUSPENSION OR MATERIAL DISRUPTION OF FUTURES OR COMMODITIES TRADING; TEMPORARY
DISTORTIONS
The futures markets and the markets for corn 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. In addition, U.S. futures exchanges
(including the CBOT) and certain
S-18
<PAGE> 20
foreign exchanges on which replacement Benchmark Corn 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 a country that at
such time is a member of the Organization of Economic Cooperation and
Development) have regulations which may limit the amount of fluctuation of
futures contract prices which may occur during a single trading day. Such limits
are generally referred to as "daily price fluctuation limits" or, more commonly,
"daily 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.
Any such circumstances, particularly if they occur during the Rollover Period
for the Applicable Index or during an Early Determination Period or the
Determination Period for the Applicable Index, could adversely affect the value
of the Applicable Index and/or could constitute a Market Disruption Event and,
therefore, could adversely affect the value of the ComPS.
Depending on the period of time over which a Market Disruption Event continues,
the correlation between changes in the value of the Applicable Index and changes
in the general level of prices of corn may be adversely affected. Under such
circumstances, the value of the Applicable Index, and the value of the ComPS,
may be adversely affected.
Additionally, because the ComPS will be listed and will trade on a stock
exchange, trading in the ComPS may be subject to interruption or delay due to
extreme volatility in the trading prices of equity securities generally on such
exchange (the so-called "circuit breaker" rules), notwithstanding the specific
price movements of the ComPS.
MARKET DISRUPTION EVENTS
In the event of a Market Disruption Event during any Early Determination Period
or the Determination Period, the Early Redemption Value or Redemption Value, as
applicable, payable in respect of the ComPS will be calculated using the
Applicable Index on the day or days on which open-outcry trading on either the
NYMEX or the London Metals Exchange (the "LME") is scheduled to occur or occurs
(each, a "Trading Day") immediately following the termination of such Market
Disruption Event. However, if such Market Disruption Event remains in effect for
longer than 20 consecutive Trading Days and, in the reasonable judgment of
Morgan Guaranty, such Market Disruption Event is likely to remain in effect,
then the Applicable Index Early Settlement Value or the Applicable Index
Settlement Value, as applicable, for each Trading Day subject to a Market
Disruption Event may be determined in good faith by Morgan Guaranty based on
alternative pricing sources reasonably believed by it to be indicative of
then-prevailing prices for notional transactions in futures contracts or
commodities equal in size to the Applicable Index Early Settlement Value or the
Applicable Index Settlement Value, as applicable, although Morgan Guaranty has
no obligation to do so, and such value will be utilized in the calculation of
the Early Redemption Value or the Redemption Value, as applicable, for such
days. Because Morgan Guaranty's obligations under the Related Note will also be
based on the Applicable Index Early Settlement Value or the Applicable Index
Settlement Value, Morgan Guaranty may have an adverse interest with respect to
such determination.
HISTORICAL CORRELATIONS MAY NOT PREVAIL IN THE FUTURE
Although historically the JPMCI Corn Total Return Index and the 1st nearby
future prices of corn have shown a low correlation of quarterly returns with
stock and bond returns (in each case in the United States), there can be no
assurance that such correlations will prevail in the future. As a result,
investors who invest in ComPS in reliance on these correlations should
individually assess the likelihood of such correlations continuing.
S-19
<PAGE> 21
10-YEAR CORRELATION (R) OF QUARTERLY PERCENTAGE CHANGES, DECEMBER 1987 - MARCH
1998
<TABLE>
<CAPTION>
---------------------------------------
1st Nearby Corn JPMCI Corn
Futures Price Total Return Index
----------------- ------------------
<S> <C> <C>
U.S. Equities Total Return................................. 0.15 0.19
U.S. Government Bonds Total Return......................... 0.00 (0.04)
</TABLE>
Source: Morgan Guaranty
CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS THEREOF
Prices of commodities and commodity futures contracts may be adversely affected
by the promulgation of new laws or regulations or by the reinterpretation of
existing laws or regulations (including, without limitation, those relating to
taxes and duties on commodities or commodity components) by one or more
governments, governmental agencies or instrumentalities, courts or other
official bodies. Any such event could adversely affect the value of the
Applicable Index and, correspondingly, could adversely affect the value of the
ComPS. Additionally, the occurrence of certain events increasing the cost of
holding or trading the Benchmark Corn Contracts and the inability to find a
suitable replacement Benchmark Corn Contract could lead Morgan Guaranty to cause
the Applicable Index Settlement Value to be fixed, which Applicable Index
Settlement Value would be utilized to determine any Early Redemption Value and
in which event the Redemption Value of the ComPS would not vary through Stated
Maturity. Such an early determination of the Applicable Index Settlement Value
may result in the holders of the ComPS receiving an amount that is less than
what indicative commodity and futures prices prevailing on any Early Redemption
Date or at the Stated Maturity would otherwise imply.
EXTENSION OF SETTLEMENT DATE OR STATED MATURITY
If any Benchmark Corn Contract were to be affected by a Market Disruption Event
during any Early Determination Period or the Determination Period, the
applicable Settlement Date would be postponed until the later of (i) the
applicable Early Redemption Date or the Stated Maturity and (ii) the fifth
Business Day after the last day of the applicable Early Determination Period or
the Determination Period. Such delay could be of indefinite duration, during
which time a holder of ComPS will not receive the Early Redemption Value or
Redemption Value thereof, as applicable. In the event that payment of the
Redemption Value is postponed beyond the Stated Maturity, no interest or
dividends will accrue or be payable on the Face Amount, as described under the
caption "Description of the ComPS--Calculation of Redemption Value". In the
event payment of the Early Redemption Value is postponed beyond the applicable
Early Redemption Date, no dividends will be payable, and no interest will accrue
and be payable, with respect to ComPS redeemed on such Early Redemption Date.
DISCONTINUANCE OF PUBLISHING OF THE JPMCI CORN TOTAL RETURN INDEX
In the event that Morgan Guaranty discontinues publication of the JPMCI Corn
Total Return Index, the Calculation Agent will continue to calculate in good
faith the Applicable Index during the remaining term of the ComPS, based on the
methodology described in the Prospectus under "Description of the ComPS".
However, such good-faith calculation may result in a ComPS Redemption Price or
ComPS Early Redemption Price for the ComPS which is less than the ComPS
Redemption Price or ComPS Early Redemption Price, as applicable, for such ComPS
had it been calculated on the basis of the JPMCI Corn Total Return Index.
POTENTIAL MODIFICATIONS TO THE JPM INDICES AND/OR THE APPLICABLE INDEX
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As described under "Description of the ComPS--Early Determination of Applicable
Index Settlement Value and Redemption Value", if any Benchmark Corn Contract
becomes less liquid or representative, the JPMCI Policy Committee could
recommend a replacement Benchmark Corn Contract. Such a change from a less
liquid to a more liquid
S-20
<PAGE> 22
contract may result in a lower Early Redemption Value or Redemption Value for
the ComPS than would have been the case if the less liquid contract had remained
the benchmark.
If at any time no replacement contracts can be found to serve as a Benchmark
Corn Contract, the Applicable Index Settlement Value of the ComPS will be
determined at such time, as described under the caption "Modifications to JPM
Indices". Such an early determination of the Applicable Index Settlement Value
may result in the holders of the ComPS receiving an amount that is less than
what indicative commodity and futures prices prevailing on any Early Redemption
Date or at the Stated Maturity would otherwise imply. Because Morgan Guaranty
will be the Calculation Agent, such early determination may raise adverse
interests.
Additionally, if at any time any Benchmark Corn Contract, or the trading
thereof, becomes subject to any increased cost or additional tax, Morgan
Guaranty reserves the right to designate a replacement Benchmark Corn Contract
or, if no such contract is designated, to cause, at its option, the Applicable
Index Settlement Value of the ComPS to be determined at such time as described
under "Modifications to JPM Indices". Because Morgan Guaranty will, at the time
any Benchmark Corn Contract becomes subject to such increased cost or additional
tax, in its discretion decide whether or not to cause an early determination of
the Applicable Index Settlement Value of the ComPS, exercise of such option may
raise an adverse interest. Such a change in contracts due to the imposition of
any increased cost or additional tax may result in a lower Redemption Value for
such ComPS than would have been the case if the contract on which such increased
cost or additional tax were imposed had remained a Benchmark Corn Contract.
Any early determination of the Applicable Index Settlement Value may cause the
market price of ComPS in any existing secondary market to decline.
EARLY REDEMPTION
The ComPS may be redeemed prior to their Stated Maturity upon the occurrence of
a Special Event or redeemed at the option of the holders thereof on each
Optional Redemption Date. In the case of a redemption upon the occurrence of a
Special Event, the Early Redemption Value paid by the Trust at such time may be
significantly less than the Redemption Value that would otherwise have been
payable had the ComPS not been redeemed prior to their Stated Maturity and the
occurrence of such Special Event may cause the market price of ComPS in any
existing secondary market to decline. In the case of an optional redemption by
holders, it is likely, under usually-prevailing market conditions, that the
Early Redemption Value paid by the Trust will be less than the amount such
holder could have realized by selling such ComPS in an existing secondary
market, if any, ratably during the Early Determination Period. Delay in payment
of the ComPS Early Redemption Price (as a result of a Market Disruption Event or
a delay in the provision by DTC to the Trust of the Applicable Notice (as
defined below)) will not entitle holders of ComPS to any dividends on the ComPS
or the accrual of any interest on such ComPS Early Redemption Price.
CERTAIN CONSIDERATIONS REGARDING HEDGING
Prospective purchasers of the ComPS who intend to hedge against the risks
associated with the market for corn should recognize the complexities of
utilizing the ComPS in this manner. The formula under which the Principal Amount
is calculated is not guaranteed to produce distributions to holders having
readily definable relationships with other corn market instruments and products.
As described below, because the Applicable Index is a Total Return Index, the
value of the ComPS will reflect not only the price of the Benchmark Corn
Contracts but also the state of the futures market for Benchmark Corn Contracts
(i.e., whether such market is in "backwardation" or "contango" over time, as
discussed above) and the Collateral Return Component, reduced by the Factor.
Also, under certain circumstances, amounts payable on the ComPS may be based on
the good faith determination of Morgan Guaranty and not on the Applicable Index.
For these reasons, investors should be cautious in using the ComPS in a hedging
program. The risks associated with utilizing the ComPS in a hedging program may
be magnified in periods of substantial corn price volatility, since properly
correlating the ComPS either as a hedge of other assets
S-21
<PAGE> 23
or correlating the ComPS to a hedge thereof may become more difficult. Also,
investing in ComPS should not be considered a complete investment program.
FEDERAL INCOME TAX CONSEQUENCES
The proper tax characterization of the Related Note is uncertain. Morgan
Guaranty and the holders of ComPS will agree to treat the Related Note as a cash
settled forward purchase contract. Under this approach, under current law
holders should not be required to report OID income and would have capital gain
or loss on the sale or redemption of the ComPS. However, other tax results,
including OID income and ordinary income on a sale or redemption of the ComPS,
might arise. See "United States Federal Income Taxation".
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 subsidiaries engaged globally in providing a
wide range of financial services to institutions, corporations, governments and
individuals. J.P. Morgan's activities are summarized in the Prospectus.
J.P. MORGAN INDEX FUNDING COMPANY I
J.P. Morgan Index Funding Company I is a statutory business trust formed on
December 12, 1996 under the Delaware Business Trust Act (the "Business Trust
Act") pursuant to (i) a declaration of trust among the Trustees and J.P. Morgan
and (ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware on December 12, 1996, which was restated pursuant to the
filing of a restated certificate of trust with the Secretary of State of the
State of Delaware on September 30, 1997. On March 26, 1998, J.P. Morgan, as
sponsor, and the Trustees entered into an amended and restated declaration of
trust, dated as of March 26, 1998 (the "Declaration"), filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement and the
Prospectus. J.P. Morgan will acquire all series of Common Securities, including
the Series [B] Common Securities, of the Trust. The Declaration will be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Company has been merged into the Trust (the "Merger")
pursuant to (i) an Agreement and Plan of Merger between the Trust and the
Company and (ii) a Certificate of Merger merging the Company into the Trust
filed with the Secretary of State of the State of Delaware. By operation of law,
the Trust has become the owner of all assets of the Company, including any
outstanding related notes corresponding to any series of Securities, and has
succeeded to all the obligations of the Company, including any outstanding
Preferred Securities and Common Securities theretofore issued by the Company,
including the Series A Securities, and all the rights of the Company, including
in respect of any related note guarantee executed in connection with such Series
A Securities. Following the effectiveness of the Merger, the outstanding Series
A Securities represent an undivided beneficial interest in the related note
executed in connection with such Series A Securities.
This description summarizes the material terms of the Declaration and is
qualified in its entirety by reference to the form of Declaration, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part, and the Trust Indenture Act.
SERIES [B] SECURITIES
Upon issuance of the Series [B] Preferred Securities, the holders thereof will
own all of the issued and outstanding Series [B] Preferred Securities, and J.P.
Morgan will own all of the issued and outstanding Series [B] Common Securities.
The certificates for each Series [B] Security will represent a fractional
undivided beneficial interest in certain assets of the Trust consisting of the
Related Note and the proceeds thereof, all monies due and to become due under
the Related Note, and the right to receive a portion of the payments of
principal of and interest on the Related Note. J.P. Morgan will acquire the
Series [B] Common Securities in a principal amount equal to 0.001% of the total
principal amount of the Series [B]
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Securities and will own all the issued and outstanding Common Securities of the
Trust which will represent 0.001% of the total capital of the Trust. The Series
[B] Preferred Securities and the Series [B] Common Securities will rank pari
passu with each other and will have equivalent payment terms; provided that (i)
if a Note Event of Default (as defined herein) under the Related Note occurs and
is continuing, the holders of Series [B] Preferred Securities will have a
priority over holders of Series [B] Common Securities with respect to payments
in respect of distributions and payments upon liquidation, redemption and
maturity and (ii) holders of Series [B] Common Securities have the exclusive
right (subject to the terms of the Declaration) to appoint, remove or replace
the Trustees and to increase or decrease the number of Trustees. A Note Event of
Default under the Related Note will not prohibit payments in respect of
distributions and payments upon liquidation, redemption and maturity under a
related note corresponding to any other series of Securities or under such
Securities. No holder of Securities of any series shall have any claim on, or
right to, any assets allocated to, or associated with, any other series (except
if, and to the extent that, such holder is also a holder of Securities of such
other series). The Trust exists for the exclusive purposes of (a) issuing ComPS
and Series [B] Common Securities, and from time to time issuing additional
series of Securities, (b) investing the gross proceeds from the sale of the
ComPS and the Series [B] Common Securities in the Related Note and investing the
proceeds of such additional issuances of Securities in other debt obligations of
Morgan Guaranty and (c) engaging in only such other activities as are necessary,
convenient or incidental thereto. The rights of the holders of the Series [B]
Securities, including economic rights, rights to information and voting rights,
are set forth in the Declaration (which term shall include any Declaration
Supplement), the Business Trust Act and the Trust Indenture Act.
POWERS AND DUTIES OF TRUSTEES
The number of trustees (the "Trustees") of the Trust shall initially be five.
Three of such Trustees (the "Regular Trustees") are individuals who are
employees or officers of J.P. Morgan. The fourth such trustee will be U.S. Bank
Trust National Association, which is unaffiliated with J.P. Morgan and which
will serve as the property trustee (the "Property Trustee") and act as the
indenture trustee for purposes of the Trust Indenture Act. The fifth such
trustee is Wilmington Trust Company, which has its principal place of business
in the State of Delaware (the "Delaware Trustee"). Pursuant to the Declaration,
legal title to the Related Note will be held by the Property Trustee for the
benefit of the holders of the Series [B] Securities, and the Property Trustee
will have the power to exercise all rights, powers and privileges with respect
to the Related Note. In addition, the Property Trustee will maintain exclusive
control of a separate segregated non-interest-bearing bank account for the
Series [B] Securities (the "Property Account") to hold all payments in respect
of the Related Note for the benefit of the holders of the Series [B] Securities.
The Property Trustee will promptly make distributions to the holders of the
Series [B] Securities out of funds from the Property Account. The Guarantee is
separately qualified under the Trust Indenture Act and will be held by U.S. Bank
Trust National Association, acting in its capacity as indenture trustee with
respect thereto, for the benefit of the holders of the Series [B] Preferred
Securities and other Preferred Securities. As used in this Prospectus
Supplement, the term "Property Trustee" with respect to the Trust refers to U.S.
Bank Trust National Association acting either in its capacity as a Trustee under
the Declaration and the holder of legal title to the Related Note or in its
capacity as indenture trustee under, and the holder of, the Guarantee, as the
context may require. J.P. Morgan, as the owner of all of the Common Securities,
will have the exclusive right (subject to the terms of the Declaration) to
appoint, remove or replace Trustees and to increase or decrease the number of
Trustees, provided that the number of Trustees shall be at least five and the
majority of Trustees shall be Regular Trustees. The Regular Trustees are
authorized and directed to take such action as they deem reasonable in order
that the Trust will not be deemed to be an "investment company" required to be
registered under the 1940 Act or that the Trust will not be classified for
United States Federal income tax purposes as an association taxable as a
corporation or a partnership and will be treated as a grantor trust for United
States Federal income tax purposes. In this connection, the Regular Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Trust or the Declaration, that the Regular Trustees
determine in their discretion to be reasonable and necessary or desirable for
such purposes, as long as such action does not adversely affect the
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interests of holders of the Securities. The term of the Trust will be until
November 21, 2105, but the Trust may terminate earlier as provided in the
Declaration.
The duties and obligations of the Trustees of the Trust will be governed by the
Declaration. Under the Declaration, the Trust (on behalf of a series of
Securities or otherwise) shall not, and the Trustees of the Trust shall not
cause the Trust (on behalf of a series of Securities or otherwise) to, engage in
any activity other than in connection with the purposes of the Trust or other
than as required or authorized by the Declaration. In particular, the Trust (on
behalf of a series of Securities or otherwise) shall not, and the Trustees of
the Trust shall cause the Trust (on behalf of a series of Securities or
otherwise) not to, (a) invest any proceeds received by the Trust from holding
the Related Note, but shall promptly distribute from the Property Account all
such proceeds to holders of the Series [B] Securities pursuant to the terms of
the Declaration and of the Series [B] Securities; (b) acquire any assets other
than as expressly provided in the Declaration; (c) possess Trust Property for
other than a Trust purpose; (d) make any loans, other than loans represented by
the Related Note and other related notes corresponding to other series of
Securities; (e) exercise any power or otherwise act in such a way as to vary the
assets of the Trust or the terms of the Series [B] Securities or other series of
Securities in any way whatsoever; (f) issue any securities or other evidences of
beneficial ownership of, or beneficial interests in, the Trust other than the
Series [B] Securities or other series of Securities associated with other
related notes; (g) incur any indebtedness for borrowed money or (h) (i) direct
the time, method and place of exercising any trust or power conferred upon the
Property Trustee of the Trust with respect to the Series [B] Securities or other
series of Securities, (ii) waive any past default that is waivable under the
Related Note (or other related notes) or the Declaration, (iii) exercise any
right to rescind or annul any declaration that the principal of all the Related
Note (or other related notes) deposited in the Trust as trust assets shall be
due and payable or (iv) consent to any amendment, modification or termination of
the Related Note (or other related notes) or the Declaration, in each case where
such consent shall be required, unless in the case of this clause (h) the
Property Trustee shall have received (i) an unqualified opinion of nationally
recognized independent tax counsel recognized as expert in such matters to the
effect that such action will not cause the Trust to be classified for United
States Federal income tax purposes as an association taxable as a corporation or
a partnership and that the Trust will continue to be classified as a grantor
trust for United States Federal income tax purposes and (ii) if required, the
approval of the holders of the Series [B] Securities or other series of
Securities for the taking of any such action. See "J.P. Morgan Index Funding
Company I -- Voting" and "Description of the ComPS -- Voting Rights".
BOOKS AND RECORDS
The books and records of the Trust will be maintained at the principal office of
the Trust and will be open for inspection by a holder of Preferred Securities or
such holder's representative for any purpose reasonably related to such holder's
interest in the related note held by the Trust, on behalf of holders of
Securities of the applicable series, during normal business hours. Separate and
distinct books and records will be maintained by the Trust for each series of
Securities, and the assets associated with, or related to, any such series will
be held and accounted for separately from the assets of the Trust generally or
from the assets associated with, or related to, any other series of Securities.
VOTING
Except as set forth below and under "Events of Default" below and under
"Description of the ComPS--Voting Rights" and as provided under the Business
Trust Act, the Declaration and the Trust Indenture Act, holders of Series [B]
Preferred Securities will have no voting rights.
If any proposed amendment to the Declaration provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Securities, whether by way of
amendment to the Declaration or otherwise, or (ii) the dissolution or bankruptcy
of the Trust, then the holders of outstanding Securities will be entitled to
vote on such amendment or proposal as a class and such amendment or proposal
shall not be effective except with the approval of the holders of Securities
representing a majority in principal amount of such Securities; provided,
however, that if any
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amendment or proposal referred to in clause (i) above would adversely affect
only certain series of the Preferred Securities or certain series of the Common
Securities, then only the affected series or class, as applicable, will be
entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of a majority in principal
amount of such series or class, as applicable, of Securities.
THE PROPERTY TRUSTEE
The Property Trustee, for the benefit of holders of the Series [B] Securities,
is authorized under the Declaration to exercise all rights with respect to the
Related Note deposited with the Property Trustee as a trust asset, including its
rights as the holder of the Related Note to enforce the Trust's rights under the
Related Note upon the occurrence of a Note Event of Default. The Property
Trustee is also authorized to enforce the rights of the Trust under the Related
Note Guarantee. Holders of at least a majority in principal amount of the Series
[B] Preferred Securities will have the right to direct the Property Trustee for
the Trust with respect to certain matters under the Declaration and the Related
Note Guarantee; provided that (a) such direction would not conflict with any
applicable law or the Declaration and would not result in any personal liability
or expense to the Property Trustee, (b) such direction would not cause the Trust
not to be properly classified as a grantor trust for U.S. Federal income tax
purposes and (c) the Property Trustee may take any other action deemed proper by
the Property Trustee which is not inconsistent with such direction. In addition,
under certain circumstances, a holder of the outstanding ComPS may directly
institute Direct Action against J.P. Morgan without first instituting a legal
proceeding against the Trust, the Property Trustee or any other person or
entity. See "Risk Factors--Limitations on Rights Under the Guarantee, the
Related Note Guarantee and the Related Note", "J.P. Morgan Index Funding Company
I--Events of Default", "Description of the ComPS--General" and "Description of
the Related Note Guarantee--Remedies of the Trust and Holders of the ComPS". The
Declaration will provide that the Sponsor will pay the Property Trustee's fees
and expenses and will indemnify the Property Trustee in respect of certain
matters.
The Property Trustee is a depository for funds and performs other services for,
and transacts other banking business with, J.P. Morgan in the normal course of
business.
DISTRIBUTIONS
Pursuant to the Declaration, distributions on the Series [B] Securities must be
paid on the dates payable to the extent that the Property Trustee has cash on
hand in the Property Account to permit such payment. The funds available for
distribution to the holders of the Series [B] Securities will be limited to
payments received by the Property Trustee in respect of the Related Note. If
Morgan Guaranty does not make interest payments on the Related Note, the
Property Trustee will not make distributions on the Series [B] Securities. Under
the Declaration, except as set forth below, if and to the extent Morgan Guaranty
does make interest payments on the Related Note, the Property Trustee is
obligated to make distributions on the Series [B] Securities on a Pro Rata Basis
(as defined below). The payment of distributions on the Series [B] Preferred
Securities is guaranteed by J.P. Morgan on a subordinated basis as and to the
extent set forth under "Description of the Guarantee." The Guarantee, when taken
together with J.P. Morgan's obligations under the Related Note Guarantee and its
obligations under the Declaration, provides a full and unconditional guarantee
from the time of issuance of the Series [B] Preferred Securities of amounts due
on the Series [B] Preferred Securities. Such Guarantee itself, however, covers
distributions and other payments on the Series [B] Preferred Securities only if
and to the extent that Morgan Guaranty has made a payment to the Property
Trustee of interest or principal on the Related Note. As used in this Prospectus
Supplement, the term "Pro Rata Basis" shall mean pro rata to each holder of
Series [B] Securities according to the aggregate principal amount of all Series
[B] Securities held by the relevant holder in relation to the aggregate
principal amount of the Series [B] Securities outstanding unless, in relation to
a payment, a Note Event of Default under the Related Note has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Series [B] Preferred Securities pro rata according
to the aggregate principal amount of the Series [B] Preferred Securities held by
the relevant
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holder in relation to the aggregate principal amount of all the Series [B]
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Series [B] Preferred Securities to each holder of
Series [B] Common Securities pro rata according to the aggregate principal
amount of the Series [B] Common Securities held by the relevant holder in
relation to the aggregate principal amount of all Series [B] Common Securities
outstanding.
EVENTS OF DEFAULT
In the event that the Trust fails to pay distributions on the Series [B]
Securities for 30 days following the date on which such payment was due in
accordance with the terms of such Series [B] Securities or if a Note Event of
Default occurs and is continuing with respect to the Related Note (a "Note Event
of Default"), an Event of Default under the Declaration will occur and be
continuing with respect to any outstanding Series [B] Securities. In such event,
the Declaration provides that (a) holders of a majority in principal amount of
Series [B] Preferred Securities, acting as a single class, may cause the Trust,
on behalf of holders of the Series [B] Securities, by written direction to the
Property Trustee, to waive any such Note Event of Default or to enforce the
Trust's rights under the Related Note against Morgan Guaranty or under the
Related Note Guarantee against J.P. Morgan or, in the case of any failure to pay
distributions, to cause the Trust to declare and pay such distributions;
provided, that such payments shall be paid solely from the proceeds of interest
or other payments made on the Related Note and received by the Trust on behalf
of holders of the Series [B] Securities and (b) in the case of a Note Event of
Default that is attributable to the failure of Morgan Guaranty to pay principal
on the Related Note on the date such principal is otherwise payable (or in the
case of a redemption, on the redemption date) any holder of the outstanding
ComPS may directly institute a Direct Action on or after the date of the
occurrence of such Note Event of Default without first instituting a legal
proceeding against the Trust, the Property Trustee or any other person or
entity. Notwithstanding any payments made to such holder of ComPS by J.P. Morgan
in connection with a Direct Action, J.P. Morgan shall remain obligated to pay
the principal of the ComPS, and the rights of J.P. Morgan, as Guarantor, shall
be subrogated to the rights of such holder of ComPS with respect to payments on
the ComPS to the extent of any payment made by J.P. Morgan to such holder of
ComPS in such Direct Action. Notwithstanding the foregoing, the right of any
holder of Series [B] Securities to receive payments or distributions on such
Series [B] Securities in accordance with the terms of the Declaration or such
Series [B] Securities on or after the respective payment dates therefor, or to
institute suit for the enforcement of any such payment on or after such payment
dates, shall not be impaired without the consent of such holder.
RECORD HOLDERS
The Declaration provides that the Trustees of the Trust may treat the person in
whose name a certificate representing Series [B] Preferred Securities is
registered on the books and records of the Trust as the sole holder thereof and
of the Series [B] Preferred Securities represented thereby for purposes of
receiving distributions and for all other purposes and, accordingly, shall not
be bound to recognize any equitable or other claim to or interest in such
certificate or in the Series [B] Preferred Securities represented thereby on the
part of any person, whether or not the Trust shall have actual or other notice
thereof. Series [B] Preferred Securities will be issued in fully registered form
and will be represented by a global certificate registered on the books and
records of the Trust in the name of The Depositary Trust Company ("DTC") or its
nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal with DTC (or
any successor) for all purposes, including the payment of distributions and
receiving approvals, votes or consents under the Declaration and, except as
set forth in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning a beneficial interest in any Series
[B] Preferred Securities ("Series [B] Preferred Security Beneficial
Owners") registered in the name of and held by DTC or its nominee; and
(ii) the rights of Series [B] Preferred Security Beneficial Owners shall
be exercised only through DTC (or any successor) and shall be limited to
those established by law and agreements between such
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Series [B] Preferred Security Beneficial Owners and DTC and/or its
participants. With respect to any Series [B] Preferred Securities
registered in the name of and held by DTC or its nominee, all notices and
other communications required under the Declaration shall be given to, and
all distributions on such Series [B] Preferred Securities shall be given or
made to, DTC (or its successor).
DEBTS AND OBLIGATIONS
The Declaration provides that any person or entity extending credit to,
contracting with, or having any claim against, the Trust with respect to any
series of Securities may look only to the assets of the Trust associated with
such series to satisfy or enforce any debt, liability, obligation or expense
incurred, contracted for or otherwise existing with respect to such series. In
the Declaration, J.P. Morgan has agreed to pay for all debts and obligations
(other than with respect to the Securities) and all costs and expenses of the
Trust, including the fees and expenses of its Trustees and any taxes and all
costs and expenses with respect thereto, to which the Trust may become subject,
except for United States withholding taxes. The foregoing obligations of J.P.
Morgan under the Declaration are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed a (a "Creditor"), whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of J.P. Morgan directly
against J.P. Morgan and J.P. Morgan has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Trust or any other
person before proceeding against J.P. Morgan. J.P. Morgan has agreed in the
Declaration to execute such additional agreements as may be necessary or
desirable in order to give full effect to the foregoing.
The business address of the Trust is c/o J.P. Morgan & Co. Incorporated, 60 Wall
Street, New York, New York 10260-0060, telephone number (212) 648-2323.
USE OF PROCEEDS
The Trust will invest the proceeds from the sale of the ComPS offered hereby and
the related Series [B] Common Securities in the Related Note of Morgan Guaranty,
the proceeds of which will be used by Morgan Guaranty for general corporate
purposes and for hedging its obligations under the Related Note.
At the time of the pricing of the ComPS, Morgan Guaranty hedged its anticipated
exposure under the Related Note and, subject to market conditions, Morgan
Guaranty expects that it will continue to hedge its exposure under the Related
Note from time to time following this offering of ComPS by taking long or short
positions in the Benchmark Corn Contracts or in listed or over-the-counter
options contracts in, or other derivative or synthetic instruments related to,
several or all of the Benchmark Corn Contracts. There can be no assurance that
Morgan Guaranty's initial hedging did not, and that its continued hedging will
not, affect the price of the Benchmark Corn Contracts (and, as a result, the
economic terms and the subsequent value of the ComPS). In addition, J.P. Morgan
and its affiliates may from time to time purchase or otherwise acquire a long or
short position in the ComPS and may, in their sole discretion, hold or resell
such ComPS. Morgan Guaranty may also take positions in 3-month Treasury Bills
and in other types of appropriate financial instruments that may become
available in the future. To the extent Morgan Guaranty has a long hedge position
in several or all of the Benchmark Corn Contracts or options contracts in, or
other derivative or synthetic instruments related to, several or all of the
Benchmark Corn Contracts, Morgan Guaranty may liquidate a portion or all of its
holdings, as applicable, at or about the time of any Early Redemption Date or
the Stated Maturity of the Related Note (which correspond to the Early
Redemption Dates and the Stated Maturity of the ComPS). Depending on, among
other things, future market conditions, the aggregate amount and the composition
of those positions are likely to vary over time. Profits or losses from any such
position cannot be ascertained until that position is closed out and any
offsetting position or positions are taken into account. However, none of the
contracts or securities acquired in connection with any hedging activity will be
held for the benefit of holders of ComPS.
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DESCRIPTION OF THE COMPS
The ComPS will be issued pursuant to the Declaration. The following summary of
the principal terms and provisions of the ComPS does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the Prospectus
and the Declaration, a copy of which is filed as an exhibit to the Registration
Statement relating to this Prospectus Supplement and the Prospectus.
GENERAL
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary over the life of the ComPS in relation to the Applicable Index
(the JPMCI Corn Total Return Index), reduced by the Factor. As described herein,
the Applicable Index will change based on the daily percentage change in value
of the Benchmark Corn Contracts plus the Collateral Return Component. The
Principal Amount repayable on any Early Redemption Date, upon the occurrence of
any Special Event Redemption or at Stated Maturity will be determined, pursuant
to the terms described herein (including, without limitation, the averaging of
the Applicable Index over the Early Determination Period or the Determination
Period, as applicable, and the present-valuing of the Principal Amount in
connection with redemptions prior to Stated Maturity), by comparing the level of
the JPMCI Corn Total Return Index set on the date of issuance of the ComPS with
the level determined pursuant to the terms hereof for any such date of
redemption, reduced by the Factor.
The Declaration authorizes the Trust to issue Preferred Securities and Common
Securities. All of the Common Securities will be owned by J.P. Morgan. Payments
of redemptions of principal of the ComPS and the related Series [B] Common
Securities will be made on a pro rata basis among the ComPS and the related
Series [B] Common Securities, except that upon the occurrence and during the
continuance of a Note Event of Default or upon the occurrence of a liquidation
of the Trust, the rights of the holders of the Series [B] Common Securities to
receive payments upon liquidation, redemption or otherwise will be subordinated
to the rights of the holders of all Series [B] Preferred Securities. The
Guarantee does not permit the incurrence of any indebtedness by the Trust (other
than any Preferred Securities thereof) while any Preferred Securities are
outstanding. The payment of distributions out of money held by the Trust, and
payments upon liquidation of the Trust, are guaranteed by J.P. Morgan to the
extent described under "Description of the Guarantee". The Guarantee does not
cover payment of principal in respect of, the ComPS when Morgan Guaranty has not
made payment of principal on the Related Note. In such event, the remedy of a
holder of ComPS is to direct the Trust to enforce its rights under the Related
Note and the Related Note Guarantee with respect to such Related Note. In
addition, upon the occurrence and during the continuance of a Note Event of
Default that is attributable to the failure of Morgan Guaranty to pay principal
on the Related Note on the date such principal is otherwise payable (or in the
case of a redemption, on the redemption date), any holder of the outstanding
ComPS may directly institute a Direct Action on or after the date of the
occurrence of such Note Event of Default without first instituting a legal
proceeding against the Trust, the Property Trustee or any other person or
entity. Notwithstanding any payments made to such holder of ComPS by J.P. Morgan
in connection with a Direct Action, J.P. Morgan shall remain obligated to pay
the principal of the ComPS, and the rights of J.P. Morgan, as Guarantor, shall
be subrogated to the rights of such holder of ComPS with respect to payments on
the ComPS to the extent of any payment made by J.P. Morgan to such holder of
ComPS in such Direct Action. See "-- Voting Rights" and "Effect of Obligations
Under the Guarantee, the Related Note Guarantee and the Related Note".
DIVIDENDS
No dividends on the ComPS will be paid.
REDEMPTION AT STATED MATURITY
Unless previously redeemed pursuant to the optional or special redemption
provisions and subject to extension in the case of a Market Disruption Event (as
defined below), each of the outstanding ComPS will
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be redeemed by the Trust, in cash, on the Stated Maturity, at the ComPS
Redemption Price. The ComPS Redemption Price is the Redemption Value per Series
[B] Preferred Security.
CALCULATION OF REDEMPTION VALUE
The Principal Amount of each Series [B] Preferred Security is indexed to the
difference of (i) the Applicable Index, which is calculated based on the change
in value of certain corn futures contracts included from time to time in the JPM
Indices (such contracts, from time to time, the "Benchmark Corn Contracts") plus
the Collateral Yield Component, and (ii) the Factor. On the date of this
Prospectus Supplement, the Benchmark Corn Contract is the CBOT No. 2 Yellow Corn
contract. Subject to the more complete definitions and formulae contained in the
accompanying Prospectus, the Principal Amount of each Series [B] Preferred
Security payable at Stated Maturity, subject to extension in the case of a
Market Disruption Event (the "Redemption Value"), shall be determined by
multiplying the Face Amount of each Series [B] Preferred Security by the
difference between (a) a fraction, the numerator of which is the Applicable
Index Settlement Value and the denominator of which is the Applicable Index
Commencement Value, and (b) the Factor. For purposes of this Prospectus
Supplement, the "Applicable Index Settlement Value" means the arithmetic average
(rounded to four digits following the decimal point) of the daily values of the
Applicable Index for each day of the Determination Period (the period of ten
consecutive Trading Days on which no Market Disruption Event occurs commencing
immediately following the twentieth scheduled Business Day prior to Stated
Maturity), and the "Applicable Index Commencement Value" means [ ]. The
ComPS Redemption Price will first be payable on the later of the Stated Maturity
and the fifth Business Day after the completion of the Determination Period.
For a complete description and definition of a Total Return Index, see
"Description of ComPS -- Calculation of Redemption Value" and "The JPM
Indices -- Total Return Methodology" in the Prospectus. As defined in the
accompanying Prospectus under "Description of ComPS -- Market Disruption
Events", a Market Disruption Event, as determined by Morgan Guaranty, is the
occurrence of one or more of the following on any Trading Day with respect to
any Benchmark Corn Contract underlying the Applicable Index, or an exchange on
which any Benchmark Corn Contract is traded (a "Relevant Exchange"): (a) a day
on which the fluctuation of the price of any Benchmark Corn Contract underlying
the Applicable Index is materially limited by the rules of a Relevant Exchange
setting the maximum or minimum price for such day (a "Limit Price"); (b) a day
on which the official settlement price (the "Settlement Price") on the Relevant
Exchange of a Benchmark Corn Contract underlying the Applicable Index is the
Limit Price; (c) the failure of a Relevant Exchange to determine, announce or
publish the Settlement Price with respect to a Benchmark Corn Contract
underlying the Applicable Index; (d) the material suspension of trading in any
Benchmark Corn Contract underlying the Applicable Index on a Relevant Exchange;
(e) the failure of trading to commence, or the permanent discontinuation of
trading, in any Benchmark Corn Contract underlying the Applicable Index on any
Relevant Exchange and (f) the imposition of any material limitation on trading
in any Benchmark Corn Contract underlying the Applicable Index on any Relevant
Exchange.
EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As discussed in the accompanying Prospectus, the JPMCI Policy Committee advises
Morgan Guaranty with respect to, among other things, the composition of the JPM
Indices, the price sources upon which the JPM Indices are based (i.e., the
underlying futures contracts, including the Benchmark Corn Contracts), and the
weightings and calculation methodology of the JPM Indices, with a view toward
maintaining the JPM Indices as appropriate commodity investment benchmarks that
serve as a measure of performance of the commodity markets. The inclusion
requirements for the futures contracts underlying the JPM Indices require that
such futures contracts be sufficiently liquid and representative price sources.
It is possible, however, that any such underlying contract could become less
liquid or representative and, as a result, the JPMCI Policy Committee may
recommend a modification in the calculation methodology or the contracts
underlying the JPM Indices and,
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therefore, the Applicable Index. Any such replacement contract (i) will be
required to satisfy the JPMCI Inclusion Criteria, as described in the Prospectus
under the caption "The JPMCI Policy Committee", (ii) must be traded in a market
or with a self-regulator which has established either (a) a comprehensive
information sharing agreement with the exchange, if any, on which the ComPS are
then traded or (b) suitable alternative arrangements with the Commission and
(iii) will be with respect to the same general commodity type as the contract
being replaced. Under no circumstances will the general commodity type
underlying the futures contract be changed (e.g., a corn futures contract could
not be replaced by a gold futures contract).
If at any time no contract satisfying both clauses (i) and (ii) of the previous
paragraph can be found to serve as a Benchmark Corn Contract, the Applicable
Index Settlement Value of the ComPS will be determined at such time (in
accordance with the methodology for the Total Return ComPS set forth above under
the caption "Description of the ComPS--Early Redemption Upon the Occurrence of a
Special Event or at the Election of the Holders") as if the last date of the
inclusion of the final Benchmark Corn Contract in the JPM Indices were the Early
Redemption Date. However, the ComPS will not be redeemed at such time; rather,
the ComPS will remain outstanding to Stated Maturity and will be redeemed at
Stated Maturity for a Redemption Value calculated using the Applicable Index
Settlement Value determined at such time as no contract satisfying clauses (i)
and (ii) of the previous paragraph was able to be found. Such ComPS will also be
subject to redemption upon the occurrence of a Special Event and optional
redemption on each Optional Redemption Date (treating the Applicable Index
Settlement Value determined pursuant to the terms of this paragraph as the
Applicable Index Early Settlement Value for any Early Redemption Date).
Additionally, if at any time any Benchmark Corn Contract, or the trading
thereof, becomes subject to any increased cost or additional tax, whether
imposed by any exchange or otherwise, Morgan Guaranty reserves the right (x) to
designate a replacement Benchmark Corn Contract, satisfying both clauses (i) and
(ii) of the second preceding paragraph, which contract is subject to an amount
of cost or tax less than or equal to such increased amount, or (y) if no
contract satisfying clause (x) of this paragraph is designated by Morgan
Guaranty, to cause, at its option, the Applicable Index Settlement Value of the
ComPS to be determined at such time (in accordance with the methodology set
forth above) as if the date of such increase in cost or tax (or, in Morgan
Guaranty's discretion, the last calendar day of the month in which the
determination of the Applicable Index Settlement Value is completed) were the
applicable Early Redemption Date. However, the ComPS will not be redeemed at
such time; rather, the ComPS will remain outstanding to Stated Maturity and will
be redeemed at Stated Maturity for a Redemption Value calculated using the
Applicable Index Settlement Value determined pursuant to the terms of this
paragraph. Such ComPS will also be subject to redemption upon the occurrence of
a Special Event and optional redemption on each Optional Redemption Date
(treating the Applicable Index Settlement Value determined pursuant to the terms
of this paragraph as the Applicable Index Early Settlement Value for any Early
Redemption Date). See "Risk Factors -- Potential Modification to the JPM Indices
and/or the Applicable Index".
OPTIONAL REDEMPTION
The ComPS will be subject to redemption prior to their Stated Maturity at the
election of the holders thereof on each [anniversary of Stated Maturity] prior
to the Stated Maturity, beginning [anniversary of Stated Maturity], 199[ ]
(each, an "Optional Redemption Date"). In order to effect an Optional
Redemption, any such redeeming holder will be required to provide notice of the
number of ComPS to be redeemed on such Optional Redemption Date to a Participant
or Direct Participant in DTC, and such Participant or Direct Participant must
communicate such notice to DTC no earlier than 32 scheduled Business Days prior
to but no later than 22 scheduled Business Days prior to the applicable Optional
Redemption Date. The DTC will then provide notice to the Trust (which will
promptly notify the Property Trustee) or its Transfer Agent of the total number
of ComPS to be redeemed on the Optional Redemption Date (the "Applicable
Notice"). Each Applicable Notice will be provided by DTC to the Trust by 12:30
p.m. New York time on the Business Day next succeeding the last day of the
applicable notice period. Each Applicable Notice will be irrevocable upon
receipt by the Trust or its Transfer Agent, and may not be
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withdrawn or modified after such receipt. Additionally, the Early Determination
Period will not commence until the Trust has received the Applicable Notice and
the applicable Optional Redemption Date will be subject to extension in the case
of a Market Disruption Event. The redeeming holders will be entitled to the
ComPS Early Redemption Price for each Series [B] Preferred Security redeemed,
which is equal to the Early Redemption Value for such ComPS. The Early
Redemption Value of such ComPS shall be determined in accordance with the
formula specified in the Prospectus; provided that, for the purposes of this
Prospectus Supplement, "Unused Costs" shall equal [0.75% (0.75 percent)]. See
"-- Book Entry Issuance -- The Depository Trust Company" herein and "Description
of ComPS -- Early Redemption Upon the Occurrence of a Special Event or at the
Election of the Holders of the ComPS" in the Prospectus.
SPECIAL EVENT REDEMPTION
The ComPS will be subject to redemption by the Trust prior to Stated Maturity,
at its option, upon the occurrence of a Tax Event or an Investment Company Event
(each, a "Special Event"), as discussed herein.
"Tax Event" means that the Trust shall have obtained an opinion of nationally
recognized independent tax counsel experienced in such matters (a "Tax Opinion")
to the effect that, as a result of (a) any amendment to, or change (including
any announced prospective change) in, the laws (or any regulations thereunder)
of the United States or any political subdivision or taxing authority thereof or
therein, (b) any amendment to, or change in, an interpretation or application of
any such laws or regulations by any legislative body, court, governmental agency
or regulatory authority (including the enactment of any legislation and the
publication of any judicial decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the theretofore generally accepted
position or (d) any action taken by any governmental agency or regulatory
authority, which amendment or change is enacted, promulgated, issued or
announced or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after the date of this Prospectus
Supplement, there is more than an insubstantial risk that at such time or within
90 days of the date thereof (i) the Trust is or would be subject to United
States Federal income tax with respect to income accrued or received on the
Related Note, (ii) the contingent principal in excess of the Face Amount, if
any, payable on the Related Note is not, or would not be, deductible by Morgan
Guaranty for United States Federal income tax purposes or (iii) the Trust is or
would be subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges.
"Investment Company Event" means that the Trust shall have received an opinion
of a nationally recognized independent counsel experienced in such matters to
the effect that, as a result of the occurrence of a change in law or regulation,
a written change in interpretation or application of law or regulation by any
legislative body, court, governmental agency or regulatory authority or the
expiration or revocation of any exemption from any provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), obtained by the Trust (a
"Change in 1940 Act Law"), there is more than an insubstantial risk that the
Trust is or will be considered an "investment company" that is required to be
registered as such under the 1940 Act, which Change in 1940 Act Law becomes
effective on or after the date of this Prospectus Supplement.
If at any time a Tax Event or an Investment Company Event shall occur and be
continuing, J.P. Morgan shall elect to either:
(a) direct, within 90 days following the occurrence of such Special
Event, Morgan Guaranty to redeem the Related Note in whole or in part, upon
not less than 22 scheduled Business Days' notice to DTC, in which case the
Trust shall redeem in cash on a pro rata basis ComPS and related Series [B]
Common Securities having an aggregate Principal Amount equal to the
Principal Amount of the Related Note so redeemed, at a price per Series [B]
Preferred Security of the Early Redemption Value; provided, that Morgan
Guaranty shall only be entitled to redeem the Related Note in part if such
partial redemption is sufficient to cause such Special Event to cease; or
(b) in the case of a Tax Event, allow the Related Note and the ComPS to
remain outstanding and indemnify the Trust for all taxes payable by it as a
result of such Tax Event (if any);
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provided that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, that has no adverse effect on the Trust,
J.P. Morgan, Morgan Guaranty or the holders of ComPS, the Trust will pursue such
measure in lieu of redemption; provided further, that Morgan Guaranty shall have
no right to redeem the Related Note while the Trust is pursuing any such
ministerial action or reasonable measure unless the Special Event shall not have
been so eliminated by the 85th day following the occurrence thereof, in which
case J.P. Morgan shall be permitted to direct Morgan Guaranty to provide notice
to the Trust of the redemption of the Related Note.
Under current United States Federal income tax law, a redemption of ComPS upon
the occurrence of a Special Event, whether or not upon dissolution of the Trust,
would be a taxable event to such holders. See "United States Federal Income
Taxation".
REDEMPTION PROCEDURES
In the case of a redemption by a holder of ComPS on an Optional Redemption Date,
any such redeeming holder will be required to provide notice of the number of
ComPS to be redeemed on such Optional Redemption Date to a Participant in DTC,
and such Participant must communicate such notice to DTC no earlier than 32
scheduled Business Days prior to but no later than 22 scheduled Business Days
prior to the applicable Optional Redemption Date.
In the case of a redemption of ComPS upon the occurrence of a Special Event, the
Trust will provide notice of such redemption to the Transfer Agent and to DTC on
a date not less than 22 scheduled Business Days prior to such Early Redemption
Date stating, among other things, the date of such redemption.
The related Series [B] Common Securities will be redeemed on a pro rata basis
with the ComPS except that, in the case of any dissolution or liquidation in
which the assets of the Trust consisting of the Related Note and the proceeds
thereof are insufficient to repay in full the Principal Amount of all Series [B]
Preferred Securities then outstanding, all Series [B] Preferred Securities will
be redeemed prior to the redemption of any Series [B] Common Securities. ComPS
registered in the name of and held by DTC (as defined herein) or its nominee
will be redeemed in accordance with DTC's standard procedures. See "--Book-Entry
Only Issuance--The Depository Trust Company".
Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as
applicable, of the ComPS is conditioned upon delivery or book-entry transfer of
such ComPS (together with necessary endorsements) to the Trust at any time
(whether prior to, on or after the relevant Redemption Date) after the required
notice is given (to the extent such notice is required). See "--Book-Entry Only
Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price
or the ComPS Early Redemption Price, as applicable, for such ComPS will be made
by the delivery of cash no later than the applicable Settlement Date with
respect to such ComPS (subject to delay in the case of a Market Disruption
Event) or, if later, the time of delivery or book-entry transfer of such ComPS.
If the Trust, on behalf of holders of Series [B] Securities holds money
sufficient to pay the ComPS Redemption Price or the ComPS Early Redemption
Price, as applicable, of the ComPS on the applicable Settlement Date, then
immediately at the close of business on such Settlement Date, such ComPS will
cease to be outstanding whether or not such ComPS are delivered to the Trust,
and all rights of the holder of such ComPS shall terminate and lapse, other than
the right to receive the ComPS Redemption Price or the ComPS Early Redemption
Price, as applicable, upon delivery of the ComPS.
Provided that Morgan Guaranty has paid to the Trust, on behalf of holders of
Series [B] Securities the required amount of cash due upon any redemption or at
the maturity of the Related Note, the Trust, on behalf of holders of Series [B]
Securities will irrevocably deposit with DTC no later than the close of business
on the applicable Settlement Date funds sufficient to pay the ComPS Redemption
Price or the ComPS Early Redemption Price, as applicable, payable with respect
to ComPS on such date and will give the Depositary irrevocable instructions and
authority to pay such amount to the holders of ComPS entitled thereto. See
"--Book-Entry Only Issuance--The Depository Trust Company". In the event that
any Settlement Date is not a Business Day, then payment of the ComPS Redemption
Price or the ComPS Early
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Redemption Price, as applicable, payable on such date will be made on the next
succeeding Business Day with the same force and effect as if made on such date
and no interest on such distributions will accrue from and after such date,
except that, if such Business Day falls in the next calendar year such payment
will be made on the immediately preceding Business Day. In the event that
payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as
applicable, is improperly withheld or refused and not paid by the Trust or by
J.P. Morgan pursuant to the Guarantee, no dividends on such ComPS will accrue
from the original Redemption Date to the actual date of payment by the Trust to
DTC.
If a partial redemption as a result of a Special Event Redemption by Morgan
Guaranty of a part or all of the Related Note would result in the delisting of
the ComPS by any national securities exchange (or automated inter-dealer
quotation system, including The Nasdaq Stock Market ("Nasdaq")) on which the
ComPS are then listed, Morgan Guaranty may only redeem the Related Note in whole
and, as a result, the Trust may only redeem the ComPS in whole.
Subject to the foregoing and to applicable law (including, without limitation,
United States Federal securities laws), J.P. Morgan or its affiliates may, at
any time and from time to time, purchase outstanding ComPS by tender, in the
open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any dissolution of the Trust (a "Liquidation Event"), whether
voluntary or involuntary, the holders of ComPS on the date of such Liquidation
Event will be entitled to be paid out of the assets of the Trust consisting of
the Related Note and the proceeds thereof, and after satisfaction of liabilities
to creditors of the Trust with respect to Series [B] Securities, the Liquidation
Distribution. The "Liquidation Distribution" will be equal to the Early
Redemption Value with respect to such ComPS (treating the date of such
distribution as the Early Redemption Date). To the extent such assets of the
Trust are insufficient to repay all amounts due to holders of all the ComPS,
holders of the ComPS then outstanding will be entitled to a pro rata share of
such assets of the Trust, based upon the relative Principal Amounts of all ComPS
outstanding. In addition, in the event that such assets of the Trust exceed the
amount necessary to pay to all holders of ComPS the full amount of the
Liquidation Distribution, such excess will be paid to the holders of the Series
[B] Common Securities, in an amount sufficient to cover the Liquidation
Distribution in respect of all Series [B] Common Securities, and thereafter pro
rata to the holders of the ComPS and the Series [B] Common Securities.
Pursuant to the Declaration, the legal existence of the Trust shall terminate on
November 21, 2105.
VOTING RIGHTS
Except as described herein and under "--Modification of the Declaration" and
under "J.P. Morgan Index Funding Company I -- Voting", and as otherwise required
by law and the Declaration, the holders of the ComPS will have no voting rights.
Pursuant to the provisions of the Guarantee, certain amendments to or
modifications of the Guarantee may only be effected with the approval of a
majority in aggregate Principal Amount at such time of the ComPS and all other
affected Preferred Securities. See "Description of the Guarantee--Modification
of the Guarantee".
Pursuant to the provisions of the Related Note, the Related Note Guarantee and
the Declaration, certain amendments to or modifications of the Related Note or
the Related Note Guarantee may only be effected with the approval of a majority
in aggregate Principal Amount at such time of the ComPS. See "Description of the
Related Note--Modification of the Related Note".
Notwithstanding that holders of ComPS are entitled to vote or consent under any
of the circumstances described above, any of the ComPS that are owned at such
time by J.P. Morgan or any entity directly or indirectly controlling or
controlled by, or under direct or indirect common control with, J.P. Morgan,
shall not be entitled to vote or consent and shall, for purposes of such vote or
consent, be treated as if such ComPS were not outstanding.
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The procedures by which holders of ComPS may exercise their voting rights are
described below under "--Book-Entry Only Issuance--The Depository Trust Company"
and in the Declaration.
MODIFICATION OF THE DECLARATION
The Declaration may be amended or modified if approved by a written instrument
executed by a majority in interest of the holders of Common Securities; provided
that, if any proposed amendment provides for (i) any action that would adversely
affect the powers, preferences or special rights of the ComPS or (ii) the
dissolution of the Trust other than pursuant to the terms of the Declaration,
then the holders of all affected outstanding Preferred Securities (or, in the
case of an event described in clause (ii), all Preferred Securities, including
the ComPS) of the Trust voting together as a single class will be entitled to
vote on such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of holders of not less than a majority in
aggregate Principal Amount of all affected outstanding Preferred Securities (or,
in the case of an event described in clause (ii), all Preferred Securities) of
the Trust affected thereby.
The Declaration further provides that it may be amended without the consent of
the holders of the ComPS to (i) cure any ambiguity, (ii) correct or supplement
any provision in the Declaration that may be defective or inconsistent with any
other provision of the Declaration, (iii) add to the covenants, restrictions or
obligations of J.P. Morgan, (iv) conform to changes in, or a change in
interpretation or application of, certain requirements of the 1940 Act by the
Commission and (v) conform to certain requirements of the Code with respect to
the characterization of the Trust for U.S. Federal income tax purposes, so long
as such amendment does not adversely affect the rights, preferences or
privileges of the holders of the ComPS.
LISTING
The ComPS have been approved for listing on the Amex under the symbol
[" "], subject to official notice of issuance. Trading of the ComPS on the
Amex is expected to commence within a 30-day period after the date of this
Prospectus Supplement. Prior to this offering, there has been no market for the
ComPS.
ACCOUNTING TREATMENT
The financial statements of the Trust will be included in the consolidated
financial statements of J.P. Morgan, with the ComPS included on the balance
sheet as "Long-term debt not qualifying as risk-based capital", with a footnote
disclosing that (1) the Trust is a wholly-owned subsidiary of J.P. Morgan, (2)
the sole assets of the Trust are the Related Note and other similar notes,
specifying the principal amount, interest rate and maturity of each, and (3)
considered together, the Guarantee and the Related Note Guarantee and J.P.
Morgan's obligations under the Declaration constitute a full and unconditional
guarantee by J.P. Morgan with respect to the ComPS.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into or be replaced by,
or convey, transfer or lease its properties and assets substantially as an
entirety to, any corporation or other entity.
BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for the ComPS. The ComPS will be issued
only as fully-registered securities registered in the name of Cede & Co. (DTC's
nominee). One or more fully-registered global ComPS certificates, representing
the total aggregate number of ComPS, will be issued and will be deposited with
DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System,
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a "clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others, such as
securities brokers and dealers, banks and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a Direct Participant either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Commission.
Purchases of ComPS within the DTC system must be made by or through Direct
Participants, which will receive a credit for the ComPS on DTC's records. The
ownership interest of each actual purchaser of each Series [B] Preferred
Security ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased ComPS. Transfers of ownership
interests in the ComPS are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in the ComPS, except
in the event that use of the book-entry system for the ComPS is discontinued.
To facilitate subsequent transfers, all ComPS deposited by Participants with DTC
are registered in the name of DTC's nominee, Cede & Co. The deposit of ComPS
with DTC and their registration in the name of Cede & Co. effect no change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the ComPS. DTC's records reflect only the identity of the Direct Participants to
whose accounts such ComPS are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants and by Direct and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time.
In the case of a Special Event Redemption, redemption notices shall be sent to
Cede & Co. If less than all of the ComPS are being redeemed, DTC will reduce the
amount of the interest of each Direct Participant in such ComPS in accordance
with its procedures. In the case of an Optional Redemption, redemption notices
shall be provided by Beneficial Owners and Participants to DTC in accordance
with its procedures. DTC will then provide the Applicable Notice to the Trust or
its Transfer Agent of the number of ComPS to be redeemed on the applicable
Optional Redemption Date. The Applicable Notice will be irrevocable upon receipt
by the Trust or its Transfer Agent, and may not be withdrawn or modified after
such receipt.
Although voting with respect to the ComPS is limited, in those cases where a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to ComPS. Under its usual procedures, DTC would mail an Omnibus Proxy to
the Trust as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co. consenting or voting rights to those Direct Participants to whose
accounts the ComPS are credited on the record date (identified in a listing
attached to the Omnibus Proxy). J.P. Morgan and the Trust believe that the
arrangements among DTC, Direct and Indirect Participants and Beneficial Owners
will enable the Beneficial Owners to exercise rights equivalent in substance to
the rights that can be directly exercised by a holder of an interest in the
assets of the Trust consisting of the Related Note and the proceeds thereof.
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DTC may discontinue providing its services as securities depositary with respect
to the ComPS at any time by giving reasonable notice to the Trust. Under such
circumstances, in the event that a successor securities depositary is not
obtained, ComPS certificates are required to be printed and delivered.
Additionally, the Trust may decide to discontinue use of the system of
book-entry transfers through DTC (or any successor depositary) with respect to
the ComPS. In that event, certificates for the ComPS will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that J.P. Morgan believes to be reliable, but neither
J.P. Morgan nor the Trust takes responsibility for the accuracy thereof.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
In the event the ComPS do not remain in book-entry only form, the following
provisions will apply:
Payment of distributions of the Principal Amount of, and payments on redemption
of, the ComPS will be payable, the transfer of the ComPS will be registrable and
ComPS will be exchangeable for ComPS of other denominations of a like aggregate
principal amount at the principal corporate trust office of the Property Trustee
in The City of New York; provided that payment of distributions may be made at
the option of the Regular Trustees on behalf of the Trust by check mailed to the
address of the persons entitled thereto and that the payment on redemption of
ComPS will be made only upon surrender of such ComPS to the Property Trustee.
U.S. Bank Trust National Association or one of its affiliates will act as
registrar and transfer agent for the ComPS. U.S. Bank Trust National Association
will also act as paying agent and, with the consent of the Regular Trustees, may
designate additional paying agents.
Registration of transfers of ComPS will be effected without charge by or on
behalf of the Trust, but upon payment (with the giving of such indemnity as the
Trust may require) in respect of any tax or other governmental charges that may
be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of ComPS after such ComPS have been called for redemption.
GOVERNING LAW
The Declaration and the ComPS will be governed by and interpreted in accordance
with the laws of the State of Delaware.
DESCRIPTION OF THE RELATED NOTE
Set forth below is a summary of the terms of the Related Note in which the Trust
will invest the proceeds from the issuance and sale of the ComPS and the related
Series [B] Common Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Prospectus and the Related Note, the form of which is filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement and the
Prospectus. Certain capitalized terms are used herein as defined in the Related
Note.
GENERAL
The Related Note will be issued as an unsecured, unsubordinated obligation of
Morgan Guaranty, limited in initial principal amount to approximately $ ,
such amount being the sum of the aggregate Initial Public Offering Price shown
on the cover page hereof for the ComPS and the related Series [B] Common
Securities issued in connection therewith.
The Related Note is not subject to a sinking fund provision. The entire
Principal Amount of the Related Note will mature and become due and payable on
the Stated Maturity (subject to extension in the case of a
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Market Disruption Event), subject to the prior redemption of the Related Note in
whole or in part at the option of the holders of ComPS or in certain
circumstances upon the occurrence of a Special Event. If Morgan Guaranty redeems
the Related Note in whole or in part, the Trust must redeem on a pro rata basis
ComPS and related Series [B] Common Securities having an aggregate Principal
Amount equal to the Principal Amount of the Related Note so redeemed at the
ComPS Early Redemption Price. See "Description of the ComPS--Redemption at
Stated Maturity; --Special Event Redemption".
RELATED NOTE REDEMPTION PRICE
The amount payable under the Related Note by Morgan Guaranty to the Property
Trustee, on behalf of holders of Series [B] Securities, at any time shall equal
the Principal Amount of the Related Note at such time (the "Related Note
Redemption Price"). The Principal Amount of the Related Note at any time shall
equal the aggregate Principal Amount of outstanding ComPS and the related Series
[B] Common Securities at such time. The timing and amount of payments on the
Related Note mirror the aggregate financial terms of the ComPS.
SUBORDINATION
Morgan Guaranty's obligations under the Related Note are effectively
subordinated to all liabilities (including indebtedness) of its consolidated and
unconsolidated subsidiaries. Moreover, Morgan Guaranty's subsidiaries may incur
indebtedness and other liabilities and have obligations to third parties.
Generally, the claims of such third parties to the assets of Morgan Guaranty's
subsidiaries will be superior to those of Morgan Guaranty as a stockholder, and,
therefore, the Related Note may be deemed to be effectively subordinated to the
claims of such third parties.
Upon any payment or distribution of all or substantially all of the assets of
Morgan Guaranty or in the event of any insolvency, bankruptcy, receivership,
liquidation, dissolution, reorganization or other similar proceeding, whether
voluntary or involuntary, relative to Morgan Guaranty or its creditors, the
holders of all Senior Indebtedness of Morgan Guaranty will be entitled to
receive payment pari passu and pro rata with the Trust. However, depositors in
Morgan Guaranty will have a preference over holders of Senior Indebtedness of
Morgan Guaranty upon any such event.
As used in the Related Note, the term "Senior Indebtedness" means the principal
of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for
money borrowed, whether outstanding as of the date hereof or hereafter created,
issued or incurred (other than Morgan Guaranty's obligations to its depositors),
except any indebtedness expressly subordinated to such Senior Indebtedness, and
(b) any deferrals, renewals or extensions of any such Senior Indebtedness. The
Related Note does not limit the amount of Senior Indebtedness which Morgan
Guaranty may incur.
INTEREST
The Related Note shall not bear interest.
OPTIONAL REDEMPTION
The Trust shall have the right to call for redemption prior to each Optional
Redemption Date a Principal Amount of the Related Note sufficient to allow it to
pay the ComPS Early Redemption Price to any holders of ComPS who exercise their
right to redeem any or all of such holders' ComPS and in respect of a pro rata
portion of the related Series [B] Common Securities. See "Description of the
ComPS--Optional Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, Morgan Guaranty will have the right to
elect to, under certain circumstances, (a) redeem the Related Note at the
Related Note Redemption Price or (b) in the case of a
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Tax Event, allow the Related Note to remain outstanding and indemnify the Trust
for any taxes payable by it as a result of such Tax Event. See "Description of
the ComPS--Special Event Redemption".
EVENTS OF DEFAULT
The Note Events of Default are described in "Description of the Related Notes--
Note Events of Default" in the Prospectus of which this Prospectus Supplement
constitutes a part. A default or event of default under any Senior Indebtedness
would not constitute a default or event of default under the Related Note. A
default or event of default under the Related Note would not constitute a
default or event of default under any related note pertaining to any other
series of Securities.
MODIFICATION OF THE RELATED NOTE
The Related Note contains provisions permitting Morgan Guaranty and the Property
Trustee, with the consent of the holders of not less than a majority in
Principal Amount of the outstanding ComPS, to modify the Related Note, subject
to certain exceptions. See "Description of the Related Notes--Modification of
the Related Notes" in the Prospectus of which this Prospectus Supplement
constitutes a part.
CONSOLIDATION, MERGER AND SALE
The Related Note provides that Morgan Guaranty may, without the consent of the
Trust or the holders of the ComPS, consolidate or merge with or into, or sell or
transfer all or substantially all of its property or assets to, any corporation
or association; provided that (i) the corporation (if other than Morgan
Guaranty) or association formed by or resulting from any such consolidation or
merger or which shall have received such property or assets shall have assumed
Morgan Guaranty's obligations under the Related Note and (ii) immediately after
giving effect to such transaction, Morgan Guaranty or such successor corporation
shall not be in default under the terms of the Related Note.
GOVERNING LAW
The Related Note will be governed by, and construed in accordance with, the laws
of the State of New York.
MISCELLANEOUS
Morgan Guaranty will have the right at all times to assign any of its rights or
obligations under the Related Note to J.P. Morgan or to a direct or indirect
wholly-owned subsidiary of Morgan Guaranty; provided that, in the event of any
such assignment, Morgan Guaranty will remain jointly and severally liable for
all such obligations. Subject to the foregoing, the Related Note will be binding
upon and inure to the benefit of the parties thereto and their respective
successors and assigns. The Related Note is not a deposit or other obligation of
a bank and is not insured by the Federal Deposit Insurance Corporation or any
other federal agency. The obligations of Morgan Guaranty under the Related Note
are pari passu with all present and future Senior Indebtedness of Morgan
Guaranty (as defined herein) and are junior to Morgan Guaranty's obligations to
its depositors in the event of a receivership. In addition, J.P. Morgan's
obligations under the Guarantee and the Related Note Guarantee and Morgan
Guaranty's obligations under the Related Note are effectively subordinated to
all liabilities (including indebtedness) of the respective consolidated and
unconsolidated subsidiaries of each.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee that will
be delivered by J.P. Morgan for the benefit of the holders of ComPS and other
Preferred Securities. The terms of the Guarantee will be those set forth in the
Guarantee Agreement. The following summary does not purport to be complete and
is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Prospectus and the form of Guarantee Agreement,
which is filed as an exhibit to the Registration Statement relating to this
Prospectus Supplement and the Prospectus. The Guarantee will be separately
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qualified under the Trust Indenture Act and will be held by the Property
Trustee, acting in its capacity as indenture trustee with respect thereto.
GENERAL
Pursuant to the Guarantee, J.P. Morgan irrevocably and unconditionally agrees,
on a subordinated basis, to pay in full to the holders of the ComPS the
Guarantee Payments (as defined herein) (except to the extent paid by the Trust),
as and when due, regardless of any defense, right of set-off or counterclaim
that the Trust may have or assert. The following payments with respect to ComPS
issued by the Trust (the "Guarantee Payments"), to the extent not paid by the
Trust, will be subject to the Guarantee (without duplication): (i) the ComPS
Early Redemption Price or the ComPS Redemption Price, as applicable, but if and
only if to the extent that, in each case, Morgan Guaranty has made payment of
principal on the Related Note and (ii) upon a Liquidation Event (other than in
connection with the redemption of all of the ComPS at Stated Maturity or
redemption in whole of the Related Note) the lesser of (A) the Liquidation
Distribution to the extent the Trust has funds available therefor and (B) the
amount of assets of the Trust consisting of the Related Note and the proceeds
thereof remaining available for distribution to holders of the ComPS upon such
Liquidation Event. J.P. Morgan's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by J.P. Morgan to the
holders of ComPS or by causing the Trust to pay such amounts to such holders.
The Guarantee will be effective with respect to the ComPS from the time of
issuance of the ComPS to the extent Morgan Guaranty has made payments under the
Related Note. If Morgan Guaranty does not make payments on the Related Note, the
Trust may not pay distributions on the ComPS issued and may not have funds
available therefor. See "Description of the Related Note".
So long as any ComPS or other Preferred Securities remain outstanding, J.P.
Morgan will not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to, any of its common
stock or preferred stock or make any Guarantee Payment with respect thereto if
at such time (i) J.P. Morgan shall be in default with respect to its Guarantee
Payments or other payment obligations under the Guarantee or (ii) there shall
have occurred any event of default under the Declaration; provided, however,
that the foregoing restrictions shall not apply to (a) dividends, redemptions,
purchases, acquisitions, distributions or payments made by J.P. Morgan by way of
issuance of shares of its capital stock, (b) payments of accrued dividends by
J.P. Morgan upon the redemption, exchange or conversion of any preferred stock
of J.P. Morgan as may be outstanding from time to time in accordance with the
terms of such preferred stock, (c) cash payments made by J.P. Morgan in lieu of
delivering fractional shares upon the redemption, exchange or conversion of any
preferred stock of J.P. Morgan as may be outstanding from time to time in
accordance with the terms of such preferred stock, (d) repurchases, redemptions
or other acquisitions of shares of capital stock of J.P. Morgan in connection
with any employment contract, benefit plan or other similar arrangement with or
for the benefit of employees, officers, directors of consultants, or (e) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of such rights pursuant thereto.
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
holders of Preferred Securities (in which case no consent will be required), the
Guarantee may be amended by J.P. Morgan and the Property Trustee only with the
prior approval of the holders of not less than a majority in aggregate Principal
Amount at such time of the holders of each series of affected Preferred
Securities, voting as a single class. All guarantees and agreements contained in
the Guarantee shall bind the successors, assignees, receivers, trustees and
representatives of J.P. Morgan and shall inure to the benefit of the holders of
the ComPS.
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REMEDIES OF HOLDERS
The Guarantee will be deposited with U.S. Bank Trust National Association, as
indenture trustee, to be held for the benefit of holders of the ComPS and
Preferred Securities of other series. U.S. Bank Trust National Association shall
enforce such Guarantee on behalf of holders of the ComPS and Preferred
Securities of other series. The holders of not less than a majority in aggregate
principal amount of the ComPS and Preferred Securities of each affected series
have the right to direct the time, method and place of conducing any proceeding
for any remedy available in respect of the Guarantee, including the giving of
directions to U.S. Bank Trust National Association. In addition, any holder of
ComPS and Preferred Securities of other series may institute a legal proceeding
directly against J.P. Morgan to enforce its right under the Guarantee, without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other person or entity. Subject to the award by a court of competent
jurisdiction of legal fees in connection with any such legal proceeding, each
holder will be required to bear its own costs in connection with instituting a
legal proceeding directly against J.P. Morgan, which cost may be significant.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate with respect to the ComPS upon full payment of the
aggregate ComPS Early Redemption Price or ComPS Redemption Price, as applicable,
or upon full payment of the amounts payable in accordance with the Declaration
upon liquidation of the Trust. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of ComPS must
restore payment of any sums paid under such ComPS or the Guarantee (e.g., upon a
subsequent bankruptcy of Morgan Guaranty or J.P. Morgan).
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of J.P. Morgan and will
rank (i) subordinate and junior in right of payment to all other liabilities of
J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock
outstanding as of the date hereof of J.P. Morgan and with respect to obligations
under other guarantee agreements which J.P. Morgan may enter into from time to
time to the extent that such agreements provide for comparable guarantees by
J.P. Morgan of payment on other preferred securities issued by the predecessor
of the Trust or by other trusts sponsored by J.P. Morgan and (iii) senior to
J.P. Morgan's common stock. The terms of the ComPS provide that each holder of
ComPS by acceptance thereof agrees to the subordination provisions and other
terms of the Guarantee.
The Guarantee will constitute a guarantee of payment and not of collection (that
is, the guaranteed party may institute a legal proceeding directly against the
guarantor to enforce its rights under the Guarantee without instituting a legal
proceeding against any other person or entity).
GOVERNING LAW
The Guarantee will be governed by and construed and interpreted in accordance
with the laws of the State of New York.
DESCRIPTION OF THE RELATED NOTE GUARANTEE
Set forth below is a summary of information concerning the Related Note
Guarantee that will be delivered by J.P. Morgan for the benefit of the Property
Trustee for the benefit of holders of Securities of various series. The terms of
the Related Note Guarantee will be those set forth in the Related Note Guarantee
Agreement. The following summary does not purport to be complete and is subject
in all respects to the provisions of, and is qualified in its entirety by
reference to, the Prospectus and the form of Related Note Guarantee Agreement,
which is filed as an exhibit to the Registration Statement relating to this
Prospectus Supplement and the Prospectus. The Related Note Guarantee will be
held by the Property Trustee (for the benefit of holders of Series [B]
Securities), as the holder of the Related Note.
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GENERAL
Pursuant to the Related Note Guarantee, J.P. Morgan irrevocably and
unconditionally agrees, on a subordinated basis, to pay in full to the Property
Trustee for the benefit of holders of Series [B] Securities the Related Note
Guarantee Payments (as defined herein), as and when due, regardless of any
defense, right of set-off or counterclaim that Morgan Guaranty may have or
assert with respect to its obligation to make such Related Note Guarantee
Payments. The following payments with respect to the Related Note issued by
Morgan Guaranty (the "Related Note Guarantee Payments") will be subject to the
Related Note Guarantee (without duplication): any principal payable by Morgan
Guaranty under the Related Note, as and when payable by Morgan Guaranty. J.P.
Morgan's obligation to make a Related Note Guarantee Payment may be satisfied by
direct payment of the required amounts by J.P. Morgan to the Property Trustee
for the benefit of holders of Series [B] Securities or by causing Morgan
Guaranty to pay such amounts to the Property Trustee for the benefit of holders
of Series [B] Securities. The Related Note Guarantee will be a full and
unconditional guarantee with respect to the Related Note from the time of
issuance of the Related Note.
MODIFICATION OF THE RELATED NOTE GUARANTEE; ASSIGNMENT
The Related Note Guarantee may be amended only with the prior approval of the
Property Trustee; provided that no such amendment shall adversely affect the
holders of the Preferred Securities without the consent of a majority in
aggregate Principal Amount at such time of the holders of Preferred Securities
of each affected series, voting as a single class. 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 Property Trustee (for the benefit of holders of Series [B]
Securities) as the holder of the Related Note.
REMEDIES OF THE TRUST AND HOLDERS OF THE COMPS
The Trust has the right to direct the time, method and place of conducting any
proceeding for any remedy available to it in respect of the Related Note
Guarantee. Pursuant to the Declaration, the holders of a majority in Principal
Amount of the ComPS in certain circumstances (including a payment default under
the Related Note Guarantee by J.P. Morgan) have the right to direct the Trust,
through the Property Trustee, to exercise certain of its rights as the holder of
the Related Note Guarantee. In addition, upon the occurrence and during the
continuance of a Note Event of Default that is attributable to the failure of
Morgan Guaranty to pay the principal of the Related Note on the date such
principal is otherwise payable (or in the case of a redemption, on the
redemption date), J.P. Morgan acknowledges that a holder of the outstanding
ComPS may directly institute Direct Action on or after the date of the
occurrence of such Note Event of Default. Notwithstanding any payments made to
such holder of ComPS by J.P. Morgan in connection with a Direct Action, J.P.
Morgan shall remain obligated to pay the principal of the ComPS, and the rights
of J.P. Morgan, as Guarantor, shall be subrogated to the rights of such holder
of ComPS with respect to payments on the ComPS to the extent of any payment made
by J.P. Morgan to such holder of ComPS in such Direct Action.
TERMINATION OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will terminate with respect to the Related Note upon
full payment of the Related Note Redemption Price (as defined below) of the
Related Note. The Related Note Guarantee will continue to be effective or will
be reinstated with respect to the Related Note, as the case may be, if at any
time the Property Trustee, on behalf of holders of Series [B] Securities, must
restore payment of any sums paid under the Related Note or the Related Note
Guarantee (e.g., upon a subsequent bankruptcy of J.P. Morgan).
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STATUS OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will constitute an unsecured obligation of J.P.
Morgan and will rank (i) subordinate and junior in right of payment to all other
liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or
preference stock outstanding as of the date hereof of J.P. Morgan and (iii)
senior to J.P. Morgan's common stock. The terms of the ComPS provide that each
holder of ComPS by acceptance thereof agrees to the subordination provisions and
other terms of the Related Note Guarantee.
The Related Note Guarantee will constitute a guarantee of payment and not of
collection (that is, the Property Trustee may institute a legal proceeding
directly against J.P. Morgan to enforce its rights under the Related Note
Guarantee without instituting a legal proceeding against Morgan Guaranty).
GOVERNING LAW
The Related Note Guarantee will be governed by and construed and interpreted in
accordance with the laws of the State of New York.
EFFECT OF OBLIGATIONS UNDER THE GUARANTEE,
THE RELATED NOTE GUARANTEE AND THE RELATED NOTE
As set forth in the Declaration, the sole purpose of the Trust is to issue the
Series [B] Securities and other Securities of separate series, and to invest the
proceeds from such issuances in the Related Note and other debt obligations of
Morgan Guaranty.
As long as payments are made when due on the Related Note, such payments will be
sufficient to cover payments due on the ComPS because of the following factors:
(i) the Principal Amount of the Related Note will be equal to the sum of the
aggregate Principal Amount of the ComPS and the related Series [B] Common
Securities outstanding at any time; (ii) the payment dates on the Related Note
will match the payment dates for the ComPS and the related Series [B] Common
Securities; (iii) J.P. Morgan shall pay all, and the Trust shall not be
obligated to pay, directly or indirectly, any, costs and expenses of the Trust
other than principal of the ComPS and the related Series [B] Common Securities;
and (iv) the Declaration further provides that the J.P. Morgan shall not cause
the Trust (on behalf of a series of Securities or otherwise) to, among other
things, engage in any activity that is not consistent with the purposes of the
Trust.
Payments due on the ComPS (to the extent Morgan Guaranty has made payment of
principal and other amounts on the Related Note) are guaranteed by J.P. Morgan
as and to the extent set forth under "Description of the Guarantee" herein and
in the Prospectus. The Guarantee is a full and unconditional guarantee from the
time of its issuance but does not apply to payments unless and until Morgan
Guaranty has made payments on the Related Note.
If Morgan Guaranty fails to make payments on the Related Note when due, the
Declaration provides a mechanism whereby the holders of the ComPS, using the
procedures described in the Declaration, may direct the Property Trustee, on
behalf of holders of the Series [B] Securities, to enforce its rights under the
Related Note and the Related Note Guarantee. If J.P. Morgan fails to perform any
of its payment or other obligations with respect to the ComPS under the
Guarantee, any holder of ComPS may institute a legal proceeding directly against
J.P. Morgan to enforce such holder's rights under the Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee or any
other person or entity.
The Related Note Guarantee by J.P. Morgan guarantees to the Property Trustee the
payment of principal of the Related Note as provided pursuant to the terms of
the Related Note, at such times and in such amounts as provided therein. In
addition, upon the occurrence and during the continuance of a Note Event of
Default that is attributable to the failure of Morgan Guaranty to pay the
principal of the Related Note on the date such principal is otherwise payable
(or in the case of a redemption, on the redemption date), J.P. Morgan
acknowledges that a holder of the outstanding ComPS may directly institute
Direct Action on
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or after the date of the occurrence of such Note Event of Default.
Notwithstanding any payments made to such holder of ComPS by J.P. Morgan in
connection with a Direct Action, J.P. Morgan shall remain obligated to pay the
principal of the ComPS, and the rights of J.P. Morgan, as Guarantor, shall be
subrogated to the rights of such holder of ComPS with respect to payments on the
ComPS to the extent of any payment made by J.P. Morgan to such holder of ComPS
in such Direct Action. J.P. Morgan's obligations under the Related Note
Guarantee will be subordinated and junior in right of payment to all liabilities
of J.P. Morgan, pari passu with the most senior preferred stock outstanding as
of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan.
The Declaration provides that J.P. Morgan will pay, or cause to be paid, all
debts and obligations (other than with respect to the ComPS and other Preferred
Securities to the extent set forth herein and in the Prospectus) and all costs
and expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject. The Declaration provides
that any person to whom such debts, obligations, costs and expenses are owed
will have the right to enforce J.P. Morgan's obligations in respect of such
debts, obligations, costs and expenses directly against J.P. Morgan without
first proceeding against the Trust.
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee and the Declaration, taken together, will provide a full and
unconditional guarantee, on a subordinated basis, of payments due on the ComPS.
See "Description of the Guarantee -- General" and "Description of the Related
Note Guarantee -- General" herein and in the accompanying Prospectus.
Upon any voluntary or involuntary dissolution of the Trust, the holders of
Series [B] Securities will be entitled to receive, after satisfaction of
liabilities to creditors of the Trust with respect to Series [B] Securities, the
Liquidation Distribution. Holders of ComPS will be entitled to the benefits of
the Guarantee with respect to the Liquidation Distribution. See "Description of
the ComPS -- Liquidation Distribution Upon Dissolution". Upon any voluntary or
involuntary liquidation or bankruptcy of Morgan Guaranty, the Property Trustee
as holder of the Related Note on behalf of the Trust would rank equally in right
of payment with creditors of Morgan Guaranty (other than any depositors
therein), including all Senior Indebtedness, and would be entitled to receive
payment in full of principal, premium, if any, and interest, before any
stockholders of Morgan Guaranty receive payments of distributions.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a summary of the material United States Federal income tax
consequences of the purchase, ownership and disposition of ComPS by U.S. Holders
(as defined herein). Unless otherwise stated, this summary deals only with ComPS
held as capital assets by holders who purchase the ComPS upon original issuance
("Initial Holders").
This summary does not address tax considerations applicable to investors that
may be subject to special U.S. Federal income tax treatment, such as dealers in
securities or persons that will hold the ComPS as a position in a "straddle"
(within the meaning of Section 1092 of the Internal Revenue Code of 1986, as
amended (the "Code")), or as part of a "conversion transaction" (within the
meaning of Section 1258 of the Code) or "synthetic security" or other integrated
investment comprised of ComPS and one or more other investments. This summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. Dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of ComPS. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the ComPS.
This summary is based on the Code, Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis. In the opinion
of Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Trust
("Tax
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Counsel"), the statements contained in the following summary, to the extent they
constitute conclusions of law, accurately described the material U.S. Federal
income tax consequences to Initial Holders of the acquisition, ownership and
disposition of ComPS. For purposes of this summary, a "U.S. Holder" shall mean a
holder who is (i) a citizen or a resident of the United States (or any state
thereof), (ii) a corporation, or other entity taxable as a corporation, created
or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate or trust, the income of which is subject to
U.S. Federal income tax regardless of its source, and (iv) any other person
subject to U.S. Federal income tax on net income.
CLASSIFICATION OF THE TRUST
The Trust will be classified as "grantor trust" for Federal income tax purposes.
As a result, a holder of ComPS will be treated as owning an undivided beneficial
interest in the Related Note. Accordingly, for U.S. Federal income tax purposes,
each holder will be required to report income, gain or loss as if the holder
directly held its pro rata share of the Related Note. No portion of the income
accrued by holders will be eligible for the corporate dividends received
deduction.
CLASSIFICATION OF THE RELATED NOTE
There are no regulations, published rulings, judicial decisions or other
authorities concerning the proper characterization of instruments such as the
Related Note for Federal income tax purposes, and no ruling is being requested
from the Internal Revenue Service (the "IRS"). As a result, the proper tax
characterization of the Related Note is uncertain, and Tax Counsel can express
no opinion on this matter. While alternative characterizations are possible, as
discussed below, Morgan Guaranty will take the position for Federal income tax
purposes that the Related Note is a cash settled forward purchase contract on
the Applicable Index. Each holder of a ComPS, by acquiring a ComPS, will agree
to treat the Related Note in this manner.
U.S. HOLDERS OF COMPS
The following discussion of the tax consequences to U.S. Holders assumes that
for U.S. Federal income tax purposes the Trust will be treated as a grantor
trust, and, except as provided otherwise, the Related Note will be treated as a
cash settled forward purchase contract. If these assumptions are not correct,
holders could be subject to different consequences than those discussed below.
The following discussion also assumes that the Initial Holders purchased ComPS
at the Face Amount.
Assuming the Related Note is properly treated as a cash settled forward purchase
contract, (i) a U.S. Holder should not have any income over the period during
which the ComPS are held, (ii) any gain or loss realized by the U.S. Holder on
the sale, exchange or redemption of the ComPS would be capital gain or loss, and
(iii) the ComPS would not be subject to the mark to market rules of Section 1256
of the Code. Any capital gain or loss described in clause (ii) would be long
term capital gain or loss if the ComPS had been held for more than one year, and
in the case of an individual would be eligible for a reduced maximum tax rate of
28% (if the ComPS were held for more than one year and no more than eighteen
months) or 20% (if the ComPS were held for more than eighteen months). No
assurance can be given that future legislation or regulations will not change
these results, on a retroactive basis or otherwise.
Alternatively, the Related Note might properly be treated for Federal income tax
purposes as a contingent payment debt instrument issued by Morgan Guaranty. If
so, (i) a U.S. Holder, whether on the cash or accrual method of accounting,
would be required to accrue original issue discount ("OID") each year that the
ComPS were held at a rate equal to the "comparable yield" on the issue date of
the ComPS, which is a rate equal to the greater of (x) the "Applicable Federal
Rate" (a rate for Treasury obligations of maturities comparable to the ComPS)
and (y) the fixed rate into which Morgan Guaranty could hedge the Related Note
(or if no hedge is available, the fixed rate on a comparable debt instrument
issued by Morgan Guaranty), (ii) the amount of OID accrued under clause (i)
would increase the U.S. Holder's tax basis in the ComPS, (iii) on the sale,
exchange, or retirement of the ComPS, the U.S. Holder would have gain or
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loss equal to the difference between the amount realized and the U.S. Holder's
tax basis in the ComPS, (iv) any gain described in clause (iii) would be
ordinary income, while any loss would be ordinary loss to the extent of OID
previously accrued and any additional loss would be a capital loss, and (v)
additional rules would apply to secondary market purchasers of ComPS. No
assurance can be given that these rules would not be applicable to holders of
ComPS.
NON-UNITED STATES HOLDERS
In the case of a holder of ComPS that is not a U.S. Holder, assuming the Related
Note is properly treated as a cash settled forward contract, payments made with
respect to the ComPS would not be subject to U.S. withholding tax. If the
Related Note is properly treated as contingent payment debt, payments made with
respect to the ComPS will likewise not be subject to U.S. withholding tax;
provided that such holder complies with applicable certification requirements
(and does not directly or indirectly own 10% or more of the voting stock of J.P.
Morgan). To avoid risk of withholding tax liability on the Trust, Non-United
States Holders of ComPS will be required to comply with such applicable
certification requirements in order to avoid withholding by the Trust on
payments made on the ComPS. Under either characterization of the Related Note,
any gain realized upon the redemption, sale or other disposition of ComPS by a
holder that is not a U.S. Holder will generally not be subject to U.S. Federal
income tax if (i) such gain is not effectively connected with a U.S. trade or
business of such holder and (ii) in the case of an individual, such individual
is not present in the United States for 183 days or more in the taxable year of
the redemption, sale or other disposition or the gain is not attributable to a
fixed place of business maintained by such individual in the United States.
INFORMATION REPORTING TO HOLDERS
Holders of ComPS that are not exempt from information reporting requirements
will receive annually, on IRS Form 1099, information concerning OID determined
for an Initial Holder and attributable to such holder's ComPS. For the reasons
noted above, the information reported on such form may not be accurate for
secondary market purchasers.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the ComPS may be subject to a
"backup" withholding tax of 31% unless the holder complies with certain
identification requirements. Any withheld amounts will be allowed as a credit
against the holder's U.S. Federal income tax, provided that the required
information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMPS, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan (a
"Plan") subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the ComPS. Accordingly, among other factors, the fiduciary should consider
whether the investment would satisfy the prudence and diversification
requirements of ERISA and would be consistent with the documents and instruments
governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibits Plans, as well as
individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain
S-45
<PAGE> 47
transactions involving "plan assets" with persons who are "parties in interest"
under ERISA or "disqualified persons" under the Code ("Parties in Interest")
with respect to such Plan. A violation of these "prohibited transaction" rules
may result in an excise tax or other liabilities under ERISA and/or Section 4975
of the Code for such persons, unless exemptive relief is available under an
applicable statutory or administrative exemption. Employee benefit plans that
are governmental plans (as defined in Section 3(32) of ERISA), certain church
plans (as defined in Section 3(33) of ERISA) and foreign plans (as described in
Section 4(b)(5) of ERISA) are not subject to the requirements of ERISA or
Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S. Department
of Labor (the "DOL"), the assets of the Trust would be deemed to be "plan
assets" of a Plan for purposes of ERISA and Section 4975 of the Code if "plan
assets" of the Plan were used to acquire an equity interest in the Trust and no
exception were applicable under the Plan Assets Regulation. An "equity interest"
is defined under the Plan Assets Regulation as any interest in an entity other
than an instrument which is treated as indebtedness under applicable local law
and which has no substantial equity features.
Pursuant to an exception contained in the Plan Assets Regulation, the assets of
the Trust would not be deemed to be "plan assets" of investing Plans if the
ComPS are (i) freely transferable, (ii) part of a class of securities that is
owned by 100 or more investors independent of the issuer and of one another at
the conclusion of the offering and (iii) either (a) part of a class of
securities registered under Section 12(b) or 12(g) of the Exchange Act, or (b)
sold to a Plan as part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act and the class of
securities of which such security is a part is registered under the Exchange Act
within 120 days (or such later time as may be allowed by the Commission) after
the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred. There are no restrictions imposed on the
transfer of ComPS and the ComPS will be sold as part of an offering registered
under Section 12(b) of the Exchange Act. The Representative (as defined in
"Underwriting") will notify the Trust as to whether or not the ComPS will be
held by at least 100 separately named persons at the conclusion of the offering.
The Trust will not determine whether the 100-investor requirement of the
exception for publicly offered securities is satisfied as to the ComPS.
Prospective purchasers may obtain a copy of the notification described in the
second preceding sentence from the Trust at 60 Wall Street, New York, NY
10260-0060.
In the event assets of the Trust were determined to constitute "plan assets",
certain transactions involving the Trust could be deemed to constitute direct or
indirect prohibited transactions under ERISA and Section 4975 of the Code with
respect to a Plan. For example, if J.P. Morgan, Morgan Guaranty and/or any
affiliates of either is a Party in Interest with respect to an investing Plan
(either directly or by reason of its status as the sponsor of the Trust or of
any of J.P. Morgan's or Morgan Guaranty's other subsidiaries), the extension of
credit between the J.P. Morgan or Morgan Guaranty and/or any affiliates of
either and the Trust (as represented by the Related Note, the Related Note
Guarantee and the Guarantee) would likely be prohibited by Section 406(a)(1)(B)
of ERISA and Section 4975(c)(1)(B) of the Code, unless exemptive relief were
available under an applicable administrative exemption (see below).
The DOL has issued five prohibited transaction class exemptions ("PTCEs") that
may provide exemptive relief for direct or indirect prohibited transactions
resulting from the purchase or holding of the ComPS. Those class exemptions are
PTCE 96-23 (for certain transactions determined by in-house asset managers),
PTCE 95-60 (for certain transactions involving insurance company general
accounts), PTCE 91-38 (for certain transactions involving bank collective
investment funds), PTCE 90-1 (for certain transactions involving insurance
company pooled separate accounts) and PTCE 84-14 (for certain transactions
determined by independent qualified professional asset managers).
If the Representative does not notify the Trust, as described above, that the
ComPS will be expected to be held by at least 100 separately named persons, the
ComPS may not be purchased or held by any Plan, any entity whose underlying
assets include "plan assets" by reason of any Plan's investment in the entity (a
"Plan Asset Entity") or any person investing "plan assets" of any Plan, unless
such purchaser or holder is eligible for the exemptive relief available under
PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. In such event, any purchaser,
transferee or holder of the ComPS or any interest therein will be deemed to have
S-46
<PAGE> 48
represented by its purchase, acquisition or holding thereof that (a) it is not a
Plan or a Plan Asset Entity and is not purchasing such securities on behalf of
or with "plan assets" of any Plan, (b) it is eligible for the exemptive relief
available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 with respect to such
purchase or holding or (c) such purchase, acquisition or holding will not
otherwise give rise to a prohibited transaction under ERISA or the Code for
which a prohibited transaction is unavailable. See "Notice to Investors."
In any case, J.P. Morgan, Morgan Guaranty and/or any affiliates of either may be
considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to certain Plans. The acquisition and ownership of ComPS by a Plan (or
by an individual retirement arrangement or other plans described in Section
4975(e)(i) of the Code) with respect to which J.P. Morgan, Morgan Guaranty or
any of its affiliates of either is considered a party in interest or a
disqualified person may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless such ComPS are acquired pursuant to
and in accordance with an applicable exemption. As a result, Plans with respect
to which J.P. Morgan, Morgan Guaranty or any affiliates of either is a party in
interest or a disqualified person should not acquire ComPS unless a statutory or
administrative exemption from the prohibited transaction provisions of ERISA or
the Code applies.
Due to the complexity of these rules and the penalties that may be imposed upon
persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the ComPS on
behalf of or with "plan assets" of any Plan consult with their counsel regarding
the potential consequences if the assets of the Trust were deemed to be "plan
assets" and the availability of exemptive relief from the prohibited transaction
provisions of ERISA and the Code.
S-47
<PAGE> 49
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
the date hereof (the "Underwriting Agreement"), the Trust has agreed to sell to
the underwriters named below (the "Underwriters") and the Underwriters, for whom
JPMS1 is acting as representative (the "Representative"), have severally agreed
to purchase, the respective number of ComPS set forth opposite their names
below. In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the ComPS offered
hereby if any of the ComPS are purchased. Under certain circumstances, the
commitments of nondefaulting Underwriters may be increased as set forth in the
Underwriting Agreement.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF COMPS
<S> <C>
J.P. Morgan Securities Inc. .............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
---------------
Total........................................... [ ]
</TABLE>
The Underwriters initially propose to offer the ComPS, in part, directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus Supplement, and, in part, to certain securities dealers at such price
less a concession of $ per Series [B] Preferred Security. [The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
Series [B] Preferred Security to certain brokers and dealers.] After the initial
offering, the public offering price and such concessions may be changed.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Series [B]
Preferred Securities. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase, in the open market to cover syndicate shorts or to stabilize the
price of the Series [B] Preferred Securities. Finally, the underwriting
syndicate may reclaim selling concessions allowed for distributing the Series
[B] Preferred Securities in the offering, if the syndicate repurchases
previously distributed Series [B] Preferred Securities in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Series [B]
Preferred Securities above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
In view of the fact that the proceeds of the sale of the ComPS will ultimately
be used to purchase the Related Note of Morgan Guaranty, the Underwriting
Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters'
Compensation") to the Underwriters $ per Series [B] Preferred Security (or
$ in the aggregate) for the account of the Underwriters.
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering, there has been no market for the ComPS.
The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
This Prospectus Supplement and related the Prospectus may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and
sales related to secondary market transactions in the ComPS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
The Underwriters, certain agents and their associates may be customers of,
engage in transactions with, and perform services for, J.P. Morgan in the
ordinary course of business.
S-48
<PAGE> 50
The Representative is an indirect, wholly-owned subsidiary of J.P. Morgan. The
participation of the Representative in the offer and sale of the ComPS complies
with the requirements of Rule 2720 of the Rules of Conduct of the National
Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of
securities of an affiliate and complies with any restrictions imposed on such
Representative by the Board of Governors of the Federal Reserve System.
Because the NASD is expected to view the Preferred Securities offered hereby as
interests in a direct participation program, the offering is being made in
compliance with Rule 2810 of the NASD's Rules of Conduct. Offers and sales of
Preferred Securities will be made only to (i) "qualified institutional buyers",
as defined in Rule 144A under the Act; (ii) institutional "accredited
investors", as defined in Rule 501(a)(1)-(3) of Regulation D under the Act or
(iii) investors for whom an investment in non-convertible investment grade
commodity-indexed preferred securities is appropriate. The Underwriters may not
confirm sales to any accounts over which they exercise discretionary authority
without the prior written approval of the transaction by the customer.
S-49
<PAGE> 51
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Series [B]
Securities will be passed upon by Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware, special Delaware counsel to the Trust. The validity of the Series [B]
Securities offered hereby will be passed upon by Gene A. Capello, Vice President
and Assistant General Counsel of J.P. Morgan, and by Cravath, Swaine & Moore,
New York, New York, counsel for the Representative.
EXPERTS
The audited financial statements contained in J.P. Morgan's Annual Report on
Form 10-K for the year ended December 31, 1997 (included in J.P. Morgan's Annual
Report to Stockholders), are incorporated by reference in this Prospectus
Supplement in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
S-50
<PAGE> 52
ANNEX I
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used in
the Prospectus Supplement. The Declaration, the Guarantee, the Related Note
Guarantee and the Related Note may contain more complete definitions of certain
of the terms defined herein, as well as definitions of certain other terms not
defined herein, and reference should be made to the Declaration, the Guarantee,
the Related Note Guarantee and the Related Note, as applicable, for complete
definitions of such terms.
AMEX....................the American Stock Exchange.
APPLICABLE INDEX........the JPMCI Corn Total Return Index.
APPLICABLE INDEX
COMMENCEMENT
VALUE...................
APPLICABLE INDEX
SETTLEMENT VALUE........the arithmetic average of the values of the Applicable
Index during the Determination Period; provided,
however, that if the Applicable Index Settlement Value
has been permanently determined prior to such time, the
Applicable Index Settlement Value shall equal the value
so determined.
BACKWARDATION...........describes a period during which the prices of
longer-dated Benchmark Corn Contracts are below the
prices of shorter-dated contracts.
APPLICABLE INDEX EARLY
SETTLEMENT VALUE........for each day of the Early Determination Period, the
value of the Applicable Index for such day of the Early
Determination Period; provided, however, that if the
Applicable Index Settlement Value has been permanently
determined prior to such time, the Applicable Index
Early Settlement Value shall equal the value so
determined.
BENCHMARK CORN
CONTRACTS...............the corn futures contracts included from time to time in
the JPM Indices, which shall initially be the CBOT No. 2
Yellow Corn contract.
BUSINESS DAY............any day other than a Saturday, Sunday or any other day
on which banking institutions in The City of New York,
New York, are permitted or required by any applicable
law to close.
CODE....................the Internal Revenue Code of 1986, as amended.
COLLATERAL YIELD
COMPONENT...............a component of the value of the Applicable Index,
computed on the fluctuating index value of the
Applicable Index at the most recent auction rate for
3-month U.S. Treasury Bills or any successor rate
thereto with a maturity of 3 months or less or, if no
such rate has been determined in the 13 days prior to
the date of determination, as Morgan Guaranty may
determine in its reasonable discretion.
COMMISSION..............the Securities and Exchange Commission.
COMMON SECURITIES.......the Series [B] Common Securities and any other common
securities issued by the Trust (or its predecessor).
A-1
<PAGE> 53
COMPS EARLY REDEMPTION
PRICE...................On any Early Redemption Date, an amount equal to the
Early Redemption Value per Series [B] Preferred
Security.
COMPS REDEMPTION
PRICE...................at Stated Maturity, an amount equal to the Redemption
Value per Series [B] Preferred Security.
CONTANGO................describes a period during which the prices of
longer-dated Benchmark Corn Contracts are above the
prices of shorter-dated contracts.
DECLARATION.............the amended and restated declaration of trust among J.P.
Morgan & Co. Incorporated, as sponsor, and the trustees
named therein dated as of March 26, 1998.
DETERMINATION PERIOD....the 10 consecutive Trading Days on which no Market
Disruption Event occurs immediately following the 20th
Business Day prior to Stated Maturity.
DIVIDENDS...............no dividends on the ComPS will be paid.
DTC.....................the Depository Trust Company.
EARLY DETERMINATION
PERIOD..................the 10 consecutive Trading Days which are Business Days
on which U.S. Treasury Bond markets are open and on
which no Market Disruption Event occurs immediately
following the 20th Business Day prior to the applicable
Early Redemption Date.
EARLY REDEMPTION
VALUE...................the average for the 10 days of the Early Determination
Period of the discounted present value of the indexed
Principal Amount of the ComPS, as set forth in the
accompanying Prospectus under "Description of
ComPS--Early Redemption Upon the Occurrence of a Special
Event or at the Election of the Holders of the ComPS".
EARLY REDEMPTION
DATE....................each Optional Redemption Date and the date of any
Special Event Redemption or Liquidation Distribution.
ERISA...................the Employee Retirement Income Security Act of 1974, as
amended.
EXCHANGE ACT............the Securities Exchange Act of 1934, as amended.
FACE AMOUNT.............[$25].
FACTOR..................[0.095 (9.5 percent)], which is designed to offset the
costs of issuing and hedging the indexation of the
ComPS.
GUARANTEE...............the Guarantee Agreement executed by J.P. Morgan on
behalf of the holders of each series of Preferred
Securities.
GUARANTEE PAYMENTS......without duplication, (i) the ComPS Early Redemption
Price or the ComPS Redemption Price, as applicable, but
if and only to the extent that, in each of case, Morgan
Guaranty has made a payment of principal on the Related
Note and (ii) upon a Liquidation Event (other than in
connection with the redemption of all the ComPS upon the
maturity or redemption of the Related Note), the lesser
of (A) the Liquidation Distribution to the extent the
Trust, on behalf of holders of Series [B] Securities,
has funds available therefor, and (B) the amount of
assets of the Trust consisting of the
A-2
<PAGE> 54
Related Note and the proceeds thereof remaining
available for distribution to holders of all Series [B]
Preferred Securities upon such Liquidation Event.
INITIAL HOLDERS.........holders who purchase any ComPS upon original issuance.
INVESTMENT COMPANY
EVENT...................the receipt by the Trust 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
Trust (a "Change in 1940 Act Law"), there is more than
an insubstantial risk that the Trust 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.............. , 1998.
JPM BASKET INDICES......JPM Indices that are based upon at least two or more
underlying commodities (whether computed on an excess
return or total return basis).
JPM INDICES.............variations of the JPMCI, including the permutations of
the JPMCI in the form of sub-indices, that may be based
upon one or more commodities (whether computed on an
excess return or total return basis) and that have been
or may be originated and calculated by Morgan Guaranty.
JPM INDIVIDUAL
INDICES.................JPM Indices that are based upon only one underlying
commodity (whether computed on an excess return or total
return basis).
JPMCI...................The J.P. Morgan Commodity Index.
LIQUIDATION
DISTRIBUTION............in respect of any Liquidation Event, the sum of the
Early Redemption Value (treating the date of such
distribution as the Early Redemption Date).
LIQUIDATION EVENT.......any dissolution of the Trust, whether voluntary or
involuntary.
LME.....................the London Metals Exchange.
MARKET DISRUPTION
EVENT...................the occurrence of one or more of the following on any
Trading Day with respect to any Benchmark Corn Contract
underlying the Applicable Index, or an exchange on which
any Benchmark Corn Contract is traded (a "Relevant
Exchange"): (a) a day on which the fluctuation of the
price of any Benchmark Corn Contract underlying the
Applicable Index is materially limited by the rules of a
Relevant Exchange setting the maximum or minimum price
for such day (a "Limit Price"); (b) a day on which the
official settlement price (the "Settlement Price") on
the Relevant Exchange of a Benchmark Corn Contract
underlying the Applicable Index is the Limit Price; (c)
the failure of a Relevant Exchange to determine,
announce or publish the Settlement Price with respect to
a Benchmark Corn Contract underlying the Applicable
Index; (d) the material suspension of trading in any
Benchmark Corn Contract underlying the Applicable Index
on a Relevant Exchange; (e) the failure of trading to
commence, or the permanent discontinuation of trading,
in any Benchmark Corn Contract
A-3
<PAGE> 55
underlying the Applicable Index on any Relevant
Exchange; and (f) the imposition of any material
limitation on trading in any Benchmark Corn Contract
underlying the Applicable Index on any Relevant
Exchange.
NASDAQ..................The Nasdaq Stock Market.
1940 ACT................the Investment Company Act of 1940, as amended.
NOTE EVENT OF DEFAULT...(i) default in payment of principal amount at the Stated
Maturity or any amount payable upon any redemption of
the Related Note; (ii) failure by Morgan Guaranty for 90
days after receipt of notice to it to comply with any of
its covenants or agreements contained in the Related
Note; and (iii) certain events of bankruptcy,
insolvency, receivership or reorganization involving
Morgan Guaranty or certain affiliates.
NYMEX...................the New York Mercantile Exchange.
OPTIONAL REDEMPTION.....the redemption of ComPS by the holders thereof on any
Optional Redemption Date for the ComPS Early Redemption
Price.
OPTIONAL REDEMPTION
DATE....................each prior to Stated Maturity, subject to
extension in the case of (i) delay in the provision by
DTC of the Applicable Notice or (ii) the occurrence and
continuance of a Market Disruption Event.
PREFERRED SECURITIES....the ComPS and any other preferred securities issued by
the Trust.
PRINCIPAL AMOUNT........at any time, (i) in the case of ComPS, the Redemption
Value or Early Redemption Value, as applicable, as if
determined as of such time, and (ii) in the case of the
Related Note, the principal amount thereof at such time
determined pursuant to the terms thereof.
REDEMPTION DATE.........either the Stated Maturity or an Early Redemption Date,
as applicable.
REDEMPTION VALUE........at Stated Maturity, the Face Amount per Series [B]
Preferred Security multiplied by a fraction, the
numerator of which is the Applicable Index Settlement
Value and the denominator of which is the Applicable
Index Commencement Value.
RELATED NOTE............the unsecured, unsubordinated debt obligation of Morgan
Guaranty due .
ROLLOVER PERIOD.........the period during which each replacement of
shorter-dated Benchmark Corn Contracts with longer-dated
Benchmark Corn Contracts as the basis for the change in
value of the Applicable Index occurs.
SECURITIES..............the Series [B] Securities and any other securities
issued by the Trust.
SECURITIES ACT..........the Securities Act of 1933, as amended.
SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, the principal of,
premium, if any, and interest on (a) all indebtedness of
Morgan Guaranty for money borrowed, whether outstanding
as of the date hereof or hereafter created, issued or
incurred (other than Morgan Guaranty's obligations to
its depositors), except any indebtedness expressly
subordinated to such Senior Indebtedness, and (b) any
deferrals, renewals or extensions of any such Senior
Indebtedness.
A-4
<PAGE> 56
SERIES [B] COMMON
SECURITIES..............the common securities of the Trust representing an
undivided beneficial interest in the Related Note (and
the proceeds thereof), to be owned by J.P. Morgan.
SERIES [B] SECURITIES...the ComPS and the Series [B] Common Securities.
SPECIAL EVENT...........either a Tax Event or an Investment Company Event.
SPECIAL REDEMPTION......upon the occurrence and during the continuation of a
Special Event, Morgan Guaranty will have the right to
redeem the Related Note in whole or in part for cash at
the Related Note Redemption Price, with the result that
the Trust will redeem on a pro rata basis ComPS and
related Series [B] Common Securities in an equal
Principal Amount for cash at the ComPS Early 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 Note, and the Trust
shall have called for redemption on a pro rata basis an
equal Principal Amount of the ComPS and related Series
[B] Common Securities.
STATED MATURITY......... , [2001].
TAX COUNSEL.............Cravath, Swaine & Moore, special tax counsel to J.P.
Morgan and the Trust.
TAX EVENT...............the receipt by the Trust 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 Trust 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 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 (iii) the Trust is or
would be subject to more than a de minimis amount of
other taxes, duties or other governmental charges.
TRADING DAY.............any day on which open-outcry trading on either the NYMEX
or the LME is scheduled to occur or occurs.
A-5
<PAGE> 57
TRUST INDENTURE ACT.....the Trust Indenture Act of 1939, as amended.
UNUSED COSTS............[0.75]% ([0.75] percent).
A-6
<PAGE> 58
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE TRUST OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF J.P. MORGAN, OR THE
TRUST SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary of the Offering........................ S-4
The Offering................................... S-5
Risk Factors................................... S-10
J.P. Morgan & Co. Incorporated................. S-22
J.P. Morgan Index Funding Company I............ S-22
Use of Proceeds................................ S-27
Description of the ComPS....................... S-28
Description of the Related Note................ S-36
Description of the Guarantee................... S-38
Description of the Related Note Guarantee...... S-40
Effect of Obligations Under the Guarantee, the
Related Note Guarantee and the Related
Note......................................... S-42
United States Federal Income Taxation.......... S-43
ERISA Considerations........................... S-45
Underwriting................................... S-48
Legal Matters.................................. S-50
Experts........................................ S-50
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. A-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
J.P. Morgan & Co. Incorporated................. 3
J.P. Morgan Index Funding Company I............ 6
Use of Proceeds................................ 12
Consolidated Ratios of J.P. Morgan............. 12
Description of All Securities.................. 12
Description of the ComPS....................... 13
Risk Factors with Respect to All Preferred
Securities................................... 25
Risk Factors with Respect to ComPS............. 26
The Underlying Markets......................... 33
The JPM Indices................................ 37
Description of the Related Notes............... 48
Description of the Guarantee................... 50
Description of the Related Note Guarantee...... 52
Plan of Distribution........................... 54
Legal Matters.................................. 55
Experts........................................ 55
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. A-1
</TABLE>
======================================================
======================================================
SERIES [B]
COMMODITY-INDEXED
PREFERRED SECURITIES
INDEXED TO THE
JPMCI CORN
TOTAL RETURN INDEX
J.P. MORGAN INDEX
FUNDING COMPANY I
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
J.P. MORGAN & CO.
INCORPORATED
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
[ ]
, 1998
======================================================
<PAGE> 59
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.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED [ ], 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE [ ], 1998)
$[ ]
COMMODITY-INDEXED PREFERRED SECURITIES (COMPS(R)), SERIES [B]
J.P. MORGAN INDEX FUNDING COMPANY I
SERIES [B] PREFERRED SECURITIES AT $[25] PER SHARE
INDEXED TO THE JPMCI CORN TOTAL RETURN INDEX
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
J.P. MORGAN & CO. INCORPORATED
------------------------
The Series [B] Preferred Securities (each, a "Series [B] Preferred Security",
and collectively, the "ComPS") offered hereby are being issued by J.P. Morgan
Index Funding Company I, a statutory business trust formed under the laws of the
State of Delaware (the "Trust"). No dividends on the ComPS will be paid. The
ComPS represent undivided beneficial preferred interests in certain assets of
the Trust consisting of the Related Note (as defined below) and the proceeds
thereof. Each Series [B] Preferred Security will have an initial principal
amount of [$25] (the "Face Amount"), and thereafter, the change in value of the
principal amount per Series [B] Preferred Security will be indexed to the change
in value of the JPMCI Corn Total Return Index (the "Applicable Index"), which is
calculated based on the change in value of certain corn futures contracts
included from time to time in the JPM Indices (such contracts, from time to
time, the "Benchmark Corn Contracts") plus a component of collateral yield
computed on such fluctuating index value at the most recent auction rate for
3-month U.S. Treasury Bills or certain successor rates thereto (the "Collateral
Yield Component"), reduced by a factor designed to offset the costs of issuing
and hedging the indexation of the ComPS (the "Factor"). J.P. Morgan & Co.
Incorporated, a Delaware corporation ("J.P. Morgan"), will own all the common
securities (the "Series [B] Common Securities" and, together with the ComPS, the
Series [B] Securities) representing undivided beneficial interests in certain
assets of the Trust consisting of the Related Note and the proceeds thereof. The
Trust exists for the sole purpose of issuing the Series [B] Securities and
investing the proceeds thereof in a Related Note Due , [2001] (the
"Related Note") of Morgan Guaranty Trust Company of New York, a trust company
with full banking powers organized under the laws of the State of New York and a
wholly-owned subsidiary of J.P. Morgan ("Morgan Guaranty"), and issuing similar
preferred securities (the "Preferred Securities") and common securities (the
"Common Securities" and, together with the Preferred Securities, the
"Securities") of separate series and investing the proceeds thereof in similar
notes in the future.
SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE COMPS. THE COMPS ARE NOT FUTURES CONTRACTS AND DO NOT
REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS
DEFINED BELOW) OF THE COMPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI
CORN TOTAL RETURN INDEX, REDUCED BY THE FACTOR. AS A RESULT, THE REDEMPTION
VALUE PER SERIES [B] PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT
AND MAY BE MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE
BENCHMARK CORN CONTRACTS. SEE "DESCRIPTION OF THE COMPS".
"ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are registered service
marks of J.P. Morgan & Co. Incorporated.
The ComPS have been approved for listing on the American Stock Exchange (the
"Amex") under the symbol [" "], subject to official notice of issuance.
Trading of the ComPS on the Amex is expected to commence within a 30-day period
after the date of this Prospectus Supplement. See "Underwriting".
THE SERIES [B] 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 SERIES [B] SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price $[25] per Series [B] Preferred Security plus accrued dividends, if any.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSIONS(2) THE TRUST(3)(4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series [B] Preferred Security.......... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
Total...................................... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein).
(2) The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(3) Because the proceeds of the sale of the ComPS will be invested in the
Related Note, Morgan Guaranty has agreed to pay to the Underwriters a
commission of $ per Series [B] Preferred Security (or $ in the
aggregate). See "Underwriting".
(4) Expenses of the offering which are payable by the Trust and J.P. Morgan are
estimated to be $ .
------------------------
The ComPS offered hereby are offered by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the ComPS will be
made on or about , 1998, through the book-entry facilities of The
Depository Trust Company, against payment therefor in same-day funds.
J.P. MORGAN SECURITIES LTD.
[ ], 1998.
<PAGE> 60
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
the date hereof (the "Underwriting Agreement"), the Trust has agreed to sell to
the underwriters named below (the "Underwriters") and the Underwriters, for whom
JPMSI is acting as representative (the "Representative"), have severally agreed
to purchase, the respective number of ComPS set forth opposite their names
below. In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the ComPS offered
hereby if any of the ComPS are purchased. Under certain circumstances, the
commitments of nondefaulting Underwriters may be increased as set forth in the
Underwriting Agreement. J.P. Morgan Securities Ltd. is acting as a securities
dealer and will not purchase any ComPS directly from the Trust.
<TABLE>
<CAPTION>
NUMBER OF COMPS
UNDERWRITER ---------------
<S> <C>
J.P. Morgan Securities Inc. .............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
---------------
Total........................................... [ ]
</TABLE>
The Underwriters initially propose to offer the ComPS, in part, directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus Supplement, and, in part, to certain securities dealers at such price
less a concession of $ per Series [B] Preferred Security. [The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
Series [B] Preferred Security to certain brokers and dealers.] After the initial
offering, the public offering price and such concessions may be changed.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Series [B]
Preferred Securities. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase, in the open market to cover syndicate shorts or to stabilize the
price of the Series [B] Preferred Securities. Finally, the underwriting
syndicate may reclaim selling concessions allowed for distributing the Series
[B] Preferred Securities in the offering, if the syndicate repurchases
previously distributed Series [B] Preferred Securities in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Series [B]
Preferred Securities above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
In view of the fact that the proceeds of the sale of the ComPS will ultimately
be used to purchase the Related Note of Morgan Guaranty, the Underwriting
Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters'
Compensation") to the Underwriters $ per Series [B] Preferred Security (or
$ in the aggregate) for the account of the Underwriters.
The ComPS have been approved for listing on the Amex under the symbol
[" "], subject to official notice of issuance. Trading of the ComPS on the
Amex is expected to commence within a 30-day period after the date of this
Prospectus Supplement. Prior to this offering, there has been no market for the
ComPS.
The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
This Prospectus Supplement and related the Prospectus may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and
sales related to secondary market transactions in the ComPS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
S-48
<PAGE> 61
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Underwriters, certain agents and their associates may be customers of,
engage in transactions with, and perform services for, J.P. Morgan in the
ordinary course of business.
The Representative is an indirect, wholly-owned subsidiary of J.P. Morgan. The
participation of the Representative in the offer and sale of the ComPS complies
with the requirements of Rule 2720 of the Rules of Conduct of the National
Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of
securities of an affiliate and complies with any restrictions imposed on such
Representative by the Board of Governors of the Federal Reserve System.
Because the NASD is expected to view the Preferred Securities offered hereby as
interests in a direct participation program, the offering is being made in
compliance with Rule 2810 of the NASD's Rules of Conduct. Offers and sales of
Preferred Securities will be made only to (i) "qualified institutional buyers",
as defined in Rule 144A under the Act; (ii) institutional "accredited
investors", as defined in Rule 501(a)(1)-(3) of Regulation D under the Act or
(iii) investors for whom an investment in non-convertible investment grade
commodity-indexed preferred securities is appropriate. The Underwriters may not
confirm sales to any accounts over which they exercise discretionary authority
without the prior written approval of the transaction by the customer.
S-49
<PAGE> 62
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED [ ], 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE [ ], 1998)
$[ ]
COMMODITY-INDEXED PREFERRED SECURITIES (COMPS(R)), SERIES [B]
J.P. MORGAN INDEX FUNDING COMPANY I
[2.5]% SERIES [B] PREFERRED SECURITIES AT $[$25] PER SHARE
INDEXED TO THE JPMCI BASKET TOTAL RETURN INDEX
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
J.P. MORGAN & CO. INCORPORATED
------------------------
The [2.5]% Series [B] Preferred Securities (each, a "Series [B] Preferred
Security", and collectively, the "ComPS") offered hereby are being issued by
J.P. Morgan Index Funding Company I, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"). The ComPS represent undivided
beneficial preferred interests in certain assets of the Trust consisting of the
Related Note (as defined below) and the proceeds thereof. Each Series [B]
Preferred Security will have an initial principal amount of [$25] (the "Face
Amount"), and thereafter, the change in value of the principal amount per Series
[B] Preferred Security will be indexed to the change in value of the JPMCI
Basket Total Return Index (the "Applicable Index"), which is calculated based on
the change in value of certain commodity futures contracts included from time to
time in the JPM Indices (such contracts, from time to time, the "Benchmark
Commodity Contracts") plus a component of collateral yield computed on such
fluctuating index value at the most recent auction rate for 3-month U.S.
Treasury Bills or certain successor rates thereto (the "Collateral Yield
Component"), reduced by a factor designed to offset the costs of issuing and
hedging the indexation of the ComPS (the "Factor"). J.P. Morgan & Co.
Incorporated, a Delaware corporation ("J.P. Morgan"), will own all the common
securities (the "Series [B] Common Securities" and together with the ComPS, the
"Series [B] Securities") representing undivided beneficial interests in certain
assets of the Trust consisting of the Related Note and the proceeds thereof. The
Trust exists for the sole purpose of issuing the Series [B] Securities and
investing the proceeds thereof in a [2.5]% Related Note Due , [2001]
(the "Related Note") of Morgan Guaranty Trust Company of New York, a trust
company with full banking powers organized under the laws of the State of New
York and a wholly-owned subsidiary of J.P. Morgan ("Morgan Guaranty"), and
issuing similar preferred securities (the "Preferred Securities") and common
securities (the "Common Securities" and, together with the Preferred Securities,
the "Securities") of separate series and investing the proceeds thereof in
similar notes in the future.
SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE COMPS. THE COMPS ARE NOT FUTURES CONTRACTS AND DO NOT
REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS
DEFINED BELOW) OF THE COMPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI
BASKET TOTAL RETURN INDEX, REDUCED BY THE FACTOR. AS A RESULT, THE REDEMPTION
VALUE PER SERIES [B] PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT
AND MAY BE MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE
BENCHMARK COMMODITY CONTRACTS. SEE "DESCRIPTION OF THE COMPS".
"ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are registered service
marks of J.P. Morgan & Co. Incorporated.
The ComPS have been approved for listing on the American Stock Exchange (the
"Amex") under the symbol [" "], subject to official notice of issuance.
Trading of the ComPS on the Amex is expected to commence within a 30-day period
after the date of this Prospectus Supplement. See "Underwriting".
THE SERIES [B] 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 SERIES [B] SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price $[25] per Series [B] Preferred Security plus accrued dividends, if any.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSIONS(2) THE TRUST(3)(4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series [B] Preferred Security.......... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
Total...................................... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein).
(2) The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(3) Because the proceeds of the sale of the ComPS will be invested in the
Related Note, Morgan Guaranty has agreed to pay to the Underwriters a
commission of $ per Series [B] Preferred Security (or $ in
the aggregate). See "Underwriting".
(4) Expenses of the offering which are payable by the Trust and J.P. Morgan are
estimated to be $ .
------------------------
The ComPS offered hereby are offered by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the ComPS will be
made on or about , 1998, through the book-entry facilities of The
Depository Trust Company, against payment therefor in same-day funds.
J.P. MORGAN & CO.
[ ], 1998.
<PAGE> 63
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES [B] SECURITIES
OFFERED HEREBY. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, AND MAY BID FOR AND PURCHASE THE SERIES [B] SECURITIES ON THE
AMERICAN STOCK EXCHANGE OR IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
S-2
<PAGE> 64
STRUCTURAL OVERVIEW
[DIAGRAM]
1. THE TRUST. The issuer of the ComPS is a Delaware statutory business trust
formed by J.P. Morgan for the sole purpose of issuing the Series [B] Securities
and other securities of separate series and lending the proceeds thereof to
Morgan Guaranty. J.P. Morgan will own 100% of the Series [B] Common Securities.
The Trust will be disregarded for United States Federal income tax purposes.
J.P. Morgan Index Funding Company, LLC (the "Company"), a Delaware limited
liability company, has been merged into the Trust. As a result of such merger,
the Trust has succeeded to all rights and obligations of the Company, including
any rights and obligations in respect of any securities that were issued by the
Company prior to the merger (including the 2.5% Series A Securities (the "Series
A Securities")) and any related notes and related note guarantees executed and
delivered in connection therewith.
2. THE COMPS. The ComPS issued by the Trust represent undivided beneficial
preferred interests in the assets of the Trust consisting of the Related Note
and the proceeds thereof. For tax purposes, holders of ComPS are deemed to
receive interest income in excess of interest accrued and paid on the Related
Note, and dividends on ComPS are not eligible for the dividends received
deduction for United States Federal income tax purposes. The ComPS Redemption
Price and the ComPS Early Redemption Price are indexed to the JPMCI Basket Total
Return Index, reduced by the Factor. The ComPS Early Redemption Price or the
ComPS Redemption Price may be more or less than the Face Amount of the ComPS.
The Trust intends to issue more than one series of Securities. No holder of
Securities of any series shall have any claim on, or any right to, any assets
allocated to, or associated with, Securities of any other series (except if, and
to the extent that, such holder is also a holder of Securities of such other
series).
3. COMPS PROCEEDS LOANED TO MORGAN GUARANTY. Proceeds of ComPS and related
Series [B] Common Securities will be used by the Trust on behalf of holders of
the Series [B] Securities to purchase from Morgan Guaranty the Related Note with
a maturity of [, 2001] and having the same economic terms as the
ComPS.
4. REPAYMENT OF RELATED NOTE. Morgan Guaranty will repay the Related Note in
whole or part to the extent required to repay Series [B] Securities upon any
Early Redemption Date and in whole at the Stated Maturity (subject to extension
in case of a Market Disruption Event).
5. RELATED NOTE GUARANTEE. J.P. Morgan will guarantee to the Trust, on a
subordinated basis, the payment of any distributions on and principal of the
Related Note as provided pursuant to the terms of the Related Note, at such
times and in such amounts as provided therein.
6. GUARANTEE. J.P. Morgan will guarantee to the holders of ComPS, on a
subordinated basis, the payment of (i) the ComPS Early Redemption Price or the
ComPS Redemption Price, as applicable, but if and only if and to the extent
that, in each case, Morgan Guaranty has made payment of interest or principal on
the Related Note, as the case may be, and (ii) upon liquidation, the lesser of
(a) the sum of the Early Redemption Value and the amount of accrued and unpaid
dividends on the ComPS and (b) the amount of assets of the Trust consisting of
the Related Note and the proceeds thereof available for distribution to holders
of ComPS.
7. MORGAN GUARANTY. Morgan Guaranty, a trust company with full banking powers
organized under the laws of the State of New York, is a wholly-owned subsidiary
of J.P. Morgan.
S-3
<PAGE> 65
SUMMARY OF THE OFFERING
SECURITIES OFFERED......[2.5]% Series [B] Preferred Securities ("ComPS") indexed
to the JPMCI Basket Total Return Index.
ISSUER..................J.P. Morgan Index Funding Company I (the "Trust"), a
Delaware statutory business trust and a subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan").
GUARANTOR...............J.P. Morgan, on a subordinated basis, (i) of payments to
holders of ComPS of amounts received on the Related Note
by the Trust on behalf of holders of Series [B]
Securities and (ii) of payments to the Trust on behalf
of holders of Series [B] Securities on the Related Note
by Morgan Guaranty, a wholly-owned subsidiary of J.P.
Morgan.
INITIAL OFFERING PRICE
PER SERIES [B] PREFERRED
SECURITY ("FACE
AMOUNT")................[$25].
AGGREGATE FACE
AMOUNT..................$
COMPS REDEMPTION
PRICE...................Redemption Value at Stated Maturity plus accrued and
unpaid dividends.
STATED MATURITY......... , [2001], subject to extension in the case of a
Market Disruption Event.
REDEMPTION VALUE PER
SERIES [B] PREFERRED
SECURITY................Face Amount X (Applicable Index Settlement Value)
(-------------------------------- -Factor)
(Applicable Index Commencement Value)
APPLICABLE INDEX........JPMCI Basket Total Return Index.
APPLICABLE INDEX
COMMENCEMENT VALUE......[Set on date of pricing].
APPLICABLE INDEX
SETTLEMENT VALUE........The average (rounded to four digits following the
decimal point) of the Applicable Index over the 10
consecutive Trading Days meeting certain conditions
immediately following the 20th Business Day prior to
redemption (as described herein) [, unless such value
has been permanently fixed prior to such time as
described under "Description of ComPS -- Early
Determination of Applicable Index Settlement Value and
Redemption Value."]
CALCULATION AGENT.......Morgan Guaranty.
DIVIDENDS...............Cumulative cash dividends of [2.5]% per annum on the
Face Amount (calculated on the basis of a 360 day year
of twelve 30-day months) accruing from ,
199[ ] (the "Issue Date"), and payable quarterly in
arrears on the last calendar day of each March, June,
September and December.
CASH REDEMPTION PRIOR TO
STATED MATURITY
OPTIONAL
REDEMPTION............At the holders' option, on each prior to the Stated
Maturity, for the ComPS Early Redemption Price.
SPECIAL EVENT
REDEMPTION............Under certain circumstances, upon the occurrence of a
Tax Event or an Investment Company Event, for the ComPS
Early Redemption Price.
COMPS EARLY REDEMPTION
PRICE...................The Early Redemption Value (as defined in the
Prospectus), which represents the payment of the
discounted present value of dividends and Principal
Amount on the applicable Early Redemption Date. See
"Description of the ComPS -- Optional Redemption" and
"-- Special Event Redemption".
VOTING RIGHTS...........Holders of ComPS will have limited voting rights but
will not be entitled to vote to appoint, remove or
replace the Trustees of the Trust or to increase or
decrease the number of Trustees (as defined in the
Declaration). See "Description of the ComPS--Voting
Rights".
USE OF PROCEEDS.........The proceeds to the Trust from the sale of ComPS and
related Series [B] Common Securities will be used to
purchase a note of Morgan Guaranty (the "Related Note"),
and Morgan Guaranty will use such proceeds for general
corporate purposes and for hedging its obligations under
the Related Note. See "Use of Proceeds".
FACTOR..................[0.15 (15 percent)] [set on date of pricing], which is
designed to offset the costs of issuing and hedging the
indexation of the ComPS ([ ]% of which accounts for the
approximate future value of the [2.5]% distributions).
ORIGINAL ISSUE
DISCOUNT................The ComPS will be issued with original issue discount
for Federal income tax purposes. During each taxable
period, holders of ComPS will be required to include
amounts in income in excess of current cash dividends.
Such excess amounts will increase the holders' tax basis
in the ComPS.
S-4
<PAGE> 66
THE OFFERING
The information in this Prospectus Supplement concerning J.P. Morgan, Morgan
Guaranty, the Trust, the ComPS, the Guarantee, the Related Note Guarantee and
the Related Note supplements, and should be read in conjunction with, the
information contained in the accompanying Prospectus. THE FOLLOWING SUMMARY OF
PROVISIONS RELATING TO THE COMPS IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION CONTAINED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT (THIS "PROSPECTUS SUPPLEMENT") AND THE PROSPECTUS OF WHICH
THIS PROSPECTUS SUPPLEMENT CONSTITUTES A PART (THE "PROSPECTUS"). Prospective
purchasers of ComPS should carefully review such information. Certain
capitalized terms used in this Prospectus Supplement have the meanings ascribed
to them under the "Glossary of Terms" in Annex I hereto.
GENERAL
Subject to the more specific discussion of each item elsewhere in this
Prospectus Supplement or in the Prospectus (including the effect of a Market
Disruption Event, as defined herein), following is a general summary of the
ComPS:
The ComPS pay a fixed dividend rate on the Face Amount (which equals the initial
price) and are principal-at-risk securities linked directly to the performance
of the JPMCI Basket Total Return Index (the "Applicable Index"), reduced by the
Factor. As described herein, the Applicable Index will change based on the
weighted daily change in value of the Benchmark Commodity Contracts plus a
component of collateral yield computed on such fluctuating index value at the
most recent auction rate for 3-month U.S. Treasury Bills or certain successor
rates thereto (the "Collateral Yield Component"). At maturity, an investor will
receive a principal amount determined by the following formula: Face Amount x
(the 10-day average of the Applicable Index/the Applicable Index set on the day
of pricing, minus the Factor). In no circumstances will the Redemption Value of
the ComPS be less than zero, but the Redemption Value could be more or less than
the Face Amount. Thus, the Redemption Value is linked directly to the
performance of the Applicable Index, reduced by the Factor (e.g., if the average
ending value of the Applicable Index is twice the beginning value, the
Redemption Value will be twice the Face Amount, reduced by the Factor). If the
Applicable Index decreases over the life of the ComPS, or if the percentage
increase in the Applicable Index is less than the amount of the Factor, the
Redemption Value will be less than the Face Amount. If the percentage increase
in the Applicable Index over the life of the ComPS is greater than the amount of
the Factor, the Redemption Value will be greater than the Face Amount. Factor is
[15]%, which is designed to offset the costs of issuing and hedging the
indexation of the ComPS ([ ]% of which is the approximate future value of the
[2.5]% distributions, the remaining [ ]% of which represents the future value
of the index replication costs charged to the holders of the ComPS).
The Applicable Index (the JPMCI Basket Total Return Index) is a Total Return
Index. A Basket Total Return Index, which is described more fully in the
attached Prospectus under "The JPM Basket Indices -- Total Return Methodology",
represents the cumulative return of holding a basket of volume weighted
designated nearby commodity futures contracts underlying the Applicable Index,
plus the Collateral Yield Component. A JPM Basket Total Return Index is defined
by a strategy that holds futures positions, in each of the basket's commodities
for a one month period and then rebalances the volume of commodities held for
the following month based on a constant dollar weighting scheme. The Basket
Total Return Indices have an additional return component equal to the 3 month
Treasury Bill collateral yield on the fluctuating index value. The rebalancing,
in which the new volumes are calculated using the basket's pre-defined
percentage weights for each commodity in the basket, occurs each month on the
Rebalance Date. The contract used to rebalance is the designated contract for
the next month underlying the index. Because the designated futures contracts
underlying the Basket Total Return indices have maturities (generally less than
three months) which are shorter than the maturity of the ComPS, the index
calculation methodology replaces the underlying contract used to determine the
daily change in the value of the 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 roll occurs, the daily change
in value of a Basket Total Return Index for all days prior to the Rollover
Period is calculated using the sum for all commodities of the old contract
volumes
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multiplied by the price change of the old contracts (the sum of which is the
basket's "Futures P&L"), plus the Collateral Yield Component. Beginning with the
first day after the beginning of the Rollover Period, the Futures P&L of a
Basket Total Return Index is calculated based on 80% of the old volume
multiplied by the price change of the old contract plus 20% of the new volume
multiplied by the price change in the new contract. Similar 20% adjustments are
made in the volumes attributable to each commodity's contracts price change each
day of the Rollover Period such that, by the day after the Rollover Period ends
and all subsequent days until the next Rebalance Date, the daily index change
attributable to futures (Futures P&L) is equal to 100% of the sum of the new
volume multiplied by the price change in the new contract for each commodity in
the basket. Because the change in the Applicable Index is linked directly to the
designated contracts underlying such index, plus the Collateral Yield Component,
any events which affect the designated contracts underlying the Applicable Index
may affect the Early Redemption Value and Redemption Value of the ComPS.
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary over the life of the ComPS in relation to the Applicable
Index, reduced by the Factor. The Principal Amount repayable on any Early
Redemption Date, upon the occurrence of any Special Event Redemption or at
Stated Maturity will be determined, pursuant to the terms described herein
(including, without limitation, the averaging of the Applicable Index over the
Early Determination Period or Determination Period, as applicable, and the
present-valuing of the dividends and Principal Amount in connection with early
redemptions), by comparing the level of the Applicable Index set on the date of
issuance of the ComPS with the level determined pursuant to the terms hereof for
any such date of redemption, reduced by the Factor.
The ComPS represent undivided beneficial preferred interests in certain assets
of the Trust consisting of the Related Note and the proceeds thereof. The
Related Note, in which the proceeds of the ComPS and the related Series [B]
Common Securities will be invested, matures on , [2001] (which is the
"Stated Maturity"), subject to extension in the case of a Market Disruption
Event, and is redeemable at certain times, from time to time, at the option of
the Trust upon an optional redemption by one or more holders of ComPS in an
amount sufficient to fund such redemption and the redemption of the related
Series [B] Common Securities and at any time by Morgan Guaranty in whole or in
part upon the occurrence of a Special Event. The ComPS will be redeemed at
Stated Maturity at the ComPS Redemption Price, which is equal to the sum of (a)
the Redemption Value (as defined below) per Series [B] Preferred Security plus
(b) accrued and unpaid dividends thereon to but excluding the date of
redemption. In addition, if, as a result of a Special Event, Morgan Guaranty
redeems the Related Note in whole or in part prior to Stated Maturity, the Trust
must redeem ComPS and related Series [B] Common Securities having an aggregate
Principal Amount equal to the Principal Amount of the Related Note so redeemed
at the ComPS Early Redemption Price. See "Description of the ComPS -- Redemption
at Stated Maturity"; -- Special Event Redemption". For purposes of this
Prospectus Supplement, "Principal Amount" means (i) in the case of any Series
[B] Preferred Security, the Early Redemption Value thereof or the Redemption
Value thereof (as if determined as of such time), as applicable, and (ii) in the
case of the Related Note, the principal amount thereof at such time determined
pursuant to the terms thereof.
DIVIDENDS
The holders of ComPS are entitled to receive cumulative cash dividends at the
rate of [2.5]% per annum on the Face Amount per Series [B] Preferred Security,
accruing from the Issue Date, and payable quarterly in arrears on the last
calendar day of each March, June, September and December, commencing ,
199 , or, if any such date is not a Business Day (as defined herein), the next
succeeding Business Day when, as and if available for payment by the Trust (as
described herein), except as otherwise described herein. The first dividend
payment will be for the period from and including the Issue Date to but
excluding , 199 . Dividends (or amounts equal to accrued and unpaid
dividends) payable on the ComPS for any period shorter than a quarterly dividend
period will be computed on the basis of a 360-day year of twelve 30-day months
and on the basis of the actual number of days elapsed (but never greater than
30) in any period shorter than a month. See "Description of the
ComPS -- Dividends".
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REDEMPTION AT STATED MATURITY
Unless previously redeemed pursuant to the optional or special redemption
provisions described below, each of the outstanding ComPS will be redeemed by
the Trust, in cash, on , [2001] which is the Stated Maturity of the
Related Note, subject to extension in the case of a Market Disruption Event (as
defined herein), at the ComPS Redemption Price, which is equal to (a) the
Redemption Value per Series [B] Preferred Security plus (b) accrued and unpaid
dividends thereon to but excluding the date of redemption. See "Description of
the ComPS -- Redemption at Stated Maturity"; "Risk Factors -- Extension of
Settlement Date or Stated Maturity".
CALCULATION OF REDEMPTION VALUE
The Principal Amount of each Series [B] Preferred Security is indexed to the
difference of (i) the performance of the Applicable Index, which is calculated
based on the change in value of certain commodity futures contracts included in
the JPM Indices (such contracts, from time to time, the "Benchmark Commodity
Contracts") plus the Collateral Yield Component, and (ii) the Factor. On the
date of this Prospectus Supplement, the Benchmark Commodity Contracts and their
weights are those listed on page [ ] of the accompanying Prospectus. Any
contracts for forward delivery shall be referred to herein as "futures
contracts" or "contracts." In summary, and subject to the complete definitions
and formulae contained herein and in the Prospectus, the Principal Amount of
each Series [B] Preferred Security at Stated Maturity, subject to extension in
the case of a Market Disruption Event (the "Redemption Value"), shall be
determined by multiplying the Face Amount of each Series [B] Preferred Security
by the difference between (a) a fraction, the numerator of which is the
Applicable Index Settlement Value and the denominator of which is the Applicable
Index Commencement Value, and (b) the Factor. However, the Redemption Value may
not be less than zero. Subject to the more complete definitions contained herein
and in the accompanying Prospectus, "Applicable Index Settlement Value" means
the arithmetic average of the values of the Applicable Index during the
Determination Period (as defined below), and "Applicable Index Commencement
Value" means [value set on date of issuance]. See "Description of ComPS--
Calculation of Redemption Value" herein and "Description of ComPS--Determination
Period and Settlement Date" in the Prospectus.
REMOVAL OF AFFECTED BENCHMARK COMMODITY CONTRACTS FROM THE APPLICABLE INDEX
Upon the occurrence of certain events affecting the liquidity or increasing the
cost of holding or trading any of the Benchmark Commodity Contracts and the
inability to find a suitable replacement Benchmark Commodity Contract, Morgan
Guaranty has the right to cause the removal of the affected Benchmark Commodity
Contract from the JPM Indices and thus the Applicable Index. The basket
Applicable Index will continue to be calculated using the JPM Basket Index
calculation methodology by excluding the removed commodity and using new weights
(which sum to 100% for the remaining commodities in the Applicable Index)
determined by Morgan Guaranty with the advice of the JPMCI Policy Committee. See
"Description of the ComPS -- Potential Modification of the Applicable Index".
OPTIONAL REDEMPTION
Each holder of ComPS may, by giving notice as specified herein before
[anniversary of Stated Maturity] of each year prior to Stated Maturity (each, an
"Optional Redemption Date"), cause the Trust to redeem some or all of such
holder's ComPS at the ComPS Early Redemption Price, which is equal to (a) the
Early Redemption Value (as defined in the Prospectus) per Series [B] Preferred
Security as determined at such time plus (b) accrued and unpaid dividends
thereon to but excluding the date of redemption. See "Description of the
ComPS--Optional Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event or an Investment
Company Event (each as defined herein and each a "Special Event"), Morgan
Guaranty will have the right to redeem the Related Note in whole or, if
redemption of less than all the ComPS will result in the discontinuance of such
Special Event, in part in an amount sufficient to cause such discontinuance, in
each case for cash, with the result
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that the Trust will redeem a Principal Amount of ComPS and related Series [B]
Common Securities equal to the Principal Amount of the Related Note so redeemed
for cash at the ComPS Early Redemption Price. However, in the case of a Tax
Event, Morgan Guaranty may allow the Related Note and the Trust may allow the
ComPS and related Series [B] Common Securities to remain outstanding upon the
receipt of indemnification by J.P. Morgan of the Trust for all taxes payable by
it as a result of such Tax Event. See "Description of the ComPS--Special Event
Redemption".
UNCONDITIONAL GUARANTEE BY J.P. MORGAN
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee and the Declaration, taken together, will provide a full and
unconditional guarantee, on a subordinated basis, of payments due on the ComPS.
See "Risk Factors--Limitation on Rights Under the Guarantee, the Related Note
Guarantee and the Related Note", "Description of the Related Note Guarantee" and
"Effect of Obligations Under the Guarantee, the Related Note Guarantee and the
Related Note".
THE GUARANTEE
The Guarantee by J.P. Morgan guarantees to the holders of the ComPS the payment
of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as
applicable, but if and only if and to the extent that, in each case, Morgan
Guaranty has made payment of interest or principal on the Related Note, as the
case may be, and (ii) upon a Liquidation Event (as defined herein) (other than
in connection with the redemption of all the ComPS upon maturity or redemption
in whole of the Related Note), the lesser of (A) the sum of (I) the Early
Redemption Value of such ComPS and (II) the amount of accrued and unpaid
dividends on such ComPS to but excluding the date of payment (the "Liquidation
Distribution"), to the extent the Trust has funds available therefor, and (B)
the amount of assets of the Trust consisting of the Related Note and the
proceeds thereof remaining available for distribution to holders of the ComPS
upon such Liquidation Event. J.P. Morgan's obligations under the Guarantee will
be subordinated and junior in right of payment to all liabilities of J.P.
Morgan, pari passu with the most senior preferred stock outstanding as of the
date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan.
THE RELATED NOTE GUARANTEE
The Related Note Guarantee by J.P. Morgan guarantees to the Property Trustee on
behalf of holders of Series [B] Securities the payment of any dividends on and
principal of the Related Note as provided pursuant to the terms of the Related
Note, at such times and in such amounts as provided therein. J.P. Morgan's
obligations under the Related Note Guarantee will be subordinated and junior in
right of payment to all liabilities of J.P. Morgan, pari passu with the most
senior preferred stock outstanding as of the date hereof of J.P. Morgan and
senior to the common stock of J.P. Morgan.
RELATED NOTE
The Related Note will be issued as an unsecured obligation of Morgan Guaranty,
limited in initial Principal Amount to approximately $ , such amount being the
aggregate Face Amount of the ComPS and the related Series [B] Common Securities.
The Related Note will mature on the Stated Maturity (subject to extension in the
case of a Market Disruption Event), and will bear interest at an annual rate of
[2.5]% on such aggregate Face Amount (which is equivalent to the annual dividend
rate with respect to the ComPS), payable quarterly in arrears on the last day of
each calendar quarter, commencing on , 199 . The Principal Amount of the
Related Note at any time will be the aggregate Principal Amount of the
outstanding ComPS and related Series [B] Common Securities at such time. The
amount payable upon maturity of the Related Note will be the Related Note
Redemption Price. The timing and amount of payments on the Related Note mirror
the aggregate financial terms of the ComPS.
The obligations of Morgan Guaranty under the Related Note will be pari passu
with all present and future Senior Indebtedness of Morgan Guaranty. Morgan
Guaranty's obligations under the Related Note are effectively subordinated to
all liabilities (including indebtedness) of its consolidated and unconsolidated
subsidiaries.
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VOTING RIGHTS
Holders of ComPS will have certain voting rights but will not be entitled to
vote to appoint, remove or replace the Trustees (as defined below) of the Trust
or to increase or decrease the number of Trustees. See "Description of the
ComPS--Voting Rights".
USE OF PROCEEDS
The Trust, on behalf of holders of Series [B] Securities, will invest the
proceeds from the sale of the ComPS offered hereby and the related Series [B]
Common Securities in the Related Note, the proceeds of which will be used by
Morgan Guaranty for general corporate purposes and for hedging its obligations
under the Related Note. See "Use of Proceeds".
LISTING
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering, there has been no market for the ComPS.
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<PAGE> 71
RISK FACTORS
INDEXATION OF PRINCIPAL AMOUNT
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary until Stated Maturity of the ComPS in relation to the
Applicable Index (the JPMCI Basket Total Return Index), reduced by the Factor.
The Principal Amount repayable on any Optional Redemption Date, upon the
occurrence of any Special Event Redemption or in connection with any Liquidation
Distribution (each such redemption date, an "Early Redemption Date") or at
Stated Maturity will be determined, pursuant to the terms described herein
(including, without limitation, the averaging of the Applicable Index over the
Early Determination Period or Determination Period, as applicable, and the
present-valuing of the dividends and Principal Amount in connection with early
redemptions), by comparing the level of the Applicable Index at the date of
issuance of the ComPS with the level determined pursuant to the terms hereof for
any such date of redemption, reduced by the Factor. Accordingly, the Principal
Amount to be received upon any date of redemption will fluctuate based on the
Applicable Index (reduced by the Factor) and may be lower than the Face Amount.
If the Applicable Index decreases over the life of the ComPS, or if the
percentage increase in the Applicable Index is less than the amount of the
Factor, the Redemption Value will be less than the Face Amount. If the
percentage increase in the Applicable Index is greater than the amount of the
Factor, the Redemption Value will be greater than the Face Amount.
LIMITATION ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE
RELATED NOTE
The Guarantee will be effective with respect to the ComPS from the time of
issuance of the ComPS but will not apply to any payment of dividends or other
amounts due in respect of the ComPS to the extent Morgan Guaranty has failed to
make a payment of principal of or interest on the Related Note. To the extent
Morgan Guaranty were to default on its obligation to pay amounts payable on the
Related Note, the Trust, on behalf of holders of the Series [B] Securities,
would lack available funds for the payment of distributions on or amounts
payable on redemption of the ComPS and, in such event, holders of the ComPS
would not be able to rely on the Guarantee for payment of such amounts. Instead,
holders of the ComPS would rely on the enforcement by the Trust, on behalf of
holders of the Series [B] Securities, of its rights as holder of the Related
Note against Morgan Guaranty and of its rights as holder of the Related Note
Guarantee against J.P. Morgan. In addition, upon the occurrence and during the
continuance of a Note Event of Default that is attributable to the failure of
Morgan Guaranty to pay principal of or interest on the Related Note on the date
such principal or interest is otherwise payable (or in the case of a redemption,
on the redemption date), any holder of the outstanding ComPS may directly
institute a proceeding under the Related Note Guarantee with respect to the
ComPS against J.P. Morgan for enforcement of payment to such holder of the
related principal amount of or interest on the ComPS of such holder (a "Direct
Action") on or after the date of the occurrence of such Note Event of Default
without first instituting a legal proceeding against the Trust, the Property
Trustee or any other person or entity. Notwithstanding any payments made to such
holder of ComPS by J.P. Morgan in connection with a Direct Action, J.P. Morgan
shall remain obligated to pay the principal of and interest on the ComPS, and
the rights of J.P. Morgan, as Guarantor, shall be subrogated to the rights of
such holder of ComPS with respect to payments on the ComPS to the extent of any
payment made by J.P. Morgan to such holder of ComPS in such Direct Action. J.P.
Morgan, through its obligations under the Guarantee, the Related Note Guarantee
and the Declaration, taken together, will provide a full and unconditional
guarantee, on a subordinated basis, of payments due on the ComPS. See
"Description of the Guarantee" and "Description of the Related Note Guarantee".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, unless waived by Morgan Guaranty or
subject to cure as specified herein, Morgan Guaranty shall have the right to
redeem the Related Note, in whole or in part, in which event the Trust will
redeem the ComPS and related Series [B] Common Securities on a pro rata basis to
the same extent as the Principal Amount of the Related Note is redeemed by
Morgan Guaranty.
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<PAGE> 72
As described in more detail below, a Special Event is either (i) a Tax Event or
(ii) an Investment Company Event. A Special Event may occur at any time. See
"Description of the ComPS--Special Event Redemption".
It is possible that the occurrence of a Special Event could cause the market
price of the ComPS in any existing secondary market to decline.
LIMITED VOTING RIGHTS
Holders of ComPS will have certain voting rights relating to a payment default
on or an adverse change to the ComPS, but will not be entitled to vote to
appoint, remove or replace the Trustees of the Trust or to increase or decrease
the number of Trustees, which voting rights are vested exclusively in the
holders of the Series [B] Common Securities and other Common Securities. See
"Description of the ComPS--Voting Rights".
TRADING PRICE MAY NOT REFLECT ACTUAL ECONOMIC VALUE
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering there has been no market for the ComPS. It is
not possible to predict whether the necessary number of holders will purchase
and, for the remaining term of the ComPS, continue to hold ComPS in order that
any secondary market which does develop will continue to exist. The Underwriters
(as defined in "Underwriting") are not obligated to make a market for the ComPS,
and although J.P. Morgan Securities Inc. ("JPMSI") as lead Underwriter, intends
to use its reasonable efforts to do so, it is possible that no active secondary
market for the ComPS will develop and remain in existence.
There can be no assurance as to the market prices for the ComPS in any secondary
market which does develop. Accordingly, the ComPS that an investor may purchase,
whether pursuant to the offer made hereby or in the secondary market, may trade
at a discount to the price that the investor paid to purchase such ComPS.
VALUE OF THE COMPS
The value of the ComPS at any time will depend upon the interaction of at least
two key factors: (i) the level of the Applicable Index and (ii) the credit
quality of Morgan Guaranty and J.P. Morgan. As discussed under "Description of
the ComPS", adverse changes in the Applicable Index will directly correlate to
adverse changes in the value of the ComPS. Also, a decline in the credit quality
of Morgan Guaranty and J.P. Morgan could cause the trading price of the ComPS in
any secondary market then existing to decline.
RIGHT TO INTEREST ON RELATED NOTE
Because holders of ComPS are essentially investing in a pro rata share of the
Related Note, prospective purchasers of ComPS are also making an investment
decision with regard to the Related Note and should carefully review all the
information regarding the Related Note contained herein and in the accompanying
Prospectus. Investors in ComPS have a direct right to interest distributions on
the Related Note. See "Description of the Related Note".
IMPOSITION OF BANK REGULATORY RESTRICTIONS
The Trust's ability to make distributions and other payments on the ComPS is
dependent upon Morgan Guaranty's making interest and other payments on the
Related Note as and when required or collection by the Trust, on behalf of
holders of Series [B] Securities, under the Related Note Guarantee. As noted in
the accompanying Prospectus under "J.P. Morgan & Co. Incorporated--Regulation",
Morgan Guaranty is subject to examination and regulation by U.S. federal and
state banking authorities, and although there is no current restriction on
Morgan Guaranty's ability to make payments under the Related Note, certain
transactions with affiliates, including the Trust, are or may in the future
become subject to restrictions imposed by bank regulatory authorities.
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EFFECT OF TRADING IN THE BENCHMARK COMMODITY CONTRACTS AND RELATED COMMODITIES
AND INSTRUMENTS
Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively
involved in the trading of the Benchmark Commodity Contracts, U.S. Treasury
Bills and other instruments and derivative products based thereon. Morgan
Guaranty, in particular, is an active participant in various commodity markets
including the physical petroleum, precious and base metals and related
derivatives markets. JPMSI and other affiliates may also issue or underwrite, or
authorize unaffiliated entities to issue or underwrite, other securities or
financial instruments with returns indexed to the Applicable Index, the
Benchmark Commodity Contracts, U.S. Treasury Bills, one or more of the JPM
Indices or to another commodity. Morgan Guaranty has licensed, and may in the
future license, the Applicable Index, the JPM Indices, and related indices and
sub-indices for use by affiliated and unaffiliated parties, for publication in
newspapers and periodicals, for distribution by information and data
dissemination services and for other purposes. Morgan Guaranty currently intends
to publish individual commodity sub-indices for each of the commodities included
in the JPMCI using the same calculation methodology as that described below. The
Applicable Index on the date hereof is identical to the sub-index having the
same underlying commodity.
Trading in the foregoing contracts, U.S. Treasury Bills and commodities by
Morgan Guaranty, its affiliates (including JPMSI) and unaffiliated third parties
could adversely affect the value of the Applicable Index, which would in turn
adversely affect the return on and the value of the ComPS. See "Description of
the ComPS". Furthermore, additional issuances of securities linked or referenced
to the Benchmark Commodity Contracts, similar commodity futures contracts or the
Applicable Index could adversely affect the value of the ComPS.
POTENTIAL FOR ADVERSE INTERESTS
As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in
trading activities related to the Benchmark Commodity Contracts and U.S.
Treasury Bills and other instruments or derivative products based on or related
to the Applicable Index, for their accounts where permitted or for other
accounts under their management. Morgan Guaranty, JPMSI and their affiliates, as
well as unaffiliated third parties, may also engage in other activities related
to the Applicable Index, as discussed above. Because Morgan Guaranty will issue
the Related Note issued to the Trust on behalf of holders of Series [B]
Securities, all such activities could create interests of Morgan Guaranty
adverse to those of the holders of ComPS. For example, the issuance of other
securities indexed to the Applicable Index, i.e., the introduction of competing
products into the marketplace, could adversely affect the value of the ComPS. To
the extent that J.P. Morgan or one of its affiliates serves as issuer, or JPMSI
or one of its affiliates serves as agent or underwriter, for such securities or
other instruments, their interests with respect to such products may be adverse
to those of the holders of the ComPS. Morgan Guaranty will serve as Calculation
Agent with respect to the ComPS and, accordingly, will in good faith calculate
the Applicable Index, which could also raise certain adverse interests (e.g., in
instances where Morgan Guaranty as the Calculation Agent is required to exercise
discretion).
RISK OF CARRYING AND ROLLING BENCHMARK COMMODITY CONTRACTS
As discussed below, the Early Redemption Value and the Redemption Value of the
ComPS will be calculated with reference to the Applicable Index, the value of
which is designed to replicate to the extent provided herein the cumulative
return of holding a volume weighted continuous investment in the Benchmark
Commodity Contracts, plus the Collateral Return Component. At any given time,
the Applicable Index will be calculated based on the volume weighted change in
value of certain Benchmark Commodity Contracts for delivery in the near term
(the "shorter-dated contracts"), plus the Collateral Return Component thereon.
The Applicable Index will continue to be calculated based on the volume weighted
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 volume weighted change in value of such shorter-dated contracts and
begin to be calculated based on the volume weighted change in value of the
subsequent Benchmark Commodity Contracts (the "longer-dated contracts") plus the
Collateral Return Component thereon on a regular periodic basis so as to be
continuously indexed to the
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volume weighted change in value of Benchmark Commodity Contracts. The period
during which each such replacement of shorter-dated contracts with longer-dated
contracts as the basis for the calculation of the volume weighted change in
value of the Applicable Index occurs is referred to herein as the "Rollover
Period", as further defined below. If the volume weighted market for Benchmark
Commodity Contracts is in "contango" (i.e., the prices of longer-dated contracts
are above the prices of shorter-dated contracts), the return on the Applicable
Index may be adversely affected. The Applicable Index would decline if (i) the
price of the longer-dated Benchmark Commodity Contracts during the Rollover
Period were more than the price of the shorter-dated contracts which they will
replace and (ii) the price of the longer-dated contracts were to decline as such
contracts approach maturity (i.e., the price of the longer-dated contracts were
to converge toward the price of the replaced shorter-dated contracts), in each
case in an amount greater than the Collateral Return Component accruing during
such period. While many of the commodities included in the JPM Indices and the
JPMCI basket 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. The absence of backwardation in the market for Benchmark
Commodity Contracts could adversely affect the Applicable Index and,
correspondingly, could adversely affect the value of the ComPS. Additionally,
the issuance and/or the trading of the ComPS could adversely affect the market
for Benchmark Commodity Contracts and the extent to which such markets are in
backwardation or contango and, correspondingly, could adversely affect the value
of the Applicable Index and the value of the ComPS. See "Description of
ComPS--Calculation of Redemption Value".
The following table sets forth the simulated month-end level of the JPMCI Basket
Total Return Index (the Applicable Index) for the months from January, 1988
through August 1994, and the actual level of the JPMCI Basket Total Return Index
thereafter. Because Morgan Guaranty did not commence actual daily calculation
and publication of the JPMCI Basket Total Return Index using the rules described
herein until September 1, 1994, the levels prior to such date are simulated
levels only, derived on a monthly basis by applying the arithmetic weights of
the JPMCI Basket Total Return Index as described herein to historical commodity
contract settlement values (or if futures contract prices were not available,
cash spot prices with an adjustment for average roll yield). As the basis for
calculation, the JPMCI Basket Total Return Index was set at 100 on December 31,
1984. Because the historical Applicable Index levels are simulated prior to
September 1994 and include spot natural gas prices prior to May 1990, the
historical Applicable Index, may not be entirely indicative of the returns an
investor would have received over such period. The Applicable Index calculation
uses only futures contract price returns (and no spot data) subsequent to May
1990 when NYMEX natural gas began trading. Prior to that, through the beginning
of 1988, the Applicable Index used futures price returns for all commodities in
the basket except natural gas, which used spot price data and a monthly roll
yield assumption of (0.94)%. Owing to natural gas' 7% arithmetic weight in the
Applicable Index, such roll yield assumption reduces the index total return by
approximately (0.8)% per annum.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Level of the Applicable Index as of the end of:
YEAR JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 144.79 141.71 156.90 158.08 163.66 155.18 160.68 158.76 146.15 158.24 172.66 185.71
1989 187.23 194.22 203.89 210.36 205.11 210.22 206.74 213.16 222.20 222.18 227.01 242.10
1990 243.86 245.15 237.78 228.11 222.02 216.68 238.54 278.60 336.34 311.61 288.44 279.07
1991 241.33 237.60 241.73 248.32 247.54 246.64 252.10 254.58 256.78 265.30 256.30 234.96
1992 238.31 237.56 243.04 251.18 262.63 262.33 270.68 268.91 272.91 260.45 253.65 252.36
1993 254.48 257.17 260.42 265.26 261.46 257.44 255.68 251.70 243.84 233.60 222.28 219.88
1994 234.11 230.82 234.34 245.29 260.48 272.59 280.04 263.98 269.08 271.43 270.95 272.78
1995 271.62 267.17 280.58 288.43 280.98 271.60 276.38 281.18 281.39 280.23 289.27 312.03
1996 307.00 323.52 348.64 361.63 356.37 365.98 365.79 382.76 398.63 402.99 427.42 437.48
1997 431.06 406.62 407.87 404.05 415.65 400.44 407.96 405.37 426.53 419.24 386.93 365.62
1998 363.46 342.58 345.23 340.67
</TABLE>
S-13
<PAGE> 75
Additionally, the level of the Applicable Index as of the close of business on
[the date of pricing] was [ ].
The following is a graph of such simulated and actual month-end values:
LEVELS OF JPMCI BASKET TOTAL RETURN INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD LEVELS OF JPMCI BASKET TOTAL
(FISCAL YEAR COVERED) RETURN INDEX
<S> <C>
12/31/88 185.71
187.23
194.22
203.89
210.36
205.11
210.22
206.74
213.16
222.20
222.18
227.01
12/31/89 242.10
243.86
245.15
237.78
228.11
222.02
216.68
238.54
278.60
336.34
311.61
288.44
12/31/90 279.07
241.33
237.60
241.73
248.32
247.54
246.64
252.10
254.58
256.78
265.30
256.30
12/31/91 234.96
238.31
237.56
243.04
251.18
262.63
262.33
270.68
268.91
272.91
260.45
253.65
12/31/92 252.36
254.48
257.17
260.42
265.26
261.46
257.44
255.68
251.70
243.84
233.60
222.28
12/31/93 219.88
234.11
230.82
234.34
245.29
260.48
272.59
280.04
263.98
269.08
271.43
270.95
12/31/94 272.78
271.62
267.17
280.58
288.43
280.98
271.60
276.38
281.18
281.39
280.23
289.27
12/31/95 312.03
307.00
323.52
348.64
361.63
356.37
365.98
365.79
382.76
398.63
402.99
427.42
12/31/96 437.48
431.06
406.62
407.87
404.05
415.65
400.44
407.96
405.37
426.53
419.24
386.93
12/31/97 365.62
363.46
342.58
345.23
340.67
</TABLE>
Source: Morgan Guaranty
Using the year-end levels noted above as hypothetical ending values for the
Applicable Index Settlement Values and the three-year prior year-end levels as
hypothetical beginning values for the Applicable Index Commencement Values, the
hypothetical Redemption Value of a Series [B] Preferred Security as if maturing
at the end of each of the past ten years for a Series [B] Preferred Security
priced three years prior, with a hypothetical Face Amount of $25.00 and a
hypothetical Factor of 0.15 would be as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
HYPOTHETICAL APPLICABLE INDEX
COMMENCEMENT VALUE HYPOTHETICAL APPLICABLE INDEX COMPS HYPOTHETICAL
YEAR (3 YEARS PRIOR) SETTLEMENT VALUE REDEMPTION VALUE
---- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
1988................. 118.59 185.71 $35.40
1989................. 113.71 242.10 $49.48
1990................. 146.17 279.07 $43.98
1991................. 185,71 234.96 $27.88
1992................. 242.10 252.36 $22.31
1993................. 279.07 219.88 $15.95
1994................. 234.96 272.78 $25.27
1995................. 252.36 312.03 $27.16
1996................. 219.88 437.48 $45.99
1997................. 272.76 365.62 $29.76
</TABLE>
WITH RESPECT TO THE FOREGOING MONTH-END VALUES AND HYPOTHETICAL REDEMPTION
VALUES, PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE AND VALUES.
S-14
<PAGE> 76
The following table illustrates, for a range of hypothetical changes in the
Applicable Index over the life of the ComPS, the (i) hypothetical value of the
ending index over the beginning index, (ii) the ComPS' hypothetical redemption
value as a percentage of the original face amount, (iii) the ComPS' hypothetical
redemption value in $ per share, (iv) the cumulative total return on the ComPS
including dividends and (iv) the total pretax annualized rate of return on the
ComPS including dividends. The table assumes a hypothetical ComPS with a term of
3 years, an annual dividend rate of 2 1/2% and a factor of 15%.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
COMPS HYPOTHETICAL TOTAL PRETAX
PERCENTAGE CHANGE HYPOTHETICAL SETTLEMENT REDEMPTION TOTAL CUMULATIVE ANNUALIZED RATE OF
OVER THE STARTING VALUE DIVIDED --------------------- RETURN ON THE COMPS RETURN ON THE COMPS
VALUE OF INDEX BY COMMENCEMENT VALUE AS % OF PAR AS $/SH INCLUDING DIVIDENDS INCLUDING DIVIDENDS
- ----------------- ----------------------- ----------- ------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
(60)% 40% 25.0% 6.25 (67.50)% (38.63)%
(50)% 50% 35.0% 8.75 (57.50)% (29.32)%
(40)% 60% 45.0% 11.25 (47.50)% (22.08)%
(30)% 70% 55.0% 13.75 (37.50)% (16.12)%
(20)% 80% 65.0% 16.25 (27.50)% (11.05)%
(10)% 90% 75.0% 18.75 (17.50)% (6.62)%
0 % 100% 85.0% 21.25 (7.50)% (2.69)%
10% 110% 95.0% 23.75 2.50% 0.85%
20% 120% 105.0% 26.25 12.50% 4.08%
30% 130% 115.0% 28.75 22.50% 7.03%
40% 140% 125.0% 31.25 32.50% 9.77%
50% 150% 135.0% 33.75 42.50% 12.32%
60% 160% 145.0% 36.25 52.50% 14.70%
</TABLE>
- ---------------
(a) Annualized rate of return computed on a quarterly bond equivalent basis.
VOLATILITY OF AND ADVERSE CHANGES TO COMMODITIES AND COMMODITY FUTURES PRICES
The JPMCI Basket Total Return Index is comprised of 11 commodities with US
dollar weights by commodity sector of 55% energy, 23% precious metals, 22% base
metals (See page [44] of the Prospectus for further details on weights). Of the
55% in energy, 48% is petroleum based (crude oil, heating oil, and unleaded
gasoline) while 7% is natural gas. Thus by weight, the JPMCI Basket is heavily
influenced by petroleum price volatility as well as the different metal sectors'
volatility. Petroleum prices can fluctuate widely and they are affected by
numerous factors other than economic activity. They include weather, political
events, labor activity, direct government intervention such as embargos, and,
especially, supply disruptions in major producing or consuming regions such as
the Middle East, the United States, Latin America and Russia. Supply disruptions
tend to affect oil prices worldwide, regardless of the location of the
disruption. Market expectations about these events and speculative activity also
cause prices to fluctuate.
Oil demand and supply adjust to price changes, but mainly in the long term. That
is, the adjustment that eventually corrects the imbalance that caused the
initial price fluctuation takes time. In the short term, demand/supply
responsiveness to price changes is limited and, at times, in the opposite
direction. This characteristic tends to prolong and exacerbate price
fluctuations. For example, if prices rise, oil consumers will curtail their oil
demand over time; but often their immediate response has been a rise in demand
through increased stockpiling. In addition, the structure of oil supply is
different from that of most other commodities. Since the early 1970s, market
prices have been well above the average cost of production, while the marginal
producers have been the large, low-cost producers of the Middle East. Also,
political developments (especially in the Middle East) and the outcome of
meetings of the Organization of Petroleum Exporting Countries can particularly
affect world oil supply and oil prices.
Furthermore, a significant proportion of world crude oil production capacity is
controlled by a small number of producers, and such producers have in the recent
past implemented curtailments of output and trade. Such efforts at supply
curtailment (or the cessation thereof) could affect the value of the Applicable
Index. Crude oil's major end-use as a refined product is as a transport fuel,
industrial fuel and in-home heating. Potential for substitution exists in most
areas, although considerations including relative cost often
S-15
<PAGE> 77
limit substitution levels. However, the development of a substitute product or
transport fuel could adversely affect the value of the Applicable Index.
The supply of and demand for crude oil influence the crude oil price in the
medium-to-longer term. In the event of sudden disruptions in the supplies of
crude oil, such as those caused by war, accidents, weather or acts of terrorism,
prices of Benchmark Commodity Contracts and, consequently, the value of the
Applicable Index, could become extremely volatile and unpredictable. Also,
sudden and dramatic declines in Benchmark Commodity Contract prices as may
occur, for example, upon a cessation of hostilities that may exist in countries
producing crude oil or upon the discovery of significant additional sources or
reserves of crude oil, the introduction of new or previously withheld supplies
into the market (e.g., crude oil from Iraq) or the introduction of substitute
products or commodities, could have a significant adverse effect on the value of
the Applicable Index and on the value of the ComPS. In addition, the price of
crude oil has on occasion been subject to very rapid and significant short-term
changes due to speculative activities which, if such activities result in a
price decrease, may cause the value of the ComPS to decrease.
Precious metals prices can fluctuate widely and they are affected by numerous
factors other than economic activity. They include political events, labor
activity, substitution issues, direct government intervention, central bank
sales, currency movements, hedging by producer and consumers, and environmental
regulation. In addition, the prices of precious metals have on occasion been
subject to very rapid short-term changes due to speculative activities.
Base metals prices can also fluctuate widely and there are numerous factors
which affect them other than economic activity. They include weather, political
events, labor activity, substitution issues, direct government intervention,
currency movements, hedging by producer and consumers, substitution effects, and
environmental regulation. In addition, the prices of base metals have on
occasion been subject to very rapid short-term changes due to speculative
activities.
In any case, all such volatility in the Benchmark Commodity Contracts will
correlate directly to volatility in the Applicable Index. Such volatility could
lead some investors in the Benchmark Commodity Contracts to withdraw from the
applicable futures markets, which could adversely affect the liquidity of such
markets and could adversely affect the value of the Applicable Index and,
correspondingly, the value of the ComPS.
As noted previously, the markets for the 11 commodities in the JPMCI Basket have
exhibited periods of contango and backwardation over time. The cumulative effect
of these periods is that the average carrying costs implied in rolling the
volume weighted Benchmark Commodity Contracts in the JPMCI Basket have not
offset the collateral yield component of the index, i.e., the Applicable Index
series' cumulative return is greater than the cumulative return of JPMCI
Basket's spot index in the graph below. (The spot index is an index of the
Benchmark Commodity Contracts' nearby prices used in the JPMCI Basket weighted
to have the same dollar percentage weights as the JPMCI Total Return Basket. The
spot index is proxy for the spot change in the JPMCI Basket's underlying
commodities, thus the spot index does not include either the cost (or benefit)
of rolling a continuous futures position or the collateral yield return.) In
fact, the Applicable Index's historical outperformance of the spot index is
greater than the average collateral yield component over time and thus the
aggregate volume weighted JPMCI Index has been in backwardation to a larger
extent than it has been in contango over this time period. However, there is no
assurance that backwardation will exist at any or all times in the future. And
recently the weighted average of the commodities' underlying the Applicable
Index has been in contango.
S-16
<PAGE> 78
INDEXED LEVELS OF JPMCI BASKET SPOT AND TOTAL RETURN INDICES,
BOTH INDEXED TO 144.79 AT START (01/31/88).
<TABLE>
<CAPTION>
MEASUREMENT PERIOD JPMCI TOTAL RETURN
(FISCAL YEAR COVERED) INDEX INDEXED JPMCI SPOT
<S> <C> <C>
1/31/88 144.79 144.79
141.71 140.30
156.90 153.90
158.08 152.89
163.66 156.09
155.18 145.15
160.68 149.52
158.76 146.98
146.15 133.89
158.24 142.32
172.66 153.06
185.71 162.04
1/31/89 187.23 159.66
194.22 162.14
203.89 167.06
210.36 168.41
205.11 159.56
210.22 159.61
206.74 153.99
213.16 157.39
222.20 162.93
222.18 161.20
227.01 162.98
242.10 171.86
1/31/90 243.86 169.16
245.15 167.25
237.78 161.78
228.11 154.33
222.02 151.48
216.68 148.77
238.54 165.43
278.60 194.67
336.34 235.61
311.61 219.11
288.44 201.04
279.07 196.24
1/31/91 241.33 165.57
237.60 159.12
241.73 158.94
248.32 161.59
247.54 159.77
246.64 158.95
252.10 162.19
254.58 165.08
256.78 167.47
265.30 173.30
256.30 167.10
234.96 150.70
1/31/92 238.31 152.45
237.56 152.60
243.04 156.25
251.18 161.26
262.63 167.85
262.33 167.06
270.68 172.34
268.91 170.57
272.91 172.53
260.45 164.10
253.65 159.44
252.36 157.21
1/29/93 254.48 158.05
257.17 160.00
260.42 161.36
265.26 164.24
261.46 162.04
257.44 159.79
255.68 159.67
251.70 158.14
243.84 154.63
233.60 149.29
222.28 142.64
219.88 141.41
1/31/94 234.11 151.20
230.82 147.48
234.34 149.36
245.29 156.36
260.48 165.52
272.59 172.38
280.04 175.17
263.98 164.63
269.08 169.66
271.43 174.71
270.95 174.22
272.78 175.31
1/31/95 271.62 174.04
267.17 170.48
280.58 178.77
288.43 183.81
280.98 178.18
271.60 171.01
276.38 172.89
281.18 175.24
281.39 173.42
280.23 173.34
289.27 176.85
312.03 187.32
1/31/96 307.00 179.12
323.52 184.15
348.64 193.54
361.63 194.93
356.37 183.37
365.98 189.92
365.79 189.57
382.76 192.95
398.63 203.90
402.99 210.95
427.42 217.15
437.48 224.78
1/31/97 431.06 215.18
406.62 193.67
407.87 194.62
404.05 193.11
415.65 202.20
400.44 192.06
407.96 195.23
405.37 195.55
426.53 206.83
419.24 206.90
386.93 189.64
365.62 176.86
1/31/98 363.46 175.13
342.58 167.24
345.23 168.33
340.47 168.77
</TABLE>
Although the above graph shows that the Applicable Index has outperformed the
spot index of Benchmark Commodity Contracts since 1988, there have been periods
during which the Applicable Index has underperformed the spot index of the JPMCI
Basket (e.g., 1993). The following table shows year-end levels for both the Spot
Index and the Applicable Index along with their respective year-on-year percent
changes.
Again, the difference between the percent change in the spot Benchmark Commodity
Contract and the Applicable Index is the cumulative affect for each year of the
Applicable Index's collateral yield component plus the average carrying costs
implied in the Applicable Index's rolling of the Benchmark Commodity Contracts
during each roll period during that year. If the Applicable Index's weighted
average roll is in backwardation (i.e. -- the further forward contract prices
are less than the nearby forward contract prices), the implied carrying costs on
the rolling of the contracts are actually a benefit; if the Applicable Index's
weighted average roll is in contango (i.e. -- the further forward contract
prices are more than the nearby forward contract prices), the implied carrying
costs on the rolling of the contracts are a cost. If the implied average
carrying costs on the Applicable Index rolls are greater than the average
Treasury bill rate then the Applicable Index will underperform the stated annual
percentage change in the spot index of Benchmark Commodity Contracts. If the
implied average carrying costs on the Applicable Index rolls are less than the
average Treasury bill rate then
S-17
<PAGE> 79
the Applicable Index will outperform the stated annual percentage change in the
spot index of Benchmark Commodity Contracts.
<TABLE>
<CAPTION>
--------------------------------------------------
JPMCI Spot Index JPMCI Total Return Index
------------------ ------------------------
Year End Level % Chg Level % Chg
-------- ------ ------ -------- --------
<S> <C> <C> <C> <C>
1988........................ 117.48 185.71
1989........................ 124.60 6.06% 242.10 30.36%
1990........................ 142.28 14.19% 279.07 15.27%
1991........................ 109.26 (23.21)% 234.96 (15.80)%
1992........................ 113.98 4.32% 252.36 7.40%
1993........................ 102.52 (10.05)% 219.88 (12.87)%
1994........................ 127.11 23.98% 272.78 24.06%
1995........................ 135.81 6.85% 312.03 14.39%
1996........................ 162.97 20.00% 437.48 40.20%
1997........................ 128.23 (21.32)% 365.62 (16.43)%
</TABLE>
With respect to the foregoing graph and table of index levels and percent
changes, past performance is not indicative of future performance.
CHANGE OF FUTURES EXCHANGE METHODOLOGY
Any exchange on which any Benchmark Commodity Contract is traded or which
provides information relevant to the calculation of the Applicable Index may
from time to time change any rule or bylaw or take emergency action under its
rules, any of which could affect the settlement prices of the Benchmark
Commodity Contracts underlying an Applicable Index. Any such change which causes
a decrease in such settlement prices could adversely affect the value of the
Applicable Index.
SUSPENSION OR MATERIAL DISRUPTION OF FUTURES OR COMMODITIES TRADING; TEMPORARY
DISTORTIONS
The futures markets and the markets for commodities 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. In addition, U.S. futures exchanges and
certain foreign exchanges on which current or replacement Benchmark Commodity
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 a country that at such time is a member of the Organization of
Economic Cooperation and Development) have regulations which may limit the
amount of fluctuation of futures contract prices which may occur during a single
trading day. Such limits are generally referred to as "daily price fluctuation
limits" or, more commonly, "daily 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. Any such circumstances, particularly if they
occur during the Rollover Period for the Applicable Index or during an Early
Determination Period or the Determination Period for the Applicable Index, could
adversely affect the value of the Applicable Index and/or could constitute a
Market Disruption Event and, therefore, could adversely affect the value of the
ComPS.
Depending on the period of time over which a Market Disruption Event continues,
the correlation between changes in the value of the Applicable Index and changes
in the general level of prices of cash commodity prices may be adversely
affected. Under such circumstances, the value of the Applicable Index, and the
value of the ComPS, may be adversely affected.
Additionally, because the ComPS will be listed and will trade on a stock
exchange, trading in the ComPS may be subject to interruption or delay due to
extreme volatility in the trading prices of equity securities
S-18
<PAGE> 80
generally on such exchange (the so-called "circuit breaker" rules),
notwithstanding the specific price movements of the ComPS.
MARKET DISRUPTION EVENTS
In the event of a Market Disruption Event during any Early Determination Period
or the Determination Period, the Early Redemption Value or Redemption Value, as
applicable, payable in respect of the ComPS will be calculated using the
Applicable Index on the day or days on which open-outcry trading on either the
NYMEX or the London Metals Exchange (the "LME") is scheduled to occur or occurs
(each, a "Trading Day") immediately following the termination of such Market
Disruption Event. However, if such Market Disruption Event remains in effect for
longer than 20 consecutive Trading Days and, in the reasonable judgment of
Morgan Guaranty, such Market Disruption Event is likely to remain in effect,
then the Applicable Index Early Settlement Value or the Applicable Index
Settlement Value, as applicable, for each Trading Day subject to a Market
Disruption Event may be determined in good faith by Morgan Guaranty based on
alternative pricing sources reasonably believed by it to be indicative of
then-prevailing prices for notional transactions in futures contracts or
commodities equal in size to the Applicable Index Early Settlement Value or the
Applicable Index Settlement Value, as applicable, although Morgan Guaranty has
no obligation to do so, and such value will be utilized in the calculation of
the Early Redemption Value or the Redemption Value, as applicable, for such
days. Because Morgan Guaranty's obligations under the Related Note will also be
based on the Applicable Index Early Settlement Value or the Applicable Index
Settlement Value, Morgan Guaranty may have an adverse interest with respect to
such determination.
HISTORICAL CORRELATIONS MAY NOT PREVAIL IN THE FUTURE
Although historically the JPMCI Basket Total Return Index and many of the
commodities underlying the JPMCI Basket Total Return Index have shown some
positive correlation with inflation and some negative or low correlation with
stock and bond quarterly returns (in each case in the United States), there can
be no assurance that such correlations will prevail in the future. As a result,
investors who invest in ComPS in reliance on these correlations should
individually assess the likelihood of such correlations continuing.
The correlation (R) of quarterly returns from 12/87-03/98 for US financial asset
total returns and the Applicable Index returns are:
<TABLE>
<S> <C> <C>
Applicable Index correlation to............................. Correlation(R)
US Equities (S&P 500)....................................... (0.49)
US Bonds (JPMorgan US Government Bond Index)................ (0.17)
</TABLE>
Source: JP Morgan
CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS THEREOF
Prices of commodities and commodity futures contracts may be adversely affected
by the promulgation of new laws or regulations or by the reinterpretation of
existing laws or regulations (including, without limitation, those relating to
taxes and duties on commodities or commodity components) by one or more
governments, governmental agencies or instrumentalities, courts or other
official bodies. Any such event could adversely affect the value of the
Applicable Index and, correspondingly, could adversely affect the value of the
ComPS. Additionally, the occurrence of certain events increasing the cost of
holding or trading the Benchmark Commodity Contracts and the inability to find a
suitable replacement Benchmark Commodity Contract could lead Morgan Guaranty to
cause the Benchmark Commodity Contract to be removed from the JPM Indices. The
basket Applicable Index will continue to be calculated using the JPM Basket
Index calculation methodology by excluding the removed commodity using new
weights (which sum to 100% for the remaining commodities in the Applicable
Index) determined by Morgan Guaranty with the advice of the JPMCI Policy
Committee. The new weights will be published by Morgan Guaranty and will remain
in effect until further notice. Such removal of the affected commodity and new
weightings for the affected Applicable Indices may result in the holders of such
ComPS receiving an amount that is less than what would have been received if the
index methodology was not changed. Because Morgan Guaranty will be the
Calculation Agent, such early determination may raise adverse interests.
S-19
<PAGE> 81
EXTENSION OF SETTLEMENT DATE OR STATED MATURITY
If any Benchmark Commodity Contract were to be affected by a Market Disruption
Event during any Early Determination Period or the Determination Period, the
applicable Settlement Date would be postponed until the later of (i) the
applicable Early Redemption Date or the Stated Maturity and (ii) the fifth
Business Day after the last day of the applicable Early Determination Period or
the Determination Period. Such delay could be of indefinite duration, during
which time a holder of ComPS will not receive the Early Redemption Value or
Redemption Value thereof, as applicable. In the event that payment of the
Redemption Value is postponed beyond the Stated Maturity, no interest or
dividends will accrue or be payable on the Face Amount, as described under the
caption "Description of the ComPS--Calculation of Redemption Value". In the
event payment of the Early Redemption Value is postponed beyond the applicable
Early Redemption Date, no dividends will be payable, and no interest will accrue
and be payable, with respect to ComPS redeemed on such Early Redemption Date.
DISCONTINUANCE OF PUBLISHING OF THE JPMCI BASKET TOTAL RETURN INDEX
In the event that Morgan Guaranty discontinues publication of the JPMCI Basket
Total Return Index, the Calculation Agent will continue to calculate in good
faith the Applicable Index during the remaining term of the ComPS, based on the
methodology described in the Prospectus under "Description of the ComPS".
However, such good-faith calculation may result in a ComPS Redemption Price or
ComPS Early Redemption Price for the ComPS which is less than the ComPS
Redemption Price or ComPS Early Redemption Price, as applicable, for such ComPS
had it been calculated on the basis of the JPMCI Basket Total Return Index.
POTENTIAL MODIFICATIONS TO THE JPM INDICES AND/OR THE APPLICABLE INDEX
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As described under "Description of the ComPS--Early Determination of Applicable
Index Settlement Value and Redemption Value", if any Benchmark Commodity
Contract becomes less liquid or representative, the JPMCI Policy Committee could
recommend a replacement Benchmark Commodity Contract. Such a change from a less
liquid to a more liquid contract may result in a lower Early Redemption Value or
Redemption Value for the ComPS than would have been the case if the less liquid
contract had remained the benchmark.
If at any time no replacement contracts can be found to serve as a Benchmark
Commodity Contract, the Benchmark Commodity Contract will be removed from the
JPM Indices. The Applicable Index will continue to be calculated using the JPM
Basket Index calculation methodology by excluding the removed commodity and
using new weights (which sum to 100% for the remaining commodities in the
Applicable Index) determined by Morgan Guaranty with the advice of the JPMCI
Policy Committee. The new weights will be published by Morgan Guaranty and will
remain in effect until further notice. Such removal of the affected commodity
and new weightings for the affected Applicable Indices may result in the holders
of such ComPS receiving an amount that is less than what would have been
received if the index methodology was not changed. Because Morgan Guaranty will
be the Calculation Agent, such early determination may raise adverse interests.
See "Modifications to the JPM Indices".
Additionally, if at any time any Benchmark Commodity Contract, or the trading
thereof, becomes subject to any increased cost or additional tax, Morgan
Guaranty reserves the right to designate a replacement Benchmark Commodity
Contract or, if no such contract is designated, to cause, at its option, the
Benchmark Commodity Contract to be removed from the JPM Indices. The basket
Applicable Index will continue to be calculated using the JPM Basket Index
calculation methodology by excluding the removed commodity using new weights
(which sum to 100% for the remaining commodities in the Applicable Index)
determined by Morgan Guaranty with the advice of the JPMCI Policy Committee. The
new weights will be published by Morgan Guaranty and will remain in effect until
further notice. See "Modifications to the JPM Indices". Because Morgan Guaranty
will, at the time any Benchmark Commodity Contract becomes subject to such
increased cost or additional tax, in its discretion decide whether or not to
cause the removal of such affected contract from the JPM Indices, exercise of
such option may raise an adverse
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interest. Such a change in contracts due to the imposition of any increased cost
or additional tax may result in a lower Redemption Value for such ComPS than
would have been the case if the contract on which such increased cost or
additional tax were imposed had remained a Benchmark Commodity Contract.
Any early determination of the Applicable Index Settlement Value may cause the
market price of ComPS in any existing secondary market to decline.
EARLY REDEMPTION
The ComPS may be redeemed prior to their Stated Maturity upon the occurrence of
a Special Event or redeemed at the option of the holders thereof on each
Optional Redemption Date. In the case of a redemption upon the occurrence of a
Special Event, the Early Redemption Value paid by the Trust at such time may be
significantly less than the Redemption Value that would otherwise have been
payable had the ComPS not been redeemed prior to their Stated Maturity and the
occurrence of such Special Event may cause the market price of ComPS in any
existing secondary market to decline. In the case of an optional redemption by
holders, it is likely, under usually-prevailing market conditions, that the
Early Redemption Value paid by the Trust will be less than the amount such
holder could have realized by selling such ComPS in an existing secondary
market, if any, ratably during the Early Determination Period. Delay in payment
of the ComPS Early Redemption Price (as a result of a Market Disruption Event or
a delay in the provision by DTC to the Trust of the Applicable Notice (as
defined below)) will not entitle holders of ComPS to additional dividends on the
ComPS or the accrual of any interest on such ComPS Early Redemption Price.
CERTAIN CONSIDERATIONS REGARDING HEDGING
Prospective purchasers of the ComPS who intend to hedge against the risks
associated with the market for commodities should recognize the complexities of
utilizing the ComPS in this manner. The formula under which the Principal Amount
is calculated is not guaranteed to produce distributions to holders having
readily definable relationships with other commodity market instruments and
products. As described below, because the Applicable Index is a Total Return
Index, the value of the ComPS will reflect not only the price of the Benchmark
Commodity Contracts but also the state of the futures market for Benchmark
Commodity Contracts (i.e., whether such market is in "backwardation" or
"contango" over time, as discussed above) and the Collateral Return Component,
reduced by the Factor. Also, under certain circumstances, amounts payable on the
ComPS may be based on the good faith determination of Morgan Guaranty and not on
the Applicable Index. For these reasons, investors should be cautious in using
the ComPS in a hedging program. The risks associated with utilizing the ComPS in
a hedging program may be magnified in periods of substantial commodity price
volatility, since properly correlating the ComPS either as a hedge of other
assets or correlating the ComPS to a hedge thereof may become more difficult.
Also, investing in ComPS should not be considered a complete investment program.
ORIGINAL ISSUE DISCOUNT
The ComPS will be issued with original issue discount for Federal income tax
purposes. During each taxable period, holders of ComPS will be required to
include amounts in income in excess of current cash dividends. Such excess
amount, which will increase the holders' tax basis in the ComPS, may not be
received by holders upon redemption or sale of the ComPS. In such case, holders
will be entitled to tax loss (which would be ordinary under the position taken
by the Trust) for Federal income tax purposes.
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 subsidiaries engaged globally in providing a
wide range of financial services to institutions, corporations, governments and
individuals. J.P. Morgan's activities are summarized in the Prospectus.
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J.P. MORGAN INDEX FUNDING COMPANY I
J.P. Morgan Index Funding Company I is a statutory business trust formed on
December 12, 1996 under the Delaware Business Trust Act (the "Business Trust
Act") pursuant to (i) a declaration of trust among the Trustees and J.P. Morgan
and (ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware on December 12, 1996, which was restated pursuant to the
filing of a restated certificate of trust with the Secretary of State of the
State of Delaware on September 30, 1997. On March 26, 1998, J.P. Morgan, as
sponsor, and the Trustees entered into an amended and restated declaration of
trust, dated as of March 26, 1998 (the "Declaration"), filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement and the
Prospectus. J.P. Morgan will acquire all series of Common Securities, including
the Series [B] Common Securities, of the Trust. The Declaration will be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Company has been merged into the Trust (the "Merger")
pursuant to (i) an Agreement and Plan of Merger between the Trust and the
Company and (ii) a Certificate of Merger merging the Company into the Trust
filed with the Secretary of State of the State of Delaware. By operation of law,
the Trust has become the owner of all assets of the Company, including any
outstanding related notes corresponding to any series of Securities, and has
succeeded to all the obligations of the Company, including any outstanding
Preferred Securities and Common Securities theretofore issued by the Company,
including the Series A Securities, and all the rights of the Company, including
in respect of any related note guarantee executed in connection with such Series
A Securities. Following the effectiveness of the Merger, the outstanding Series
A Securities represent an undivided beneficial interest in the related note
executed in connection with such Series A Securities.
This description summarizes the material terms of the Declaration and is
qualified in its entirety by reference to the form of Declaration, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part, and the Trust Indenture Act.
SERIES [B] SECURITIES
Upon issuance of the Series [B] Preferred Securities, the holders thereof will
own all of the issued and outstanding Series [B] Preferred Securities, and J.P.
Morgan will own all of the issued and outstanding Series [B] Common Securities.
The certificates for each Series [B] Security will represent a fractional
undivided beneficial interest in certain assets of the Trust consisting of the
Related Note and the proceeds thereof, all monies due and to become due under
the Related Note, and the right to receive a portion of the payments of
principal of and interest on the Related Note. J.P. Morgan will acquire the
Series [B] Common Securities in a principal amount equal to 0.001% of the total
principal amount of the Series [B] Securities and will own all the issued and
outstanding Common Securities of the Trust which will represent 0.001% of the
total capital of the Trust. The Series [B] Preferred Securities and the Series
[B] Common Securities will rank pari passu with each other and will have
equivalent payment terms; provided that (i) if a Note Event of Default (as
defined herein) under the Related Note occurs and is continuing, the holders of
Series [B] Preferred Securities will have a priority over holders of Series [B]
Common Securities with respect to payments in respect of distributions and
payments upon liquidation, redemption and maturity and (ii) holders of Series
[B] Common Securities have the exclusive right (subject to the terms of the
Declaration) to appoint, remove or replace the Trustees and to increase or
decrease the number of Trustees. A Note Event of Default under the Related Note
will not prohibit payments in respect of distributions and payments upon
liquidation, redemption and maturity under a related note corresponding to any
other series of Securities or under such Securities. No holder of Securities of
any series shall have any claim on, or right to, any assets allocated to, or
associated with, any other series (except if, and to the extent that, such
holder is also a holder of Securities of such other series). The Trust exists
for the exclusive purposes of (a) issuing ComPS and Series [B] Common
Securities, and from time to time issuing additional series of Securities, (b)
investing the gross proceeds from the sale of the ComPS and the Series [B]
Common Securities in the Related Note and investing the proceeds of such
additional issuances of Securities in other debt obligations of Morgan Guaranty
and (c) engaging in only such other activities as are necessary, convenient or
incidental thereto. The rights of the holders of the Series [B] Securities,
including economic rights, rights to information and voting rights, are set
forth in the Declaration (which term shall include any Declaration Supplement),
the Business Trust Act and the Trust Indenture Act.
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POWERS AND DUTIES OF TRUSTEES
The number of trustees (the "Trustees") of the Trust shall initially be five.
Three of such Trustees (the "Regular Trustees") are individuals who are
employees or officers of J.P. Morgan. The fourth such trustee will be U.S. Bank
Trust National Association, which is unaffiliated with J.P. Morgan and which
will serve as the property trustee (the "Property Trustee") and act as the
indenture trustee for purposes of the Trust Indenture Act. The fifth such
trustee is Wilmington Trust Company, which has its principal place of business
in the State of Delaware (the "Delaware Trustee"). Pursuant to the Declaration,
legal title to the Related Note will be held by the Property Trustee for the
benefit of the holders of the Series [B] Securities, and the Property Trustee
will have the power to exercise all rights, powers and privileges with respect
to the Related Note. In addition, the Property Trustee will maintain exclusive
control of a separate segregated non-interest-bearing bank account for the
Series [B] Securities (the "Property Account") to hold all payments in respect
of the Related Note for the benefit of the holders of the Series [B] Securities.
The Property Trustee will promptly make distributions to the holders of the
Series [B] Securities out of funds from the Property Account. The Guarantee is
separately qualified under the Trust Indenture Act and will be held by U.S. Bank
Trust National Association, acting in its capacity as indenture trustee with
respect thereto, for the benefit of the holders of the Series [B] Preferred
Securities and other Preferred Securities. As used in this Prospectus
Supplement, the term "Property Trustee" with respect to the Trust refers to U.S.
Bank Trust National Association acting either in its capacity as a Trustee under
the Declaration and the holder of legal title to the Related Note or in its
capacity as indenture trustee under, and the holder of, the Guarantee, as the
context may require. J.P. Morgan, as the owner of all of the Common Securities,
will have the exclusive right (subject to the terms of the Declaration) to
appoint, remove or replace Trustees and to increase or decrease the number of
Trustees, provided that the number of Trustees shall be at least five and the
majority of Trustees shall be Regular Trustees. The Regular Trustees are
authorized and directed to take such action as they deem reasonable in order
that the Trust will not be deemed to be an "investment company" required to be
registered under the 1940 Act or that the Trust will not be classified for
United States Federal income tax purposes as an association taxable as a
corporation or a partnership and will be treated as a grantor trust for United
States Federal income tax purposes. In this connection, the Regular Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Trust or the Declaration, that the Regular Trustees
determine in their discretion to be reasonable and necessary or desirable for
such purposes, as long as such action does not adversely affect the interests of
holders of the Securities. The term of the Trust will be until November 21,
2105, but the Trust may terminate earlier as provided in the Declaration.
The duties and obligations of the Trustees of the Trust will be governed by the
Declaration. Under the Declaration, the Trust (on behalf of a series of
Securities or otherwise) shall not, and the Trustees of the Trust shall not
cause the Trust (on behalf of a series of Securities or otherwise) to, engage in
any activity other than in connection with the purposes of the Trust or other
than as required or authorized by the Declaration. In particular, the Trust (on
behalf of a series of Securities or otherwise) shall not, and the Trustees of
the Trust shall cause the Trust (on behalf of a series of Securities or
otherwise) not to, (a) invest any proceeds received by the Trust from holding
the Related Note, but shall promptly distribute from the Property Account all
such proceeds to holders of the Series [B] Securities pursuant to the terms of
the Declaration and of the Series [B] Securities; (b) acquire any assets other
than as expressly provided in the Declaration; (c) possess Trust Property for
other than a Trust purpose; (d) make any loans, other than loans represented by
the Related Note and other related notes corresponding to other series of
Securities; (e) exercise any power or otherwise act in such a way as to vary the
assets of the Trust or the terms of the Series [B] Securities or other series of
Securities in any way whatsoever; (f) issue any securities or other evidences of
beneficial ownership of, or beneficial interests in, the Trust other than the
Series [B] Securities or other series of Securities associated with other
related notes; (g) incur any indebtedness for borrowed money or (h) (i) direct
the time, method and place of exercising any trust or power conferred upon the
Property Trustee of the Trust with respect to the Series [B] Securities or other
series of Securities, (ii) waive any past default that is waivable under the
Related Note (or other related notes) or the Declaration, (iii) exercise any
right to rescind or annul any declaration that the principal of all the Related
Note (or other related notes) deposited in the Trust as trust assets shall be
due and payable or (iv) consent
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to any amendment, modification or termination of the Related Note (or other
related notes) or the Declaration, in each case where such consent shall be
required, unless in the case of this clause (h) the Property Trustee shall have
received (i) an unqualified opinion of nationally recognized independent tax
counsel recognized as expert in such matters to the effect that such action will
not cause the Trust to be classified for United States Federal income tax
purposes as an association taxable as a corporation or a partnership and that
the Trust will continue to be classified as a grantor trust for United States
Federal income tax purposes and (ii) if required, the approval of the holders of
the Series [B] Securities or other series of Securities for the taking of any
such action. See "J.P. Morgan Index Funding Company I -- Voting" and
"Description of the ComPS -- Voting Rights".
BOOKS AND RECORDS
The books and records of the Trust will be maintained at the principal office of
the Trust and will be open for inspection by a holder of Preferred Securities or
such holder's representative for any purpose reasonably related to such holder's
interest in the related note held by the Trust, on behalf of holders of
Securities of the applicable series, during normal business hours. Separate and
distinct books and records will be maintained by the Trust for each series of
Securities, and the assets associated with, or related to, any such series will
be held and accounted for separately from the assets of the Trust generally or
from the assets associated with, or related to, any other series of Securities.
VOTING
Except as set forth below and under "Events of Default" below and under
"Description of the ComPS -- Voting Rights" and as provided under the Business
Trust Act, the Declaration and the Trust Indenture Act, holders of Series [B]
Preferred Securities will have no voting rights.
If any proposed amendment to the Declaration provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Securities, whether by way of
amendment to the Declaration or otherwise, or (ii) the dissolution or bankruptcy
of the Trust, then the holders of outstanding Securities will be entitled to
vote on such amendment or proposal as a class and such amendment or proposal
shall not be effective except with the approval of the holders of Securities
representing a majority in principal amount of such Securities; provided,
however, that if any amendment or proposal referred to in clause (i) above would
adversely affect only certain series of the Preferred Securities or certain
series of the Common Securities, then only the affected series or class, as
applicable, will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of a
majority in principal amount of such series or class, as applicable, of
Securities.
THE PROPERTY TRUSTEE
The Property Trustee, for the benefit of holders of the Series [B] Securities,
is authorized under the Declaration to exercise all rights with respect to the
Related Note deposited with the Property Trustee as a trust asset, including its
rights as the holder of the Related Note to enforce the Trust's rights under the
Related Note upon the occurrence of a Note Event of Default. The Property
Trustee is also authorized to enforce the rights of the Trust under the Related
Note Guarantee. Holders of at least a majority in principal amount of the Series
[B] Preferred Securities will have the right to direct the Property Trustee for
the Trust with respect to certain matters under the Declaration and the Related
Note Guarantee; provided that (a) such direction would not conflict with any
applicable law or the Declaration and would not result in any personal liability
or expense to the Property Trustee, (b) such direction would not cause the Trust
not to be properly classified as a grantor trust for U.S. Federal income tax
purposes and (c) the Property Trustee may take any other action deemed proper by
the Property Trustee which is not inconsistent with such direction. In addition,
under certain circumstances, a holder of the outstanding ComPS may directly
institute Direct Action against J.P. Morgan without first instituting a legal
proceeding against the Trust, the Property Trustee or any other person or
entity. See "Risk Factors -- Limitations on Rights Under the Guarantee, the
Related Note Guarantee and the Related Note", "J.P. Morgan Index Funding Company
I -- Events of Default", "Description of the ComPS -- General" and "Description
of the Related Note
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Guarantee -- Remedies of the Trust and Holders of the ComPS". The Declaration
will provide that the Sponsor will pay the Property Trustee's fees and expenses
and will indemnify the Property Trustee in respect of certain matters.
The Property Trustee is a depository for funds and performs other services for,
and transacts other banking business with, J.P. Morgan in the normal course of
business.
DISTRIBUTIONS
Pursuant to the Declaration, distributions on the Series [B] Securities must be
paid on the dates payable to the extent that the Property Trustee has cash on
hand in the Property Account to permit such payment. The funds available for
distribution to the holders of the Series [B] Securities will be limited to
payments received by the Property Trustee in respect of the Related Note. If
Morgan Guaranty does not make interest payments on the Related Note, the
Property Trustee will not make distributions on the Series [B] Securities. Under
the Declaration, except as set forth below, if and to the extent Morgan Guaranty
does make interest payments on the Related Note, the Property Trustee is
obligated to make distributions on the Series [B] Securities on a Pro Rata Basis
(as defined below). The payment of distributions on the Series [B] Preferred
Securities is guaranteed by J.P. Morgan on a subordinated basis as and to the
extent set forth under "Description of the Guarantee." The Guarantee, when taken
together with J.P. Morgan's obligations under the Related Note Guarantee and its
obligations under the Declaration, provides a full and unconditional guarantee
from the time of issuance of the Series [B] Preferred Securities of amounts due
on the Series [B] Preferred Securities. Such Guarantee itself, however, covers
distributions and other payments on the Series [B] Preferred Securities only if
and to the extent that Morgan Guaranty has made a payment to the Property
Trustee of interest or principal on the Related Note. As used in this Prospectus
Supplement, the term "Pro Rata Basis" shall mean pro rata to each holder of
Series [B] Securities according to the aggregate principal amount of all Series
[B] Securities held by the relevant holder in relation to the aggregate
principal amount of the Series [B] Securities outstanding unless, in relation to
a payment, a Note Event of Default under the Related Note has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Series [B] Preferred Securities pro rata according
to the aggregate principal amount of the Series [B] Preferred Securities held by
the relevant holder in relation to the aggregate principal amount of all the
Series [B] Preferred Securities outstanding, and only after satisfaction of all
amounts owed to the holders of the Series [B] Preferred Securities to each
holder of Series [B] Common Securities pro rata according to the aggregate
principal amount of the Series [B] Common Securities held by the relevant holder
in relation to the aggregate principal amount of all Series [B] Common
Securities outstanding.
EVENTS OF DEFAULT
In the event that the Trust fails to pay dividends or other distributions on the
Series [B] Securities for 30 days following the date on which such payment was
due in accordance with the terms of such Series [B] Securities or if a Note
Event of Default occurs and is continuing with respect to the Related Note (a
"Note Event of Default"), an Event of Default under the Declaration will occur
and be continuing with respect to any outstanding Series [B] Securities. In such
event, the Declaration provides that (a) holders of a majority in principal
amount of Series [B] Preferred Securities, acting as a single class, may cause
the Trust, on behalf of holders of the Series [B] Securities, by written
direction to the Property Trustee, to waive any such Note Event of Default or to
enforce the Trust's rights under the Related Note against Morgan Guaranty or
under the Related Note Guarantee against J.P. Morgan or, in the case of any
failure to pay dividends or other distributions, to cause the Trust to declare
and pay such dividends or distributions; provided, that such payments shall be
paid solely from the proceeds of interest or other payments made on the Related
Note and received by the Trust on behalf of holders of the Series [B] Securities
and (b) in the case of a Note Event of Default that is attributable to the
failure of Morgan Guaranty to pay principal of or interest on the Related Note
on the date such principal or interest is otherwise payable (or in the case of a
redemption, on the redemption date) any holder of the outstanding ComPS may
directly institute a Direct Action on or after the date of the occurrence of
such Note Event of Default without first instituting a legal proceeding against
the Trust, the Property Trustee or any other person or entity. Notwithstanding
any
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payments made to such holder of ComPS by J.P. Morgan in connection with a Direct
Action, J.P. Morgan shall remain obligated to pay the principal of and interest
on the ComPS, and the rights of J.P. Morgan, as Guarantor, shall be subrogated
to the rights of such holder of ComPS with respect to payments on the ComPS to
the extent of any payment made by J.P. Morgan to such holder of ComPS in such
Direct Action. Notwithstanding the foregoing, the right of any holder of Series
[B] Securities to receive payments or distributions on such Series [B]
Securities in accordance with the terms of the Declaration or such Series [B]
Securities on or after the respective payment dates therefor, or to institute
suit for the enforcement of any such payment on or after such payment dates,
shall not be impaired without the consent of such holder.
RECORD HOLDERS
The Declaration provides that the Trustees of the Trust may treat the person in
whose name a certificate representing Series [B] Preferred Securities is
registered on the books and records of the Trust as the sole holder thereof and
of the Series [B] Preferred Securities represented thereby for purposes of
receiving distributions and for all other purposes and, accordingly, shall not
be bound to recognize any equitable or other claim to or interest in such
certificate or in the Series [B] Preferred Securities represented thereby on the
part of any person, whether or not the Trust shall have actual or other notice
thereof. Series [B] Preferred Securities will be issued in fully registered form
and will be represented by a global certificate registered on the books and
records of the Trust in the name of The Depositary Trust Company ("DTC") or its
nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal with DTC (or
any successor) for all purposes, including the payment of distributions and
receiving approvals, votes or consents under the Declaration and, except as
set forth in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning a beneficial interest in any Series
[B] Preferred Securities ("Series [B] Preferred Security Beneficial
Owners") registered in the name of and held by DTC or its nominee; and
(ii) the rights of Series [B] Preferred Security Beneficial Owners shall
be exercised only through DTC (or any successor) and shall be limited to
those established by law and agreements between such Series [B] Preferred
Security Beneficial Owners and DTC and/or its participants. With respect to
any Series [B] Preferred Securities registered in the name of and held by
DTC or its nominee, all notices and other communications required under the
Declaration shall be given to, and all distributions on such Series [B]
Preferred Securities shall be given or made to, DTC (or its successor).
DEBTS AND OBLIGATIONS
The Declaration provides that any person or entity extending credit to,
contracting with, or having any claim against, the Trust with respect to any
series of Securities may look only to the assets of the Trust associated with
such series to satisfy or enforce any debt, liability, obligation or expense
incurred, contracted for or otherwise existing with respect to such series. In
the Declaration, J.P. Morgan has agreed to pay for all debts and obligations
(other than with respect to the Securities) and all costs and expenses of the
Trust, including the fees and expenses of its Trustees and any taxes and all
costs and expenses with respect thereto, to which the Trust may become subject,
except for United States withholding taxes. The foregoing obligations of J.P.
Morgan under the Declaration are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed a (a "Creditor"), whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of J.P. Morgan directly
against J.P. Morgan and J.P. Morgan has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Trust or any other
person before proceeding against J.P. Morgan. J.P. Morgan has agreed in the
Declaration to execute such additional agreements as may be necessary or
desirable in order to give full effect to the foregoing.
The business address of the Trust is c/o J.P. Morgan & Co. Incorporated, 60 Wall
Street, New York, New York 10260-0060, telephone number (212) 648-2323.
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USE OF PROCEEDS
The Trust will invest the proceeds from the sale of the ComPS offered hereby and
the related Series [B] Common Securities in the Related Note of Morgan Guaranty,
the proceeds of which will be used by Morgan Guaranty for general corporate
purposes and for hedging its obligations under the Related Note.
At the time of the pricing of the ComPS, Morgan Guaranty hedged its anticipated
exposure under the Related Note and, subject to market conditions, Morgan
Guaranty expects that it will continue to hedge its exposure under the Related
Note from time to time following this offering of ComPS by taking long or short
positions in the Benchmark Commodity Contracts or in listed or over-the-counter
options contracts in, or other derivative or synthetic instruments related to,
several or all of the Benchmark Commodity Contracts. There can be no assurance
that Morgan Guaranty's initial hedging did not, and that its continued hedging
will not, affect the price of the Benchmark Commodity Contracts (and, as a
result, the economic terms and the subsequent value of the ComPS). In addition,
J.P. Morgan and its affiliates may from time to time purchase or otherwise
acquire a long or short position in the ComPS and may, in their sole discretion,
hold or resell such ComPS. Morgan Guaranty may also take positions in 3-month
Treasury Bills and in other types of appropriate financial instruments that may
become available in the future. To the extent Morgan Guaranty has a long hedge
position in several or all of the Benchmark Commodity Contracts or options
contracts in, or other derivative or synthetic instruments related to, several
or all of the Benchmark Commodity Contracts, Morgan Guaranty may liquidate a
portion or all of its holdings, as applicable, at or about the time of any Early
Redemption Date or the Stated Maturity of the Related Note (which correspond to
the Early Redemption Dates and the Stated Maturity of the ComPS). Depending on,
among other things, future market conditions, the aggregate amount and the
composition of those positions are likely to vary over time. Profits or losses
from any such position cannot be ascertained until that position is closed out
and any offsetting position or positions are taken into account. However, none
of the contracts or securities acquired in connection with any hedging activity
will be held for the benefit of holders of ComPS.
DESCRIPTION OF THE COMPS
The ComPS will be issued pursuant to the Declaration. The following summary of
the principal terms and provisions of the ComPS does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the Prospectus
and the Declaration, a copy of which is filed as an exhibit to the Registration
Statement relating to this Prospectus Supplement and the Prospectus.
GENERAL
The Principal Amount of each of the ComPS, which is initially equal to the Face
Amount, will vary over the life of the ComPS in relation to the Applicable Index
(the JPMCI Basket Total Return Index), reduced by the Factor. As described
herein, the Applicable Index will change based on the daily volume weighted
change in value of the Benchmark Commodity Contracts plus the Collateral Return
Component. The Principal Amount repayable on any Early Redemption Date, upon the
occurrence of any Special Event Redemption or at Stated Maturity will be
determined, pursuant to the terms described herein (including, without
limitation, the averaging of the Applicable Index over the Early Determination
Period or the Determination Period, as applicable, and the present-valuing of
the dividends and Principal Amount in connection with redemptions prior to
Stated Maturity), by comparing the level of the JPMCI Basket Total Return Index
set on the date of issuance of the ComPS with the level determined pursuant to
the terms hereof for any such date of redemption, reduced by the Factor.
The Declaration authorizes the Trust to issue Preferred Securities and Common
Securities. All of the Common Securities will be owned by J.P. Morgan. Payments
of dividends on and redemptions of principal of the ComPS and the related Series
[B] Common Securities will be made on a pro rata basis among the ComPS and the
related Series [B] Common Securities, except that upon the occurrence and during
the continuance of a Note Event of Default or upon the occurrence of a
liquidation of the Trust, the rights of the holders of the Series [B] Common
Securities to receive payment of periodic dividends and payments upon
liquidation, redemption or otherwise will be subordinated to the rights of the
holders of all Series
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[B] Preferred Securities. The Guarantee does not permit the incurrence of any
indebtedness by the Trust (other than any Preferred Securities thereof) while
any Preferred Securities are outstanding. The payment of distributions out of
money held by the Trust, and payments upon liquidation of the Trust, are
guaranteed by J.P. Morgan to the extent described under "Description of the
Guarantee". The Guarantee does not cover payment of distributions on, or
payments of principal in respect of, the ComPS when Morgan Guaranty has not made
payment of principal or interest, as applicable, on the Related Note. In such
event, the remedy of a holder of ComPS is to direct the Trust to enforce its
rights under the Related Note and the Related Note Guarantee with respect to
such Related Note. In addition, upon the occurrence and during the continuance
of a Note Event of Default that is attributable to the failure of Morgan
Guaranty to pay principal of or interest on the Related Note on the date such
principal or interest is otherwise payable (or in the case of a redemption, on
the redemption date), any holder of the outstanding ComPS may directly institute
a Direct Action on or after the date of the occurrence of such Note Event of
Default without first instituting a legal proceeding against the Trust, the
Property Trustee or any other person or entity. Notwithstanding any payments
made to such holder of ComPS by J.P. Morgan in connection with a Direct Action,
J.P. Morgan shall remain obligated to pay the principal of and interest on the
ComPS, and the rights of J.P. Morgan, as Guarantor, shall be subrogated to the
rights of such holder of ComPS with respect to payments on the ComPS to the
extent of any payment made by J.P. Morgan to such holder of ComPS in such Direct
Action. See "-- Voting Rights" and "Effect of Obligations Under the Guarantee,
the Related Note Guarantee and the Related Note".
DIVIDENDS
Dividends on the ComPS will be fixed at a rate per annum of [2.5]% of the Face
Amount of $[25] per Series [B] Preferred Security. The amount of dividends
payable for any period will be computed on the basis of a 360-day year of twelve
30-day months (and actual days elapsed (but never more than 30), in the case of
periods of less than a month) and will include the first day but exclude the
last day of such period.
Dividends on the ComPS will be cumulative, will accrue from and including the
Issue Date and will be payable quarterly in arrears on the last calendar day of
each March, June, September and December, commencing , 199[ ], when,
as and if available for payment.
Dividends on the ComPS will be payable to the holders thereof as they appear on
the books and records of the Trust on the relevant record dates, which, as long
as the ComPS remain in book-entry only form, will be one Business Day prior to
the relevant payment dates. Subject to any applicable laws and regulations and
the provisions of the Declaration, each such payment will be made as described
under "-- Book-Entry Only Issuance -- The Depository Trust Company".
In the event that the ComPS do not continue to remain in book-entry only form,
the Regular Trustees shall have the right to select relevant record dates, which
shall be at least one Business Day prior to the relevant payment dates. In the
event that any date on which dividends are to be made on the ComPS is not a
Business Day, then payment of the dividends payable on such date will be made on
the next succeeding Business Day (and without any interest or other payment in
respect of any such delay) except that, if such Business Day is in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. A "Business Day" shall mean any day other than Saturday, Sunday or
any other day on which banking institutions in The City of New York, New York
are permitted or required by any applicable law to close.
The payment of dividends on the ComPS out of moneys held by the Trust, on behalf
of holders of the Series [B] Securities, is guaranteed by J.P. Morgan on a
subordinated basis as and to the extent set forth under "Description of the
Guarantee". The Guarantee is effective from the time of issuance of the ComPS,
but the Guarantee covers dividends and other payments on the ComPS only if and
to the extent that Morgan Guaranty has made a payment to the Trust, on behalf of
holders of the Series [B] Securities, of interest or principal on the Related
Note, as the case may be.
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REDEMPTION AT STATED MATURITY
Unless previously redeemed pursuant to the optional or special redemption
provisions and subject to extension in the case of a Market Disruption Event (as
defined below), each of the outstanding ComPS will be redeemed by the Trust, in
cash, on the Stated Maturity, at the ComPS Redemption Price. The ComPS
Redemption Price is the sum of (a) the Redemption Value per Series [B] Preferred
Security plus (b) accrued but unpaid dividends on such ComPS to but excluding
the date of redemption.
CALCULATION OF REDEMPTION VALUE
The Principal Amount of each Series [B] Preferred Security is indexed to the
difference of (i) the performance of the Applicable Index, which is calculated
based on the change in value of certain commodity futures contracts included
from time to time in the JPM Indices (such contracts, from time to time, the
"Benchmark Commodity Contracts") plus the Collateral Yield Component, and (ii)
the Factor. On the date of this Prospectus Supplement, the Benchmark Commodity
Contracts and their weights are specified on page [ ] of the prospectus.
Subject to the more complete definitions and formulae contained in the
accompanying Prospectus, the Principal Amount of each Series [B] Preferred
Security payable at Stated Maturity, subject to extension in the case of a
Market Disruption Event (the "Redemption Value"), shall be determined by
multiplying the Face Amount of each Series [B] Preferred Security by the
difference between (a) a fraction, the numerator of which is the Applicable
Index Settlement Value and the denominator of which is the Applicable Index
Commencement Value, and (b) the Factor. For purposes of this Prospectus
Supplement, the "Applicable Index Settlement Value" means the arithmetic average
(rounded to four digits following the decimal point) of the daily values of the
Applicable Index for each day of the Determination Period (the period of ten
consecutive Trading Days on which no Market Disruption Event occurs commencing
immediately following the twentieth scheduled Business Day prior to Stated
Maturity), and the "Applicable Index Commencement Value" means [ ]. The
ComPS Redemption Price will first be payable on the later of the Stated Maturity
and the fifth Business Day after the completion of the Determination Period.
For a complete description and definition of a Total Return Index, see
"Description of ComPS -- Calculation of Redemption Value" and "The JPM
Indices -- Total Return Methodology" in the Prospectus. As defined in the
accompanying Prospectus under "Description of ComPS -- Market Disruption
Events", a Market Disruption Event, as determined by Morgan Guaranty, is the
occurrence of one or more of the following on any Trading Day with respect to
any Benchmark Commodity Contract underlying the Applicable Index, or an exchange
on which any Benchmark Commodity Contract is traded (a "Relevant Exchange"): (a)
a day on which the fluctuation of the price of any Benchmark Commodity Contract
underlying the Applicable Index is materially limited by the rules of a Relevant
Exchange setting the maximum or minimum price for such day (a "Limit Price");
(b) a day on which the official settlement price (the "Settlement Price") on the
Relevant Exchange of a Benchmark Commodity Contract underlying the Applicable
Index is the Limit Price; (c) the failure of a Relevant Exchange to determine,
announce or publish the Settlement Price with respect to a Benchmark Commodity
Contract underlying the Applicable Index; (d) the material suspension of trading
in any Benchmark Commodity Contract underlying the Applicable Index on a
Relevant Exchange; (e) the failure of trading to commence, or the permanent
discontinuation of trading, in any Benchmark Commodity Contract underlying the
Applicable Index on any Relevant Exchange and (f) the imposition of any material
limitation on trading in any Benchmark Commodity Contract underlying the
Applicable Index on any Relevant Exchange.
REMOVAL OF COMMODITY AND CHANGE IN BASKET COMPOSITION
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
As discussed in the accompanying Prospectus, the JPMCI Policy Committee advises
Morgan Guaranty with respect to, among other things, the composition of the JPM
Indices, the price sources upon which the JPM Indices are based (i.e., the
underlying futures contracts, including the Benchmark Commodity Contracts), and
the weightings and calculation methodology of the JPM Indices, with a view
toward maintaining the JPM Indices as appropriate commodity investment
benchmarks that serve as a measure of performance of the commodity markets. The
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inclusion requirements for the futures contracts underlying the JPM Indices
require that such futures contracts be sufficiently liquid and representative
price sources. It is possible, however, that any such underlying contract could
become less liquid or representative and, as a result, the JPMCI Policy
Committee may recommend a modification in the calculation methodology or the
contracts underlying the JPM Indices and, therefore, the Applicable Index. Any
such replacement contract (i) will be required to satisfy the JPMCI Inclusion
Criteria, as described in the Prospectus under the caption "The JPMCI Policy
Committee", (ii) must be traded in a market or with a self-regulator which has
established either (a) a comprehensive information sharing agreement with the
exchange, if any, on which the ComPS are then traded or (b) suitable alternative
arrangements with the Commission and (iii) will be with respect to the same
general commodity type as the contract being replaced (e.g., assuming the JPMCI
Policy Committee recommends a modification and assuming the requirements of
clauses (i) and (ii) are satisfied, a NYMEX crude oil futures contract could be
replaced by an International Petroleum Exchange crude oil futures contract).
Under no circumstances will the general commodity type underlying the futures
contract be changed (e.g., a crude oil futures contract could not be replaced by
a gold futures contract).
If at any time no contracts satisfying both clauses (i) and (ii) of the ComPS
Benchmark Contract Replacement Criteria can be found to serve as a Benchmark
Commodity Contract, the Benchmark Commodity Contract will be removed from the
basket. Unlike the ComPS on JPM Individual Indices, the Applicable Index
Settlement Value for a ComPS for which the Applicable Index is a JPM Basket
Index will not be determined early. Rather the Applicable Index will continue to
be calculated using the JPM Basket Index calculation methodology by excluding
the removed commodity, and using the new weights as determined by the JPMorgan
with the advice of the JPMCI Policy Committee. The new weights will adjust only
for the removed commodity, taking its old arithmetic percentage weight in the
Applicable Index and dividing it up among one or more of its subindex group
members (i.e., subindex groupings are energy, precious metals, base metals, and
softs). Thus, for example, the removal of an energy-related commodity will not
change the energy related weighting in the JPMCI basket, but it will change the
weightings some or all of the remaining energy components.
Additionally, if at any time the Benchmark Commodity Contracts then serving as
the basis for Calculating the Applicable 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 Commodity Contract, satisfying both clauses of the ComPS Benchmark
Contract Replacement Criteria which contract is subject to an amount of cost or
tax less than or equal to such increased amount or (y) if no contract satisfying
clause (x) of this paragraph is designated by Morgan Guaranty, to cause at its
option the removal of the affected Benchmark Commodity Contract from JPM
Indices.
Unlike the ComPS on JPM Individual Indices, the Applicable Index Settlement
Value for a ComPS for which the Applicable Index is a JPM Basket Index will not
be determined early. Rather the Applicable Index will continue to be calculated
using the JPM Basket Index calculation methodology by excluding the removed
commodity, and using new weights as determined by the Morgan Guaranty with the
advice of the JPMCI Policy Committee. The new weights will adjust only for the
removed commodity, taking its old arithmetic percentage weight in the Applicable
Index and dividing it up among one or more of its subindex group members
(subindex groups are energy, precious metals, base metals,and softs). Thus, for
example, the removal of an energy-related commodity will not change the energy
related weighting in the JPMCI basket, but it will change the weightings of some
or all of the remaining energy components. For example, if Natural Gas was to be
removed from the JPM Indices, its 7% weight in the JPMCI Basket would be divided
among the 3 remaining energy commodities (crude oil, heating oil, and unleaded
gasoline) as determined by Morgan Guaranty with the advice of the JPMCI Policy
Committee and the energy subindex weight will remain at 55% for the basket. See
"Risk Factors -- Potential Modification to the JPM Indices and/or the Applicable
Index".
OPTIONAL REDEMPTION
The ComPS will be subject to redemption prior to their Stated Maturity at the
election of the holders thereof on each [anniversary of Stated Maturity] prior
to the Stated Maturity, beginning [anniversary of
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Stated Maturity], 1999 (each, an "Optional Redemption Date"). In order to effect
an Optional Redemption, any such redeeming holder will be required to provide
notice of the number of ComPS to be redeemed on such Optional Redemption Date to
a Participant or Direct Participant in DTC, and such Participant or Direct
Participant must communicate such notice to DTC no earlier than 32 scheduled
Business Days prior to but no later than 22 scheduled Business Days prior to the
applicable Optional Redemption Date. The DTC will then provide notice to the
Trust (which will promptly notify the Property Trustee) or its Transfer Agent of
the total number of ComPS to be redeemed on the Optional Redemption Date (the
"Applicable Notice"). Each Applicable Notice will be provided by DTC to the
Trust by 12:30 p.m. New York time on the Business Day next succeeding the last
day of the applicable notice period. Each Applicable Notice will be irrevocable
upon receipt by the Trust or its Transfer Agent, and may not be withdrawn or
modified after such receipt. Additionally, the Early Determination Period will
not commence until the Trust has received the Applicable Notice and the
applicable Optional Redemption Date will be subject to extension in the case of
a Market Disruption Event. The redeeming holders will be entitled to the ComPS
Early Redemption Price for each Series [B] Preferred Security redeemed, which is
equal to (a) the Early Redemption Value for such ComPS plus (b) accrued and
unpaid dividends thereon to but excluding the scheduled Optional Redemption
Date. The Early Redemption Value of such ComPS shall be determined in accordance
with the formula specified in the Prospectus; provided that, for the purposes of
this Prospectus Supplement, "Unused Costs" shall equal [0.75% (three-quarters of
one percent)]. See "-- Book Entry Issuance -- The Depository Trust Company"
herein and "Description of ComPS -- Early Redemption Upon the Occurrence of a
Special Event or at the Election of the Holders of the ComPS" in the Prospectus.
SPECIAL EVENT REDEMPTION
The ComPS will be subject to redemption by the Trust prior to Stated Maturity,
at its option, upon the occurrence of a Tax Event or an Investment Company Event
(each, a "Special Event"), as discussed herein.
"Tax Event" means that the Trust shall have obtained an opinion of nationally
recognized independent tax counsel experienced in such matters (a "Tax Opinion")
to the effect that, as a result of (a) any amendment to, or change (including
any announced prospective change) in, the laws (or any regulations thereunder)
of the United States or any political subdivision or taxing authority thereof or
therein, (b) any amendment to, or change in, an interpretation or application of
any such laws or regulations by any legislative body, court, governmental agency
or regulatory authority (including the enactment of any legislation and the
publication of any judicial decision or regulatory determination), (c) any
interpretation or pronouncement that provides for a position with respect to
such laws or regulations that differs from the theretofore generally accepted
position or (d) any action taken by any governmental agency or regulatory
authority, which amendment or change is enacted, promulgated, issued or
announced or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after the date of this Prospectus
Supplement, there is more than an insubstantial risk that at such time or within
90 days of the date thereof (i) the Trust is or would be subject to United
States Federal income tax with respect to income accrued or received on the
Related Note, (ii) the interest payable on the Related Note is not, or would not
be, deductible by Morgan Guaranty for United States Federal income tax purposes,
(iii) the contingent principal in excess of the Face Amount, if any, payable on
the Related Note is not, or would not be, deductible by Morgan Guaranty for
United States Federal income tax purposes or (iv) the Trust is or would be
subject to more than a de minimis amount of other taxes, duties, assessments or
other governmental charges.
"Investment Company Event" means that the Trust shall have received an opinion
of a nationally recognized independent counsel experienced in such matters to
the effect that, as a result of the occurrence of a change in law or regulation,
a written change in interpretation or application of law or regulation by any
legislative body, court, governmental agency or regulatory authority or the
expiration or revocation of any exemption from any provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), obtained by the Trust (a
"Change in 1940 Act Law"), there is more than an insubstantial risk that the
Trust is or will be considered an "investment company" that is required to be
registered as such under
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the 1940 Act, which Change in 1940 Act Law becomes effective on or after the
date of this Prospectus Supplement.
If at any time a Tax Event or an Investment Company Event shall occur and be
continuing, J.P. Morgan shall elect to either:
(a) direct, within 90 days following the occurrence of such Special
Event, Morgan Guaranty to redeem the Related Note in whole or in part, upon
not less than 22 scheduled Business Days' notice to DTC, in which case the
Trust shall redeem in cash on a pro rata basis ComPS and related Series [B]
Common Securities having an aggregate Principal Amount equal to the
Principal Amount of the Related Note so redeemed, at a price per Series [B]
Preferred Security of the Early Redemption Value, plus an amount equal to
all accrued and unpaid dividends on such ComPS to but excluding such Early
Redemption Date; provided, that Morgan Guaranty shall only be entitled to
redeem the Related Note in part if such partial redemption is sufficient to
cause such Special Event to cease; or
(b) in the case of a Tax Event, allow the Related Note and the ComPS to
remain outstanding and indemnify the Trust for all taxes payable by it as a
result of such Tax Event (if any);
provided that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, that has no adverse effect on the Trust,
J.P. Morgan, Morgan Guaranty or the holders of ComPS, the Trust will pursue such
measure in lieu of redemption; provided further, that Morgan Guaranty shall have
no right to redeem the Related Note while the Trust is pursuing any such
ministerial action or reasonable measure unless the Special Event shall not have
been so eliminated by the 85th day following the occurrence thereof, in which
case J.P. Morgan shall be permitted to direct Morgan Guaranty to provide notice
to the Trust of the redemption of the Related Note.
Under current United States Federal income tax law, a redemption of ComPS upon
the occurrence of a Special Event, whether or not upon dissolution of the Trust,
would be a taxable event to such holders. See "United States Federal Income
Taxation".
REDEMPTION PROCEDURES
In the case of a redemption by a holder of ComPS on an Optional Redemption Date,
any such redeeming holder will be required to provide notice of the number of
ComPS to be redeemed on such Optional Redemption Date to a Participant in DTC,
and such Participant must communicate such notice to DTC no earlier than 32
scheduled Business Days prior to but no later than 22 scheduled Business Days
prior to the applicable Optional Redemption Date.
In the case of a redemption of ComPS upon the occurrence of a Special Event, the
Trust will provide notice of such redemption to the Transfer Agent and to DTC on
a date not less than 22 scheduled Business Days prior to such Early Redemption
Date stating, among other things, the date of such redemption.
The related Series [B] Common Securities will be redeemed on a pro rata basis
with the ComPS except that, in the case of any dissolution or liquidation in
which the assets of the Trust consisting of the Related Note and the proceeds
thereof are insufficient to repay in full the Principal Amount of all Series [B]
Preferred Securities then outstanding, all Series [B] Preferred Securities will
be redeemed prior to the redemption of any Series [B] Common Securities. ComPS
registered in the name of and held by DTC (as defined herein) or its nominee
will be redeemed in accordance with DTC's standard procedures. See "--Book-Entry
Only Issuance--The Depository Trust Company".
Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as
applicable, of the ComPS is conditioned upon delivery or book-entry transfer of
such ComPS (together with necessary endorsements) to the Trust at any time
(whether prior to, on or after the relevant Redemption Date) after the required
notice is given (to the extent such notice is required). See "--Book-Entry Only
Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price
or the ComPS Early Redemption Price, as applicable, for such ComPS will be made
by the delivery of cash no later than the applicable Settlement Date with
respect to such ComPS (subject to delay in the case of a Market Disruption
Event) or, if later, the time of delivery or book-entry transfer of such ComPS.
If the Trust, on behalf of holders of
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Series [B] Securities holds money sufficient to pay the ComPS Redemption Price
or the ComPS Early Redemption Price, as applicable, of the ComPS on the
applicable Settlement Date, then immediately at the close of business on such
Settlement Date, such ComPS will cease to be outstanding and dividends with
respect to such ComPS will cease to accrue, whether or not such ComPS are
delivered to the Trust, and all rights of the holder of such ComPS shall
terminate and lapse, other than the right to receive the ComPS Redemption Price
or the ComPS Early Redemption Price, as applicable, upon delivery of the ComPS.
Provided that Morgan Guaranty has paid to the Trust, on behalf of holders of
Series [B] Securities the required amount of cash due upon any redemption or at
the maturity of the Related Note, the Trust, on behalf of holders of Series [B]
Securities will irrevocably deposit with DTC no later than the close of business
on the applicable Settlement Date funds sufficient to pay the ComPS Redemption
Price or the ComPS Early Redemption Price, as applicable, payable with respect
to ComPS on such date and will give the Depositary irrevocable instructions and
authority to pay such amount to the holders of ComPS entitled thereto. See
"--Book-Entry Only Issuance--The Depository Trust Company". In the event that
any Settlement Date is not a Business Day, then payment of the ComPS Redemption
Price or the ComPS Early Redemption Price, as applicable, payable on such date
will be made on the next succeeding Business Day with the same force and effect
as if made on such date and no interest on such distributions will accrue from
and after such date, except that, if such Business Day falls in the next
calendar year such payment will be made on the immediately preceding Business
Day. In the event that payment of the ComPS Redemption Price or the ComPS Early
Redemption Price, as applicable, is improperly withheld or refused and not paid
by the Trust or by J.P. Morgan pursuant to the Guarantee, dividends on such
ComPS will continue to accrue from the original Redemption Date to the actual
date of payment by the Trust to DTC.
If a partial redemption as a result of a Special Event Redemption by Morgan
Guaranty of a part or all of the Related Note would result in the delisting of
the ComPS by any national securities exchange (or automated inter-dealer
quotation system, including The Nasdaq Stock Market ("Nasdaq")) on which the
ComPS are then listed, Morgan Guaranty may only redeem the Related Note in whole
and, as a result, the Trust may only redeem the ComPS in whole.
Subject to the foregoing and to applicable law (including, without limitation,
United States Federal securities laws), J.P. Morgan or its affiliates may, at
any time and from time to time, purchase outstanding ComPS by tender, in the
open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any dissolution of the Trust (a "Liquidation Event"), whether
voluntary or involuntary, the holders of ComPS on the date of such Liquidation
Event will be entitled to be paid out of the assets of the Trust consisting of
the Related Note and the proceeds thereof, and after satisfaction of liabilities
to creditors of the Trust with respect to Series [B] Securities, the Liquidation
Distribution. The "Liquidation Distribution" will be equal to (a) the Early
Redemption Value with respect to such ComPS (treating the date of such
distribution as the Early Redemption Date) plus (b) the amount of accrued and
unpaid dividends on such ComPS to but excluding the date of payment. To the
extent such assets of the Trust are insufficient to repay all amounts due to
holders of all the ComPS, holders of the ComPS then outstanding will be entitled
to a pro rata share of such assets of the Trust, based upon the relative
Principal Amounts of all ComPS outstanding. In addition, in the event that such
assets of the Trust exceed the amount necessary to pay to all holders of ComPS
the full amount of the Liquidation Distribution, such excess will be paid to the
holders of the Series [B] Common Securities, in an amount sufficient to cover
the Liquidation Distribution in respect of all Series [B] Common Securities, and
thereafter pro rata to the holders of the ComPS and the Series [B] Common
Securities.
Pursuant to the Declaration, the legal existence of the Trust shall terminate on
November 21, 2105.
VOTING RIGHTS
Except as described herein and under "--Modification of the Declaration" and
under "J.P. Morgan Index Funding Company I -- Voting", and as otherwise required
by law and the Declaration, the holders of the ComPS will have no voting rights.
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Pursuant to the provisions of the Guarantee, certain amendments to or
modifications of the Guarantee may only be effected with the approval of a
majority in aggregate Principal Amount at such time of the ComPS and all other
affected Preferred Securities. See "Description of the Guarantee--Modification
of the Guarantee".
Pursuant to the provisions of the Related Note, the Related Note Guarantee and
the Declaration, certain amendments to or modifications of the Related Note or
the Related Note Guarantee may only be effected with the approval of a majority
in aggregate Principal Amount at such time of the ComPS. See "Description of the
Related Note--Modification of the Related Note".
Notwithstanding that holders of ComPS are entitled to vote or consent under any
of the circumstances described above, any of the ComPS that are owned at such
time by J.P. Morgan or any entity directly or indirectly controlling or
controlled by, or under direct or indirect common control with, J.P. Morgan,
shall not be entitled to vote or consent and shall, for purposes of such vote or
consent, be treated as if such ComPS were not outstanding.
The procedures by which holders of ComPS may exercise their voting rights are
described below under "--Book-Entry Only Issuance--The Depository Trust Company"
and in the Declaration.
MODIFICATION OF THE DECLARATION
The Declaration may be amended or modified if approved by a written instrument
executed by a majority in interest of the holders of Common Securities; provided
that, if any proposed amendment provides for (i) any action that would adversely
affect the powers, preferences or special rights of the ComPS or (ii) the
dissolution of the Trust other than pursuant to the terms of the Declaration,
then the holders of all affected outstanding Preferred Securities (or, in the
case of an event described in clause (ii), all Preferred Securities, including
the ComPS) of the Trust voting together as a single class will be entitled to
vote on such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of holders of not less than a majority in
aggregate Principal Amount of all affected outstanding Preferred Securities (or,
in the case of an event described in clause (ii), all Preferred Securities) of
the Trust affected thereby.
The Declaration further provides that it may be amended without the consent of
the holders of the ComPS to (i) cure any ambiguity, (ii) correct or supplement
any provision in the Declaration that may be defective or inconsistent with any
other provision of the Declaration, (iii) add to the covenants, restrictions or
obligations of J.P. Morgan, (iv) conform to changes in, or a change in
interpretation or application of, certain requirements of the 1940 Act by the
Commission and (v) conform to certain requirements of the Code with respect to
the characterization of the Trust for U.S. Federal income tax purposes, so long
as such amendment does not adversely affect the rights, preferences or
privileges of the holders of the ComPS.
LISTING
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering, there has been no market for the ComPS.
ACCOUNTING TREATMENT
The financial statements of the Trust will be included in the consolidated
financial statements of J.P. Morgan, with the ComPS included on the balance
sheet as "Long-term debt not qualifying as risk-based capital", with a footnote
disclosing that (1) the Trust is a wholly-owned subsidiary of J.P. Morgan, (2)
the sole assets of the Trust are the Related Note and other similar notes,
specifying the principal amount, interest rate and maturity of each, and (3)
considered together, the Guarantee and the Related Note Guarantee and J.P.
Morgan's obligations under the Declaration constitute a full and unconditional
guarantee by J.P. Morgan with respect to the ComPS.
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MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into or be replaced by,
or convey, transfer or lease its properties and assets substantially as an
entirety to, any corporation or other entity.
BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
DTC will act as securities depositary for the ComPS. The ComPS will be issued
only as fully-registered securities registered in the name of Cede & Co. (DTC's
nominee). One or more fully-registered global ComPS certificates, representing
the total aggregate number of ComPS, will be issued and will be deposited with
DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). DTC holds securities that its
participants ("Participants") deposit with DTC. DTC also facilitates the
settlement among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others, such as securities brokers and
dealers, banks and trust companies that clear transactions through or maintain a
direct or indirect custodial relationship with a Direct Participant either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Commission.
Purchases of ComPS within the DTC system must be made by or through Direct
Participants, which will receive a credit for the ComPS on DTC's records. The
ownership interest of each actual purchaser of each Series [B] Preferred
Security ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased ComPS. Transfers of ownership
interests in the ComPS are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in the ComPS, except
in the event that use of the book-entry system for the ComPS is discontinued.
To facilitate subsequent transfers, all ComPS deposited by Participants with DTC
are registered in the name of DTC's nominee, Cede & Co. The deposit of ComPS
with DTC and their registration in the name of Cede & Co. effect no change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the ComPS. DTC's records reflect only the identity of the Direct Participants to
whose accounts such ComPS are credited, which may or may not be the Beneficial
Owners. The Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by
Direct Participants to Indirect Participants and by Direct and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time.
In the case of a Special Event Redemption, redemption notices shall be sent to
Cede & Co. If less than all of the ComPS are being redeemed, DTC will reduce the
amount of the interest of each Direct Participant in such ComPS in accordance
with its procedures. In the case of an Optional Redemption, redemption notices
shall be provided by Beneficial Owners and Participants to DTC in accordance
with its procedures. DTC will then provide the Applicable Notice to the Trust or
its Transfer Agent of the number of ComPS to be redeemed on the applicable
Optional Redemption Date. The Applicable Notice will be irrevocable upon receipt
by the Trust or its Transfer Agent, and may not be withdrawn or modified after
such receipt.
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Although voting with respect to the ComPS is limited, in those cases where a
vote is required, neither DTC nor Cede & Co. will itself consent or vote with
respect to ComPS. Under its usual procedures, DTC would mail an Omnibus Proxy to
the Trust as soon as possible after the record date. The Omnibus Proxy assigns
Cede & Co. consenting or voting rights to those Direct Participants to whose
accounts the ComPS are credited on the record date (identified in a listing
attached to the Omnibus Proxy). J.P. Morgan and the Trust believe that the
arrangements among DTC, Direct and Indirect Participants and Beneficial Owners
will enable the Beneficial Owners to exercise rights equivalent in substance to
the rights that can be directly exercised by a holder of an interest in the
assets of the Trust consisting of the Related Note and the proceeds thereof.
Dividend payments on the ComPS will be made to DTC. DTC's practice is to credit
Direct Participants' accounts on the relevant payment date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payments on such payment date. Payments by
participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name", and such payments will
be the responsibility of such Participant and not of DTC, the Trust or J.P.
Morgan, subject to any statutory or regulatory requirements to the contrary that
may be in effect from time to time. Payment of dividends to DTC is the
responsibility of the Trust, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursement of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with respect
to the ComPS at any time by giving reasonable notice to the Trust. Under such
circumstances, in the event that a successor securities depositary is not
obtained, ComPS certificates are required to be printed and delivered.
Additionally, the Trust may decide to discontinue use of the system of
book-entry transfers through DTC (or any successor depositary) with respect to
the ComPS. In that event, certificates for the ComPS will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system has
been obtained from sources that J.P. Morgan believes to be reliable, but neither
J.P. Morgan nor the Trust takes responsibility for the accuracy thereof.
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
In the event the ComPS do not remain in book-entry only form, the following
provisions will apply:
Payment of distributions and payments on redemption of the ComPS will be
payable, the transfer of the ComPS will be registrable and ComPS will be
exchangeable for ComPS of other denominations of a like aggregate principal
amount at the principal corporate trust office of the Property Trustee in The
City of New York; provided that payment of distributions may be made at the
option of the Regular Trustees on behalf of the Trust by check mailed to the
address of the persons entitled thereto and that the payment on redemption of
ComPS will be made only upon surrender of such ComPS to the Property Trustee.
U.S. Bank Trust National Association or one of its affiliates will act as
registrar and transfer agent for the ComPS. U.S. Bank Trust National Association
will also act as paying agent and, with the consent of the Regular Trustees, may
designate additional paying agents.
Registration of transfers of ComPS will be effected without charge by or on
behalf of the Trust, but upon payment (with the giving of such indemnity as the
Trust may require) in respect of any tax or other governmental charges that may
be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of ComPS after such ComPS have been called for redemption.
GOVERNING LAW
The Declaration and the ComPS will be governed by and interpreted in accordance
with the laws of the State of Delaware.
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DESCRIPTION OF THE RELATED NOTE
Set forth below is a summary of the terms of the Related Note in which the Trust
will invest the proceeds from the issuance and sale of the ComPS and the related
Series [B] Common Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Prospectus and the Related Note, the form of which is filed as an exhibit to
the Registration Statement relating to this Prospectus Supplement and the
Prospectus. Certain capitalized terms are used herein as defined in the Related
Note.
GENERAL
The Related Note will be issued as an unsecured, unsubordinated obligation of
Morgan Guaranty, limited in initial principal amount to approximately $ ,
such amount being the sum of the aggregate Initial Public Offering Price shown
on the cover page hereof for the ComPS and the related Series [B] Common
Securities issued in connection therewith.
The Related Note is not subject to a sinking fund provision. The entire
Principal Amount of the Related Note will mature and become due and payable,
together with any accrued and unpaid interest thereon, if any, on the Stated
Maturity (subject to extension in the case of a Market Disruption Event),
subject to the prior redemption of the Related Note in whole or in part at the
option of the holders of ComPS or in certain circumstances upon the occurrence
of a Special Event. If Morgan Guaranty redeems the Related Note in whole or in
part, the Trust must redeem on a pro rata basis ComPS and related Series [B]
Common Securities having an aggregate Principal Amount equal to the Principal
Amount of the Related Note so redeemed at the ComPS Early Redemption Price. See
"Description of the ComPS--Redemption at Stated Maturity; --Special Event
Redemption".
RELATED NOTE REDEMPTION PRICE
The amount payable under the Related Note by Morgan Guaranty to the Property
Trustee, on behalf of holders of Series [B] Securities, at any time shall equal
(a) the Principal Amount of the Related Note at such time plus (b) any accrued
but unpaid distributions due to the Property Trustee (the "Related Note
Redemption Price"). The Principal Amount of the Related Note at any time shall
equal the aggregate Principal Amount of outstanding ComPS and the related Series
[B] Common Securities at such time. The timing and amount of payments on the
Related Note mirror the aggregate financial terms of the ComPS.
SUBORDINATION
Morgan Guaranty's obligations under the Related Note are effectively
subordinated to all liabilities (including indebtedness) of its consolidated and
unconsolidated subsidiaries. Moreover, Morgan Guaranty's subsidiaries may incur
indebtedness and other liabilities and have obligations to third parties.
Generally, the claims of such third parties to the assets of Morgan Guaranty's
subsidiaries will be superior to those of Morgan Guaranty as a stockholder, and,
therefore, the Related Note may be deemed to be effectively subordinated to the
claims of such third parties.
Upon any payment or distribution of all or substantially all of the assets of
Morgan Guaranty or in the event of any insolvency, bankruptcy, receivership,
liquidation, dissolution, reorganization or other similar proceeding, whether
voluntary or involuntary, relative to Morgan Guaranty or its creditors, the
holders of all Senior Indebtedness of Morgan Guaranty will be entitled to
receive payment pari passu and pro rata with the Trust. However, depositors in
Morgan Guaranty will have a preference over holders of Senior Indebtedness of
Morgan Guaranty upon any such event.
As used in the Related Note, the term "Senior Indebtedness" means the principal
of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for
money borrowed, whether outstanding as of the date hereof or hereafter created,
issued or incurred (other than Morgan Guaranty's obligations to its depositors),
except any indebtedness expressly subordinated to such Senior Indebtedness, and
(b) any deferrals, renewals or extensions of any such Senior Indebtedness. The
Related Note does not limit the amount of Senior Indebtedness which Morgan
Guaranty may incur.
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INTEREST
The Related Note shall bear interest at the rate of [2.5]% per annum on the Face
Amount from the original date of issuance, payable quarterly in arrears on the
last calendar day of each March, June, September and December (each, an
"Interest Payment Date"), commencing , 199[ ], to the Trust, subject to
certain exceptions, at the close of business on the Business Day next preceding
the relevant Interest Payment Date.
The amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. The amount of interest payable for any
period shorter than a full monthly period for which interest is computed will be
computed on the basis of the actual number of days elapsed (but never more than
30) per 30-day month. In the event that any date on which interest is payable on
the Related Note is not a Business Day, payment of the interest payable on such
date will be made on the next succeeding Business Day with the same force and
effect as if made on such date and no interest on such distributions will accrue
from and after such date, except that, if such Business Day is in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
OPTIONAL REDEMPTION
The Trust shall have the right to call for redemption prior to each Optional
Redemption Date a Principal Amount of the Related Note sufficient to allow it to
pay the ComPS Early Redemption Price to any holders of ComPS who exercise their
right to redeem any or all of such holders' ComPS and in respect of a pro rata
portion of the related Series [B] Common Securities. See "Description of the
ComPS--Optional Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, Morgan Guaranty will have the right to
elect to, under certain circumstances, (a) redeem the Related Note at the
Related Note Redemption Price or (b) in the case of a Tax Event, allow the
Related Note to remain outstanding and indemnify the Trust for any taxes payable
by it as a result of such Tax Event. See "Description of the ComPS--Special
Event Redemption".
EVENTS OF DEFAULT
The Note Events of Default are described in "Description of the Related Notes--
Note Events of Default" in the Prospectus of which this Prospectus Supplement
constitutes a part. A default or event of default under any Senior Indebtedness
would not constitute a default or event of default under the Related Note. A
default or event of default under the Related Note would not constitute a
default or event of default under any related note pertaining to any other
series of Securities.
MODIFICATION OF THE RELATED NOTE
The Related Note contains provisions permitting Morgan Guaranty and the Property
Trustee, with the consent of the holders of not less than a majority in
Principal Amount of the outstanding ComPS, to modify the Related Note, subject
to certain exceptions. See "Description of the Related Notes--Modification of
the Related Notes" in the Prospectus of which this Prospectus Supplement
constitutes a part.
CONSOLIDATION, MERGER AND SALE
The Related Note provides that Morgan Guaranty may, without the consent of the
Trust or the holders of the ComPS, consolidate or merge with or into, or sell or
transfer all or substantially all of its property or assets to, any corporation
or association; provided that (i) the corporation (if other than Morgan
Guaranty) or association formed by or resulting from any such consolidation or
merger or which shall have received such property or assets shall have assumed
Morgan Guaranty's obligations under the Related Note and (ii) immediately after
giving effect to such transaction, Morgan Guaranty or such successor corporation
shall not be in default under the terms of the Related Note.
GOVERNING LAW
The Related Note will be governed by, and construed in accordance with, the laws
of the State of New York.
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MISCELLANEOUS
Morgan Guaranty will have the right at all times to assign any of its rights or
obligations under the Related Note to J.P. Morgan or to a direct or indirect
wholly-owned subsidiary of Morgan Guaranty; provided that, in the event of any
such assignment, Morgan Guaranty will remain jointly and severally liable for
all such obligations. Subject to the foregoing, the Related Note will be binding
upon and inure to the benefit of the parties thereto and their respective
successors and assigns. The Related Note is not a deposit or other obligation of
a bank and is not insured by the Federal Deposit Insurance Corporation or any
other federal agency. The obligations of Morgan Guaranty under the Related Note
are pari passu with all present and future Senior Indebtedness of Morgan
Guaranty (as defined herein) and are junior to Morgan Guaranty's obligations to
its depositors in the event of a receivership. In addition, J.P. Morgan's
obligations under the Guarantee and the Related Note Guarantee and Morgan
Guaranty's obligations under the Related Note are effectively subordinated to
all liabilities (including indebtedness) of the respective consolidated and
unconsolidated subsidiaries of each.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee that will
be delivered by J.P. Morgan for the benefit of the holders of ComPS and other
Preferred Securities. The terms of the Guarantee will be those set forth in the
Guarantee Agreement. The following summary does not purport to be complete and
is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Prospectus and the form of Guarantee Agreement,
which is filed as an exhibit to the Registration Statement relating to this
Prospectus Supplement and the Prospectus. The Guarantee will be separately
qualified under the Trust Indenture Act and will be held by the Property
Trustee, acting in its capacity as indenture trustee with respect thereto.
GENERAL
Pursuant to the Guarantee, J.P. Morgan irrevocably and unconditionally agrees,
on a subordinated basis, to pay in full to the holders of the ComPS the
Guarantee Payments (as defined herein) (except to the extent paid by the Trust),
as and when due, regardless of any defense, right of set-off or counterclaim
that the Trust may have or assert. The following payments with respect to ComPS
issued by the Trust (the "Guarantee Payments"), to the extent not paid by the
Trust, will be subject to the Guarantee (without duplication): (i)(A) any
accrued and unpaid dividends that are required to be paid on the ComPS and (B)
the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable,
but if and only if to the extent that, in each case, Morgan Guaranty has made
payment of interest or principal on the Related Note, as the case may be, and
(ii) upon a Liquidation Event (other than in connection with the redemption of
all of the ComPS at Stated Maturity or redemption in whole of the Related Note)
the lesser of (A) the Liquidation Distribution to the extent the Trust has funds
available therefor and (B) the amount of assets of the Trust consisting of the
Related Note and the proceeds thereof remaining available for distribution to
holders of the ComPS upon such Liquidation Event. J.P. Morgan's obligation to
make a Guarantee Payment may be satisfied by direct payment of the required
amounts by J.P. Morgan to the holders of ComPS or by causing the Trust to pay
such amounts to such holders. The Guarantee will be effective with respect to
the ComPS from the time of issuance of the ComPS to the extent Morgan Guaranty
has made payments under the Related Note. If Morgan Guaranty does not make
payments on the Related Note, the Trust may not pay distributions on the ComPS
issued and may not have funds available therefor. See "Description of the
Related Note".
So long as any ComPS or other Preferred Securities remain outstanding, J.P.
Morgan will not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to, any of its common
stock or preferred stock or make any Guarantee Payment with respect thereto if
at such time (i) J.P. Morgan shall be in default with respect to its Guarantee
Payments or other payment obligations under the Guarantee or (ii) there shall
have occurred any event of default under the Declaration; provided, however,
that the foregoing restrictions shall not apply to (a) dividends, redemptions,
purchases, acquisitions, distributions or payments made by J.P. Morgan by way of
issuance of
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shares of its capital stock, (b) payments of accrued dividends by J.P. Morgan
upon the redemption, exchange or conversion of any preferred stock of J.P.
Morgan as may be outstanding from time to time in accordance with the terms of
such preferred stock, (c) cash payments made by J.P. Morgan in lieu of
delivering fractional shares upon the redemption, exchange or conversion of any
preferred stock of J.P. Morgan as may be outstanding from time to time in
accordance with the terms of such preferred stock, (d) repurchases, redemptions
or other acquisitions of shares of capital stock of J.P. Morgan in connection
with any employment contract, benefit plan or other similar arrangement with or
for the benefit of employees, officers, directors of consultants, or (e) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of such rights pursuant thereto.
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
holders of Preferred Securities (in which case no consent will be required), the
Guarantee may be amended by J.P. Morgan and the Property Trustee only with the
prior approval of the holders of not less than a majority in aggregate Principal
Amount at such time of the holders of each series of affected Preferred
Securities, voting as a single class. All guarantees and agreements contained in
the Guarantee shall bind the successors, assignees, receivers, trustees and
representatives of J.P. Morgan and shall inure to the benefit of the holders of
the ComPS.
REMEDIES OF HOLDERS
The Guarantee will be deposited with U.S. Bank Trust National Association, as
indenture trustee, to be held for the benefit of holders of the ComPS and
Preferred Securities of other series. U.S. Bank Trust National Association shall
enforce such Guarantee on behalf of holders of the ComPS and Preferred
Securities of other series. The holders of not less than a majority in aggregate
principal amount of the ComPS and Preferred Securities of each affected series
have the right to direct the time, method and place of conducing any proceeding
for any remedy available in respect of the Guarantee, including the giving of
directions to U.S. Bank Trust National Association. In addition, any holder of
ComPS and Preferred Securities of other series may institute a legal proceeding
directly against J.P. Morgan to enforce its right under the Guarantee, without
first instituting a legal proceeding against the Trust or any other person or
entity. Subject to the award by a court of competent jurisdiction of legal fees
in connection with any such legal proceeding, each holder will be required to
bear its own costs in connection with instituting a legal proceeding directly
against J.P. Morgan, which cost may be significant.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate with respect to the ComPS upon full payment of the
aggregate ComPS Early Redemption Price or ComPS Redemption Price, as applicable,
or upon full payment of the amounts payable in accordance with the Declaration
upon liquidation of the Trust. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of ComPS must
restore payment of any sums paid under such ComPS or the Guarantee (e.g., upon a
subsequent bankruptcy of Morgan Guaranty or J.P. Morgan).
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of J.P. Morgan and will
rank (i) subordinate and junior in right of payment to all other liabilities of
J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock
outstanding as of the date hereof of J.P. Morgan and with respect to obligations
under other guarantee agreements which J.P. Morgan may enter into from time to
time to the extent that such agreements provide for comparable guarantees by
J.P. Morgan of payment on other preferred securities issued by the predecessor
of the Trust or by other trusts sponsored by J.P. Morgan and (iii) senior to
J.P. Morgan's common stock. The terms of the ComPS provide that each holder of
ComPS by acceptance thereof agrees to the subordination provisions and other
terms of the Guarantee.
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The Guarantee will constitute a guarantee of payment and not of collection (that
is, the guaranteed party may institute a legal proceeding directly against the
guarantor to enforce its rights under the Guarantee without instituting a legal
proceeding against any other person or entity).
GOVERNING LAW
The Guarantee will be governed by and construed and interpreted in accordance
with the laws of the State of New York.
DESCRIPTION OF THE RELATED NOTE GUARANTEE
Set forth below is a summary of information concerning the Related Note
Guarantee that will be delivered by J.P. Morgan for the benefit of the Property
Trustee for the benefit of holders of Securities of various series. The terms of
the Related Note Guarantee will be those set forth in the Related Note Guarantee
Agreement. The following summary does not purport to be complete and is subject
in all respects to the provisions of, and is qualified in its entirety by
reference to, the Prospectus and the form of Related Note Guarantee Agreement,
which is filed as an exhibit to the Registration Statement relating to this
Prospectus Supplement and the Prospectus. The Related Note Guarantee will be
held by the Property Trustee (for the benefit of holders of Series [B]
Securities), as the holder of the Related Note.
GENERAL
Pursuant to the Related Note Guarantee, J.P. Morgan irrevocably and
unconditionally agrees, on a subordinated basis, to pay in full to the Property
Trustee for the benefit of holders of Series [B] Securities the Related Note
Guarantee Payments (as defined herein), as and when due, regardless of any
defense, right of set-off or counterclaim that Morgan Guaranty may have or
assert with respect to its obligation to make such Related Note Guarantee
Payments. The following payments with respect to the Related Note issued by
Morgan Guaranty (the "Related Note Guarantee Payments") will be subject to the
Related Note Guarantee (without duplication): (i) any accrued and unpaid
distributions that are required to be paid by Morgan Guaranty on the Related
Note and (ii) any principal payable by Morgan Guaranty under the Related Note,
as and when payable by Morgan Guaranty. J.P. Morgan's obligation to make a
Related Note Guarantee Payment may be satisfied by direct payment of the
required amounts by J.P. Morgan to the Property Trustee for the benefit of
holders of Series [B] Securities or by causing Morgan Guaranty to pay such
amounts to the Property Trustee for the benefit of holders of Series [B]
Securities. The Related Note Guarantee will be a full and unconditional
guarantee with respect to the Related Note from the time of issuance of the
Related Note.
MODIFICATION OF THE RELATED NOTE GUARANTEE; ASSIGNMENT
The Related Note Guarantee may be amended only with the prior approval of the
Property Trustee; provided that no such amendment shall adversely affect the
holders of the Preferred Securities without the consent of a majority in
aggregate Principal Amount at such time of the holders of Preferred Securities
of each affected series, voting as a single class. 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 Property Trustee (for the benefit of holders of Series [B]
Securities) as the holder of the Related Note.
REMEDIES OF THE TRUST AND HOLDERS OF THE COMPS
The Trust has the right to direct the time, method and place of conducting any
proceeding for any remedy available to it in respect of the Related Note
Guarantee. Pursuant to the Declaration, the holders of a majority in Principal
Amount of the ComPS in certain circumstances (including a payment default under
the Related Note Guarantee by J.P. Morgan) have the right to direct the Trust,
through the Property Trustee, to exercise certain of its rights as the holder of
the Related Note Guarantee. In addition, upon the occurrence and during the
continuance of a Note Event of Default that is attributable to the failure of
Morgan Guaranty to pay the principal of or interest on the Related Note on the
date such principal or interest is otherwise payable (or in the case of a
redemption, on the redemption date), J.P. Morgan
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acknowledges that a holder of the outstanding ComPS may directly institute
Direct Action on or after the date of the occurrence of such Note Event of
Default. Notwithstanding any payments made to such holder of ComPS by J.P.
Morgan in connection with a Direct Action, J.P. Morgan shall remain obligated to
pay the principal of and interest on the ComPS, and the rights of J.P. Morgan,
as Guarantor, shall be subrogated to the rights of such holder of ComPS with
respect to payments on the ComPS to the extent of any payment made by J.P.
Morgan to such holder of ComPS in such Direct Action.
TERMINATION OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will terminate with respect to the Related Note upon
full payment of the Related Note Redemption Price (as defined below) of the
Related Note. The Related Note Guarantee will continue to be effective or will
be reinstated with respect to the Related Note, as the case may be, if at any
time the Property Trustee, on behalf of holders of Series [B] Securities, must
restore payment of any sums paid under the Related Note or the Related Note
Guarantee (e.g., upon a subsequent bankruptcy of J.P. Morgan).
STATUS OF THE RELATED NOTE GUARANTEE
The Related Note Guarantee will constitute an unsecured obligation of J.P.
Morgan and will rank (i) subordinate and junior in right of payment to all other
liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or
preference stock outstanding as of the date hereof of J.P. Morgan and (iii)
senior to J.P. Morgan's common stock. The terms of the ComPS provide that each
holder of ComPS by acceptance thereof agrees to the subordination provisions and
other terms of the Related Note Guarantee.
The Related Note Guarantee will constitute a guarantee of payment and not of
collection (that is, the Property Trustee may institute a legal proceeding
directly against J.P. Morgan to enforce its rights under the Related Note
Guarantee without instituting a legal proceeding against Morgan Guaranty).
GOVERNING LAW
The Related Note Guarantee will be governed by and construed and interpreted in
accordance with the laws of the State of New York.
EFFECT OF OBLIGATIONS UNDER THE GUARANTEE,
THE RELATED NOTE GUARANTEE AND THE RELATED NOTE
As set forth in the Declaration, the sole purpose of the Trust is to issue the
Series [B] Securities and other Securities of separate series, and to invest the
proceeds from such issuances in the Related Note and other debt obligations of
Morgan Guaranty.
As long as payments of interest and other payments are made when due on the
Related Note, such payments will be sufficient to cover dividends and payments
due on the ComPS because of the following factors: (i) the Principal Amount of
the Related Note will be equal to the sum of the aggregate Principal Amount of
the ComPS and the related Series [B] Common Securities outstanding at any time;
(ii) the interest rate and the interest and other payment dates on the Related
Note will match the dividend rate and dividend and other payment dates for the
ComPS and the related Series [B] Common Securities; (iii) J.P. Morgan shall pay
all, and the Trust shall not be obligated to pay, directly or indirectly, any,
costs and expenses of the Trust other than principal of and dividends on the
ComPS and the related Series [B] Common Securities; and (iv) the Declaration
further provides that the J.P. Morgan shall not cause the Trust (on behalf of a
series of Securities or otherwise) to, among other things, engage in any
activity that is not consistent with the purposes of the Trust.
Payments of dividends (to the extent Morgan Guaranty has made payments of
interest on the Related Note) and other payments due on the ComPS (to the extent
Morgan Guaranty has made payment of principal and other amounts on the Related
Note) are guaranteed by J.P. Morgan as and to the extent set forth under
"Description of the Guarantee" herein and in the Prospectus. If Morgan Guaranty
does not make interest payments on the Related Note, it is expected that the
Trust will not have sufficient funds to pay dividends on the ComPS. The
Guarantee is a full and unconditional guarantee from the time of its
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issuance but does not apply to any dividends or other payments unless and until
Morgan Guaranty has made payment of interest or other payments on the Related
Note.
If Morgan Guaranty fails to make interest or other payments on the Related Note
when due, the Declaration provides a mechanism whereby the holders of the ComPS,
using the procedures described in the Declaration, may direct the Property
Trustee, on behalf of holders of the Series [B] Securities, to enforce its
rights under the Related Note and the Related Note Guarantee. If J.P. Morgan
fails to perform any of its payment or other obligations with respect to the
ComPS under the Guarantee, any holder of ComPS may institute a legal proceeding
directly against J.P. Morgan to enforce such holder's rights under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other person or entity.
The Related Note Guarantee by J.P. Morgan guarantees to the Property Trustee the
payment of any distributions on and principal of the Related Note as provided
pursuant to the terms of the Related Note, at such times and in such amounts as
provided therein. In addition, upon the occurrence and during the continuance of
a Note Event of Default that is attributable to the failure of Morgan Guaranty
to pay the principal of or interest on the Related Note on the date such
principal or interest is otherwise payable (or in the case of a redemption, on
the redemption date), J.P. Morgan acknowledges that a holder of the outstanding
ComPS may directly institute Direct Action on or after the date of the
occurrence of such Note Event of Default. Notwithstanding any payments made to
such holder of ComPS by J.P. Morgan in connection with a Direct Action, J.P.
Morgan shall remain obligated to pay the principal of and interest on the ComPS,
and the rights of J.P. Morgan, as Guarantor, shall be subrogated to the rights
of such holder of ComPS with respect to payments on the ComPS to the extent of
any payment made by J.P. Morgan to such holder of ComPS in such Direct Action.
J.P. Morgan's obligations under the Related Note Guarantee will be subordinated
and junior in right of payment to all liabilities of J.P. Morgan, pari passu
with the most senior preferred stock outstanding as of the date hereof of J.P.
Morgan and senior to the common stock of J.P. Morgan.
The Declaration provides that J.P. Morgan will pay, or cause to be paid, all
debts and obligations (other than with respect to the ComPS and other Preferred
Securities to the extent set forth herein and in the Prospectus) and all costs
and expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject. The Declaration provides
that any person to whom such debts, obligations, costs and expenses are owed
will have the right to enforce J.P. Morgan's obligations in respect of such
debts, obligations, costs and expenses directly against J.P. Morgan without
first proceeding against the Trust.
J.P. Morgan, through its obligations under the Guarantee, the Related Note
Guarantee and the Declaration, taken together, will provide a full and
unconditional guarantee, on a subordinated basis, of payments due on the ComPS.
See "Description of the Guarantee -- General" and "Description of the Related
Note Guarantee -- General" herein and in the accompanying Prospectus.
Upon any voluntary or involuntary dissolution of the Trust, the holders of
Series [B] Securities will be entitled to receive, after satisfaction of
liabilities to creditors of the Trust with respect to Series [B] Securities, the
Liquidation Distribution. Holders of ComPS will be entitled to the benefits of
the Guarantee with respect to the Liquidation Distribution. See "Description of
the ComPS -- Liquidation Distribution Upon Dissolution". Upon any voluntary or
involuntary liquidation or bankruptcy of Morgan Guaranty, the Property Trustee
as holder of the Related Note on behalf of the Trust would rank equally in right
of payment with creditors of Morgan Guaranty (other than any depositors
therein), including all Senior Indebtedness, and would be entitled to receive
payment in full of principal, premium, if any, and interest, before any
stockholders of Morgan Guaranty receive payments of distributions.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a summary of the material United States Federal income tax
consequences of the purchase, ownership and disposition of ComPS by U.S. Holders
(as defined herein). Unless otherwise stated, this
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summary deals only with ComPS held as capital assets by holders who purchase the
ComPS upon original issuance ("Initial Holders").
This summary does not address tax considerations applicable to investors that
may be subject to special U.S. Federal income tax treatment, such as dealers in
securities or persons that will hold the ComPS as a position in a "straddle"
(within the meaning of Section 1092 of the Internal Revenue Code of 1986, as
amended (the "Code")), or as part of a "conversion transaction" (within the
meaning of Section 1258 of the Code) or "synthetic security" or other integrated
investment comprised of ComPS and one or more other investments. This summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. Dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of ComPS. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the ComPS.
This summary is based on the Code, Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis. In the opinion
of Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Trust
("Tax Counsel"), the statements contained in the following summary, to the
extent they constitute matters of law, accurately described the material U.S.
Federal income tax consequences to Initial Holders of the acquisition, ownership
and disposition of ComPS. For purposes of this summary, a "U.S. Holder" shall
mean a holder who is (i) a citizen or a resident of the United States (or any
state thereof), (ii) a corporation, or other entity taxable as a corporation,
created or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate or trust, the income of which is subject to
U.S. Federal income tax regardless of its source, and (iv) any other person
subject to U.S. Federal income tax on net income.
CLASSIFICATION OF THE TRUST
The Trust will be classified as "grantor trust" for Federal income tax purposes.
As a result, a holder of ComPS will be treated as owning an undivided beneficial
interest in the Related Note. Accordingly, for U.S. Federal income tax purposes,
each holder will be required to report income, gain or loss as if the holder
directly held its pro rata share of the Related Note. No portion of the income
accrued by holders will be eligible for the corporate dividends received
deduction.
CLASSIFICATION OF THE RELATED NOTE
It is believed that the Related Note is properly treated as a contingent payment
debt instrument subject to the Treasury regulations promulgated in June 1996
governing such instruments (the "Contingent Payment Regulations"). The Trust
intends to treat the Related Note accordingly. However, no ruling is being
requested from the Internal Revenue Service (the "IRS") and there is no direct
authority addressing the characterization of the Related Note. Other
characterizations might result in consequences different than those discussed
below.
U.S. HOLDERS OF COMPS
The following discussion of the tax consequences to U.S. Holders assumes both
that the Trust will be treated as a grantor trust for U.S. Federal income tax
purposes and that the Related Note will be treated as a contingent payment debt
instrument. If these assumptions are not correct, holders could be subject to
different consequences than those discussed below. The following discussion also
assumes that the Initial Holders purchased ComPS at the Face Amount.
INTEREST INCOME
Under the Contingent Payment Regulations, the original issue discount ("OID")
rules of the Code apply to a contingent payment debt instrument. OID must be
accrued each year at a rate equal to the "comparable yield" for fixed debt
issued by the issuer of the instrument (or, if a hedge is available to the
issuer, the fixed yield on the combination of the contingent debt instrument and
the hedge). The comparable yield is determined at the time of issuance of the
obligations and cannot be less than the applicable federal rate
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("AFR") on the issue date, which is the rate on United States Treasury
obligations of comparable maturities. After the "comparable yield" is
determined, a projected payment schedule for the instrument must be determined
as of the issue date, which schedule remains fixed through the term of the debt
instrument. Such schedule includes all noncontingent payments and projected
contingent payments, and must result in a yield to investors equal to the
comparable yield. If the actual amount of a contingent payment differs from the
projected amount, adjustments to income accruals to holders are made at that
time to account for the difference.
In the case of ComPS, all payments except the final payment are fixed. The
"comparable yield" for the ComPS will be the AFR applicable for the Issue Date,
which is [ %]. For tax purposes, the projected payment at Stated Maturity is
[ ]. Moreover, the rate of stated dividends will be less than the AFR. As
a result, for each period prior to the Stated Maturity, an Initial Holder will
be required to accrue a greater amount of OID into income than the actual cash
payments received during that period. Actual cash payments of interest are not
separately includible in income.
In the case of U.S. Holder of ComPS that is a tax exempt organization, the
interest would not be subject to the tax on unrelated business taxable income
unless borrowing or activities of the organization itself caused the interest to
be subject to such tax.
SALE OR OTHER DISPOSITION OF COMPS
Assuming that an Initial Holder purchased ComPS for their Face Amount, the
Initial Holder's tax basis in ComPS will initially be their Face Amount. The
Initial Holder's adjusted tax basis in ComPS will be the initial basis increased
by the amount of OID accrued as income and reduced by the amount of cash
payments received. For an Initial Holder who holds ComPS until the Stated
Maturity, the adjusted tax basis at maturity would be approximately $[ ].
On the sale, exchange, early redemption or retirement of ComPS (a
"Disposition"), the Initial Holder generally will recognize gain or loss in an
amount equal to the difference between the proceeds of the Disposition and the
adjusted tax basis of the ComPS. Any gain will be ordinary income. In the case
of a U.S. Holder of ComPS that is a tax exempt organization, such gain would not
be subject to the tax on unrelated business taxable income unless borrowing or
activities of the organization itself caused the gain to be subject to such tax.
Any loss will be an ordinary loss to the extent of the aggregate OID previously
accrued by the Initial Holder on the ComPS, and any additional loss generally
will be a capital loss (long term capital loss if at the time of the Disposition
the ComPS had been held for more than one year).
SECONDARY MARKET PURCHASERS
If a secondary market purchaser purchases ComPS at a premium or discount as
compared to the adjusted tax basis of an Initial Holder (as described under
"Sale or Other Disposition of ComPS"), then, to the extent such premium or
discount reflects an increase or decrease in the value of the stated dividend
payments over the remaining life of the ComPS (due to changes in market interest
rates or otherwise), an adjustment must be made to the amount of OID to be
included in the income of the secondary market purchaser over the remaining life
of the ComPS. Any premium or discount so allocated to the ComPS dividend
payments will result in a decrease or increase, respectively, in the periodic
amount of OID to be included in the holder's income prior to Stated Maturity.
To the extent any such premium or discount reflects an increase or decrease in
the expected payment at Stated Maturity, such premium or discount would not
change the amount of OID the holder would include in income over the remaining
life of the ComPS. Rather, such premium or discount would be reflected in the
holder's tax basis in the ComPS and would decrease or increase, respectively,
the holder's gain or loss on sale or at maturity of the ComPS.
Notwithstanding the foregoing, under a safe harbor for exchange traded
instruments, a secondary market purchaser can elect to allocate all the premium
or discount (no matter how arising) on a pro-rata basis to daily accruals of OID
over the remaining term of the ComPS, but only to the extent that the resulting
yield to maturity on the ComPS is no less than the AFR determined on the
holder's purchase date for the ComPS. (The applicable AFR can be determined from
the weekly IRS Internal Revenue Bulletin.) For
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secondary market purchasers who purchase ComPS at a premium or discount,
respectively, the election might decrease or increase, respectively, the OID
income reportable over the life of the ComPS as compared to that which would be
reported under the general rule.
Any adjustment to OID accruals is limited to the premium or discount at which
the ComPS are acquired as compared to the adjusted tax basis of an Initial
Holder at the time of such acquisition (as described under "Sale or Other
Disposition of ComPS"). As a result, for example, if market interest rates have
decreased since the initial issuance of the ComPS, but the size of the purchase
premium also reflects a decrease in the expected payment at Stated Maturity,
then the reduction of OID accruals due to the acquisition of ComPS at a premium
may not fully reflect the decrease in market interest rates.
In all cases the tax basis to a secondary market purchaser will be the purchase
price, increased by the amount of OID accrued as income (taking into account the
adjustment for premium or discount), and reduced by the amount of cash payments
received. Secondary market purchasers should consult their individual tax
advisors regarding the consequences of purchasing and holding ComPS.
NON-UNITED STATES HOLDERS
In the case of a holder of ComPS that is not a U.S. Holder, it is believed that
payments made with respect to ComPS will not be subject to U.S. withholding tax;
provided that such holder complies with applicable certification requirements
(and does not directly or indirectly own 10% or more of the voting stock of J.P.
Morgan). Any gain realized upon the redemption, sale or other disposition of
ComPS by a holder that is not a U.S. Holder will generally not be subject to
U.S. Federal income tax if (i) such gain is not effectively connected with a
U.S. trade or business of such holder and (ii) in the case of an individual,
such individual is not present in the United States for 183 days or more in the
taxable year of the redemption, sale or other disposition or the gain is not
attributable to a fixed place of business maintained by such individual in the
United States.
INFORMATION REPORTING TO HOLDERS
Holders of ComPS that are not exempt from information reporting requirements
will receive annually, on IRS Form 1099, information concerning OID determined
for an Initial Holder and attributable to such holder's ComPS. For the reasons
noted above, the information reported on such form may not be accurate for
secondary market purchasers.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the ComPS may be subject to a
"backup" withholding tax of 31% unless the holder complies with certain
identification requirements. Any withheld amounts will be allowed as a credit
against the holder's U.S. Federal income tax, provided that the required
information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMPS, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan (a
"Plan") subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the ComPS. Accordingly, among other factors, the fiduciary should consider
whether the investment would satisfy the prudence and diversification
requirements of ERISA and would be consistent with the documents and instruments
governing the Plan.
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Section 406 of ERISA and Section 4975 of the Code prohibits Plans, as well as
individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA), certain church plans (as defined in Section
3(33) of ERISA) and foreign plans (as described in Section 4(b)(5) of ERISA) are
not subject to the requirements of ERISA or Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S. Department
of Labor (the "DOL"), the assets of the Trust would be deemed to be "plan
assets" of a Plan for purposes of ERISA and Section 4975 of the Code if "plan
assets" of the Plan were used to acquire an equity interest in the Trust and no
exception were applicable under the Plan Assets Regulation. An "equity interest"
is defined under the Plan Assets Regulation as any interest in an entity other
than an instrument which is treated as indebtedness under applicable local law
and which has no substantial equity features.
Pursuant to an exception contained in the Plan Assets Regulation, the assets of
the Trust would not be deemed to be "plan assets" of investing Plans if the
ComPS are (i) freely transferable, (ii) part of a class of securities that is
owned by 100 or more investors independent of the issuer and of one another at
the conclusion of the offering and (iii) either (a) part of a class of
securities registered under Section 12(b) or 12(g) of the Exchange Act, or (b)
sold to a Plan as part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act and the class of
securities of which such security is a part is registered under the Exchange Act
within 120 days (or such later time as may be allowed by the Commission) after
the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred. There are no restrictions imposed on the
transfer of ComPS and the ComPS will be sold as part of an offering registered
under Section 12(b) of the Exchange Act. The Representative (as defined in
"Underwriting") will notify the Trust as to whether or not the ComPS will be
held by at least 100 separately named persons at the conclusion of the offering.
The Trust will not determine whether the 100-investor requirement of the
exception for publicly offered securities is satisfied as to the ComPS.
Prospective purchasers may obtain a copy of the notification described in the
second preceding sentence from the Trust at 60 Wall Street, New York, NY
10260-0060.
In the event assets of the Trust were determined to constitute "plan assets",
certain transactions involving the Trust could be deemed to constitute direct or
indirect prohibited transactions under ERISA and Section 4975 of the Code with
respect to a Plan. For example, if J.P. Morgan, Morgan Guaranty and/or any
affiliates of either is a Party in Interest with respect to an investing Plan
(either directly or by reason of its status as the sponsor of the Trust or of
any of J.P. Morgan's or Morgan Guaranty's other subsidiaries), the extension of
credit between the J.P. Morgan or Morgan Guaranty and/or any affiliates of
either and the Trust (as represented by the Related Note, the Related Note
Guarantee and the Guarantee) would likely be prohibited by Section 406(a)(1)(B)
of ERISA and Section 4975(c)(1)(B) of the Code, unless exemptive relief were
available under an applicable administrative exemption (see below).
The DOL has issued five prohibited transaction class exemptions ("PTCEs") that
may provide exemptive relief for direct or indirect prohibited transactions
resulting from the purchase or holding of the ComPS. Those class exemptions are
PTCE 96-23 (for certain transactions determined by in-house asset managers),
PTCE 95-60 (for certain transactions involving insurance company general
accounts), PTCE 91-38 (for certain transactions involving bank collective
investment funds), PTCE 90-1 (for certain transactions involving insurance
company pooled separate accounts) and PTCE 84-14 (for certain transactions
determined by independent qualified professional asset managers).
If the Representative does not notify the Trust, as described above, that the
ComPS will be expected to be held by at least 100 separately named persons, the
ComPS may not be purchased or held by any Plan, any entity whose underlying
assets include "plan assets" by reason of any Plan's investment in the entity (a
"Plan Asset Entity") or any person investing "plan assets" of any Plan, unless
such purchaser or holder is eligible for the exemptive relief available under
PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. In such event,
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any purchaser, transferee or holder of the ComPS or any interest therein will be
deemed to have represented by its purchase, acquisition or holding thereof that
(a) it is not a Plan or a Plan Asset Entity and is not purchasing such
securities on behalf of or with "plan assets" of any Plan, (b) it is eligible
for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14
with respect to such purchase or holding or (c) such purchase, aquisition or
holding will not otherwise give rise to a prohibited transaction under ERISA or
the Code for which a prohibited transaction is unavailable. See "Notice to
Investors."
In any case, J.P. Morgan, Morgan Guaranty and/or any affiliates of either may be
considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to certain Plans. The acquisition and ownership of ComPS by a Plan (or
by an individual retirement arrangement or other plans described in Section
4975(e)(i) of the Code) with respect to which J.P. Morgan, Morgan Guaranty or
any of its affiliates of either is considered a party in interest or a
disqualified person may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless such ComPS are acquired pursuant to
and in accordance with an applicable exemption. As a result, Plans with respect
to which J.P. Morgan, Morgan Guaranty or any affiliates of either is a party in
interest or a disqualified person should not acquire ComPS unless a statutory or
administrative exemption from the prohibited transaction provisions of ERISA or
the Code applies.
Due to the complexity of these rules and the penalties that may be imposed upon
persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the ComPS on
behalf of or with "plan assets" of any Plan consult with their counsel regarding
the potential consequences if the assets of the Trust were deemed to be "plan
assets" and the availability of exemptive relief from the prohibited transaction
provisions of ERISA and the Code.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
the date hereof (the "Underwriting Agreement"), the Trust has agreed to sell to
the underwriters named below (the "Underwriters") and the Underwriters, for whom
JPMSI is acting as representative (the "Representative"), have severally agreed
to purchase, the respective number of ComPS set forth opposite their names
below. In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the ComPS offered
hereby if any of the ComPS are purchased. Under certain circumstances, the
commitments of nondefaulting Underwriters may be increased as set forth in the
Underwriting Agreement.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF COMPS
<S> <C>
J.P. Morgan Securities Inc. .............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
---------------
Total........................................... [ ]
</TABLE>
The Underwriters initially propose to offer the ComPS, in part, directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus Supplement, and, in part, to certain securities dealers at such price
less a concession of $ per Series [B] Preferred Security. [The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
Series [B] Preferred Security to certain brokers and dealers.] After the initial
offering, the public offering price and such concessions may be changed.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Series [B]
Preferred Securities. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase, in the open market to cover syndicate shorts or to stabilize the
price of the Series [B] Preferred Securities. Finally, the underwriting
syndicate may reclaim selling concessions allowed for distributing the Series
[B] Preferred Securities in the offering, if the syndicate repurchases
previously distributed Series [B] Preferred Securities in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Series [B]
Preferred Securities above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
In view of the fact that the proceeds of the sale of the ComPS will ultimately
be used to purchase the Related Note of Morgan Guaranty, the Underwriting
Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters'
Compensation") to the Underwriters $ per Series [B] Preferred Security (or
$ in the aggregate) for the account of the Underwriters.
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering, there has been no market for the ComPS.
The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
This Prospectus Supplement and related the Prospectus may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and
sales related to secondary market transactions in the ComPS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
The Underwriters, certain agents and their associates may be customers of,
engage in transactions with, and perform services for, J.P. Morgan in the
ordinary course of business.
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The Representative is an indirect, wholly-owned subsidiary of J.P. Morgan. The
participation of the Representative in the offer and sale of the ComPS complies
with the requirements of Rule 2720 of the Rules of Conduct of the National
Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of
securities of an affiliate and complies with any restrictions imposed on such
Representative by the Board of Governors of the Federal Reserve System.
Because the NASD is expected to view the Preferred Securities offered hereby as
interests in a direct participation program, the offering is being made in
compliance with Rule 2810 of the NASD's Rules of Conduct. Offers and sales of
Preferred Securities will be made only to (i) "qualified institutional buyers",
as defined in Rule 144A under the Act; (ii) institutional "accredited
investors", as defined in Rule 501(a)(1)-(3) of Regulation D under the Act or
(iii) investors for whom an investment in non-convertible investment grade
commodity-indexed preferred securities is appropriate. The Underwriters may not
confirm sales to any accounts over which they exercise discretionary authority
without the prior written approval of the transaction by the customer.
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LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Series [B]
Securities will be passed upon by Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware, special Delaware counsel to the Trust. The validity of the Series [B]
Securities offered hereby will be passed upon by Gene A. Capello, Vice President
and Assistant General Counsel of J.P. Morgan, and by Cravath, Swaine & Moore,
New York, New York, counsel for the Representative.
EXPERTS
The audited financial statements contained in J.P. Morgan's Annual Report on
Form 10-K for the year ended December 31, 1997 (included in J.P. Morgan's Annual
Report to Stockholders), are incorporated by reference in this Prospectus
Supplement in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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ANNEX I
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used in
the Prospectus Supplement. The Declaration, the Guarantee, the Related Note
Guarantee and the Related Note may contain more complete definitions of certain
of the terms defined herein, as well as definitions of certain other terms not
defined herein, and reference should be made to the Declaration, the Guarantee,
the Related Note Guarantee and the Related Note, as applicable, for complete
definitions of such terms.
AMEX....................the American Stock Exchange.
APPLICABLE INDEX........the JPMCI Basket Total Return Index.
APPLICABLE INDEX
COMMENCEMENT
VALUE...................
APPLICABLE INDEX
SETTLEMENT VALUE........the arithmetic average of the values of the Applicable
Index during the Determination Period; provided,
however, that if the Applicable Index Settlement Value
has been permanently determined prior to such time, the
Applicable Index Settlement Value shall equal the value
so determined.
APPLICABLE INDEX EARLY
SETTLEMENT VALUE........for each day of the Early Determination Period, the
value of the Applicable Index for such day of the Early
Determination Period; provided, however, that if the
Applicable Index Settlement Value has been permanently
determined prior to such time, the Applicable Index
Early Settlement Value shall equal the value so
determined.
BACKWARDATION...........describes a period during which the prices of
longer-dated Benchmark Commodity Contracts are below the
prices of shorter-dated contracts.
BENCHMARK COMMODITY
CONTRACTS...............the commodity contracts specified in the accompanying
Prospectus.
BUSINESS DAY............any day other than a Saturday, Sunday or any other day
on which banking institutions in The City of New York,
New York, are permitted or required by any applicable
law to close.
CODE....................the Internal Revenue Code of 1986, as amended.
COLLATERAL YIELD
COMPONENT...............a component of the value of the Applicable Index,
computed on the fluctuating index value of the
Applicable Index at the most recent auction rate for
3-month U.S. Treasury Bills or any successor rate
thereto with a maturity of 3 months or less or, if no
such rate has been determined in the 13 days prior to
the date of determination, as Morgan Guaranty may
determine in its reasonable discretion.
COMMISSION..............the Securities and Exchange Commission.
COMMON SECURITIES.......the Series [B] Common Securities and any other common
securities issued by the Trust (or its predecessor).
COMPS EARLY REDEMPTION
PRICE...................On any Early Redemption Date, an amount equal to (i) the
Early Redemption Value per Series [B] Preferred Security
plus (ii) accrued and unpaid dividends to but excluding
the date of redemption.
A-1
<PAGE> 114
COMPS REDEMPTION
PRICE...................at Stated Maturity, an amount equal to (i) the
Redemption Value per Series [B] Preferred Security plus
(ii) accrued and unpaid dividends to but excluding
Stated Maturity.
CONTANGO................describes a period during which the prices of
longer-dated Benchmark Commodity Contracts are above the
prices of shorter-dated contracts.
DECLARATION.............the amended and restated declaration of trust among J.P.
Morgan & Co. Incorporated, as sponsor, and the trustees
named therein dated as of March 26, 1998.
DETERMINATION PERIOD....the 10 consecutive Trading Days on which no Market
Disruption Event occurs immediately following the 20th
Business Day prior to Stated Maturity.
DIVIDENDS...............cumulative cash dividends of [2.5]% per annum on the
Face Amount (calculated on the basis of a 360 day year
of twelve 30-day months) accruing from the Issue Date
and payable quarterly in arrears.
DTC.....................the Depository Trust Company.
EARLY DETERMINATION
PERIOD..................the 10 consecutive Trading Days which are Business Days
on which U.S. Treasury Bond markets are open and on
which no Market Disruption Event occurs immediately
following the 20th Business Day prior to the applicable
Early Redemption Date.
EARLY REDEMPTION
VALUE...................the average for the 10 days of the Early Determination
Period of the discounted present value of the future
dividends and the indexed Principal Amount of the ComPS,
as set forth in the accompanying Prospectus under
"Description of ComPS--Early Redemption Upon the
Occurrence of a Special Event or at the Election of the
Holders of the ComPS".
EARLY REDEMPTION
DATE....................each Optional Redemption Date and the date of any
Special Event Redemption or Liquidation Distribution.
ERISA...................the Employee Retirement Income Security Act of 1974, as
amended.
EXCHANGE ACT............the Securities Exchange Act of 1934, as amended.
FACE AMOUNT.............[$25].
FACTOR..................[0.15 (15 percent)], which is designed to offset the
costs of issuing and hedging the indexation of the
ComPS.
GUARANTEE...............the Guarantee Agreement executed by J.P. Morgan on
behalf of the holders of each series of Preferred
Securities.
GUARANTEE PAYMENTS......without duplication, (i)(A) any accrued and unpaid
dividends that are required to be paid on the ComPS and
(B) the ComPS Early Redemption Price or the ComPS
Redemption Price, as applicable, but if and only to the
extent that, in each of case, Morgan Guaranty has made a
payment of interest or principal, as the case may be, on
the Related Note and (ii) upon a Liquidation Event
(other than in connection with the redemption of all the
ComPS upon the maturity or redemption of the Related
Note), the lesser of (A) the Liquidation Distribution to
the extent the Trust, on behalf of holders of Series [B]
Securities, has funds available therefor, and (B) the
amount of assets of the Trust consisting of the Related
Note and the proceeds
A-2
<PAGE> 115
thereof remaining available for distribution to holders
of all Series [B] Preferred Securities upon such
Liquidation Event.
INITIAL HOLDERS.........holders who purchase any ComPS upon original issuance.
INTEREST PAYMENT DATE...with respect to the Related Note, the last calendar day
of each March, June, September and December, beginning
, 199[ ].
INVESTMENT COMPANY
EVENT...................the receipt by the Trust 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
Trust (a "Change in 1940 Act Law"), there is more than
an insubstantial risk that the Trust 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.............. , 199[ ].
JPM BASKET INDICES......JPM Indices that are based upon at least two or more
underlying commodities (whether computed on an excess
return or total return basis).
JPM INDICES.............variations of the JPMCI, including the permutations of
the JPMCI in the form of sub-indices, that may be based
upon one or more commodities (whether computed on an
excess return or total return basis) and that have been
or may be originated and calculated by Morgan Guaranty.
JPM INDIVIDUAL
INDICES.................JPM Indices that are based upon only one underlying
commodity (whether computed on an excess return or total
return basis).
JPMCI...................The J.P. Morgan Commodity Index.
LIQUIDATION
DISTRIBUTION............in respect of any Liquidation Event, the sum of (a) the
Early Redemption Value (treating the date of such
distribution as the Early Redemption Date), plus (b) the
amount of accrued and unpaid dividends on such Series
[B] Preferred Security to but excluding the date of
payment.
LIQUIDATION EVENT.......any dissolution of the Trust, whether voluntary or
involuntary.
LME.....................the London Metals Exchange.
MARKET DISRUPTION
EVENT...................the occurrence of one or more of the following on any
Trading Day with respect to any Benchmark Commodity
Contract underlying the Applicable Index, or an exchange
on which any Benchmark Commodity Contract is traded (a
"Relevant Exchange"): (a) a day on which the fluctuation
of the price of any Benchmark Commodity Contract
underlying the Applicable Index is materially limited by
the rules of a Relevant Exchange setting the maximum or
minimum price for such day (a "Limit Price"); (b) a day
on which the official settlement price (the "Settlement
Price") on the Relevant Exchange of a Benchmark
Commodity Contract underlying the Applicable Index is
the Limit Price; (c) the failure of a Relevant Exchange
to determine, announce or publish the Settlement Price
with respect to a Benchmark Commodity Contract
underlying the Applicable Index; (d) the material
suspension of trading in any Benchmark Commodity
Contract
A-3
<PAGE> 116
underlying the Applicable Index on a Relevant Exchange;
(e) the failure of trading to commence, or the permanent
discontinuation of trading, in any Benchmark Commodity
Contract underlying the Applicable Index on any Relevant
Exchange; and (f) the imposition of any material
limitation on trading in any Benchmark Commodity
Contract underlying the Applicable Index on any Relevant
Exchange.
NASDAQ..................The Nasdaq Stock Market.
1940 ACT................the Investment Company Act of 1940, as amended.
NOTE EVENT OF DEFAULT...(i) default for 30 days in the payment of interest on
the Related Note; (ii) default in payment of principal
amount at the Stated Maturity or any amount payable upon
any redemption of the Related Note; (iii) failure by
Morgan Guaranty for 90 days after receipt of notice to
it to comply with any of its covenants or agreements
contained in the Related Note; and (iv) certain events
of bankruptcy, insolvency, receivership or
reorganization involving Morgan Guaranty or certain
affiliates.
NYMEX...................the New York Mercantile Exchange.
OPTIONAL REDEMPTION.....the redemption of ComPS by the holders thereof on any
Optional Redemption Date for the ComPS Early Redemption
Price.
OPTIONAL REDEMPTION
DATE....................each prior to Stated Maturity, subject to
extension in the case of (i) delay in the provision by
DTC of the Applicable Notice or (ii) the occurrence and
continuance of a Market Disruption Event.
PREFERRED SECURITIES....the ComPS and any other preferred securities issued by
the Trust.
PRINCIPAL AMOUNT........at any time, (i) in the case of ComPS, the Redemption
Value or Early Redemption Value, as applicable, as if
determined as of such time, and (ii) in the case of the
Related Note, the principal amount thereof at such time
determined pursuant to the terms thereof.
REDEMPTION DATE.........either the Stated Maturity or an Early Redemption Date,
as applicable.
REDEMPTION VALUE........at Stated Maturity, the Face Amount per Series [B]
Preferred Security multiplied by a fraction, the
numerator of which is the Applicable Index Settlement
Value and the denominator of which is the Applicable
Index Commencement Value.
RELATED NOTE............the [2.5]% unsecured, unsubordinated debt obligation of
Morgan Guaranty due .
ROLLOVER PERIOD.........the period during which each replacement of
shorter-dated Benchmark Commodity Contracts with
longer-dated Benchmark Commodity Contracts as the basis
for the change in value of the Applicable Index occurs.
SECURITIES..............the Series [B] Securities and any other securities
issued by the Trust.
SECURITIES ACT..........the Securities Act of 1933, as amended.
SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, the principal of,
premium, if any, and interest on (a) all indebtedness of
Morgan Guaranty for money borrowed, whether outstanding
as of the date hereof or hereafter created, issued or
incurred (other than Morgan Guaranty's obligations to
its depositors), except any indebtedness expressly
subordinated to such Senior Indebtedness, and (b) any
deferrals, renewals or extensions of any such Senior
Indebtedness.
A-4
<PAGE> 117
SERIES [B] COMMON
SECURITIES..............the common securities of the Trust representing an
undivided beneficial interest in the Related Note (and
the proceeds thereof), to be owned by J.P. Morgan.
SERIES [B] SECURITIES...the ComPS and the Series [B] Common Securities.
SPECIAL EVENT...........either a Tax Event or an Investment Company Event.
SPECIAL REDEMPTION......upon the occurrence and during the continuation of a
Special Event, Morgan Guaranty will have the right to
redeem the Related Note in whole or in part for cash at
the Related Note Redemption Price, with the result that
the Trust will redeem on a pro rata basis ComPS and
related Series [B] Common Securities in an equal
Principal Amount for cash at the ComPS Early 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 Note, and the Trust
shall have called for redemption on a pro rata basis an
equal Principal Amount of the ComPS and related Series
[B] Common Securities.
STATED MATURITY......... , [2001].
TAX COUNSEL.............Cravath, Swaine & Moore, special tax counsel to J.P.
Morgan and the Trust.
TAX EVENT...............the receipt by the Trust 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 Trust 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 Trust is or would be subject to more than a
de minimis amount of other taxes, duties or other
governmental charges.
TRADING DAY.............any day on which open-outcry trading on either the NYMEX
or the LME is scheduled to occur or occurs.
A-5
<PAGE> 118
TRUST INDENTURE ACT.....the Trust Indenture Act of 1939, as amended.
UNUSED COSTS............[0.75]% ([three-quarters of one] percent).
A-6
<PAGE> 119
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE TRUST OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF J.P. MORGAN, OR THE
TRUST SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary of the Offering........................ S-4
The Offering................................... S-5
Risk Factors................................... S-10
J.P. Morgan & Co. Incorporated................. S-21
J.P. Morgan Index Funding Company I............ S-22
Use of Proceeds................................ S-27
Description of the ComPS....................... S-27
Description of the Related Note................ S-37
Description of the Guarantee................... S-39
Description of the Related Note Guarantee...... S-41
Effect of Obligations Under the Guarantee, the
Related Note Guarantee and the Related
Note......................................... S-42
United States Federal Income Taxation.......... S-43
ERISA Considerations........................... S-46
Underwriting................................... S-49
Legal Matters.................................. S-51
Experts........................................ S-51
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. A-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
J.P. Morgan & Co. Incorporated................. 3
J.P. Morgan Index Funding Company I............ 6
Use of Proceeds................................ 12
Consolidated Ratios of J.P. Morgan............. 12
Description of All Securities.................. 12
Description of the ComPS....................... 13
Risk Factors with Respect to All Preferred
Securities................................... 25
Risk Factors with Respect to ComPS............. 26
The Underlying Markets......................... 33
The JPM Indices................................ 37
Description of the Related Notes............... 48
Description of the Guarantee................... 50
Description of the Related Note Guarantee...... 52
Plan of Distribution........................... 53
Legal Matters.................................. 55
Experts........................................ 55
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. A-1
</TABLE>
======================================================
======================================================
SERIES [B]
COMMODITY-INDEXED
PREFERRED SECURITIES
INDEXED TO THE
JPMCI BASKET
TOTAL RETURN INDEX
J.P. MORGAN INDEX
FUNDING COMPANY I
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
J.P. MORGAN & CO.
INCORPORATED
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
[ ]
, 1998
======================================================
<PAGE> 120
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.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED [ ], 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE [ ], 1998)
$[ ]
COMMODITY-INDEXED PREFERRED SECURITIES (COMPS(R)), SERIES [B]
J.P. MORGAN INDEX FUNDING COMPANY I
[2.5]% SERIES [B] PREFERRED SECURITIES AT $[25] PER SHARE
INDEXED TO THE JPMCI BASKET TOTAL RETURN INDEX
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
J.P. MORGAN & CO. INCORPORATED
------------------------
The [2.5]% Series [B] Preferred Securities (each, a "Series [B] Preferred
Security", and collectively, the "ComPS") offered hereby are being issued by
J.P. Morgan Index Funding Company I, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"). The ComPS represent undivided
beneficial preferred interests in certain assets of the Trust consisting of the
Related Note (as defined below) and the proceeds thereof. Each Series [B]
Preferred Security will have an initial principal amount of [$25] (the "Face
Amount"), and thereafter, the change in value of the principal amount per Series
[B] Preferred Security will be indexed to the change in value of the JPMCI
Basket Total Return Index (the "Applicable Index"), which is calculated based on
the change in value of certain commodity futures contracts included from time to
time in the JPM Indices (such contracts, from time to time, the "Benchmark
Commodity Contracts") plus a component of collateral yield computed on such
fluctuating index value at the most recent auction rate for 3-month U.S.
Treasury Bills or certain successor rates thereto (the "Collateral Yield
Component"), reduced by a factor designed to offset the costs of issuing and
hedging the indexation of the ComPS (the "Factor"). J.P. Morgan & Co.
Incorporated, a Delaware corporation ("J.P. Morgan"), will own all the common
securities (the "Series [B] Common Securities" and, together with the ComPS, the
Series [B] Securities) representing undivided beneficial interests in certain
assets of the Trust consisting of the Related Note and the proceeds thereof. The
Trust exists for the sole purpose of issuing the Series [B] Securities and
investing the proceeds thereof in a [2.5]% Related Note Due , [2001]
(the "Related Note") of Morgan Guaranty Trust Company of New York, a trust
company with full banking powers organized under the laws of the State of New
York and a wholly-owned subsidiary of J.P. Morgan ("Morgan Guaranty"), and
issuing similar preferred securities (the "Preferred Securities") and common
securities (the "Common Securities" and, together with the Preferred Securities,
the "Securities") of separate series and investing the proceeds thereof in
similar notes in the future.
SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE COMPS. THE COMPS ARE NOT FUTURES CONTRACTS AND DO NOT
REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS
DEFINED BELOW) OF THE COMPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI
BASKET TOTAL RETURN INDEX, REDUCED BY THE FACTOR. AS A RESULT, THE REDEMPTION
VALUE PER SERIES [B] PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT
AND MAY BE MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE
BENCHMARK COMMODITY CONTRACTS. SEE "DESCRIPTION OF THE COMPS".
"ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are registered service
marks of J.P. Morgan & Co. Incorporated.
The ComPS have been approved for listing on the American Stock Exchange (the
"Amex") under the symbol [" "], subject to official notice of issuance.
Trading of the ComPS on the Amex is expected to commence within a 30-day period
after the date of this Prospectus Supplement. See "Underwriting".
THE SERIES [B] 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 SERIES [B] SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price $[25] per Series [B] Preferred Security plus accrued dividends, if any.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSIONS(2) THE TRUST(3)(4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series [B] Preferred Security.......... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
Total...................................... $ (3) $
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein).
(2) The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting".
(3) Because the proceeds of the sale of the ComPS will be invested in the
Related Note, Morgan Guaranty has agreed to pay to the Underwriters a
commission of $ per Series [B] Preferred Security (or $ in the
aggregate). See "Underwriting".
(4) Expenses of the offering which are payable by the Trust and J.P. Morgan are
estimated to be $ .
------------------------
The ComPS offered hereby are offered by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the ComPS will be
made on or about , 1998, through the book-entry facilities of The
Depository Trust Company, against payment therefor in same-day funds.
J.P. MORGAN SECURITIES LTD.
[ ], 1998.
<PAGE> 121
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
the date hereof (the "Underwriting Agreement"), the Trust has agreed to sell to
the underwriters named below (the "Underwriters") and the Underwriters, for whom
JPMSI is acting as representative (the "Representative"), have severally agreed
to purchase, the respective number of ComPS set forth opposite their names
below. In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the ComPS offered
hereby if any of the ComPS are purchased. Under certain circumstances, the
commitments of nondefaulting Underwriters may be increased as set forth in the
Underwriting Agreement. J.P. Morgan Securities Ltd. is acting as a securities
dealer and will not purchase any ComPS directly from the Trust.
<TABLE>
<CAPTION>
NUMBER OF COMPS
UNDERWRITER ---------------
<S> <C>
J.P. Morgan Securities Inc. .............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
[ ]............................. [ ]
---------------
Total........................................... [ ]
</TABLE>
The Underwriters initially propose to offer the ComPS, in part, directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus Supplement, and, in part, to certain securities dealers at such price
less a concession of $ per Series [B] Preferred Security. [The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
Series [B] Preferred Security to certain brokers and dealers.] After the initial
offering, the public offering price and such concessions may be changed.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Series [B]
Preferred Securities. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. In addition, the Underwriters may bid for,
and purchase, in the open market to cover syndicate shorts or to stabilize the
price of the Series [B] Preferred Securities. Finally, the underwriting
syndicate may reclaim selling concessions allowed for distributing the Series
[B] Preferred Securities in the offering, if the syndicate repurchases
previously distributed Series [B] Preferred Securities in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Series [B]
Preferred Securities above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
In view of the fact that the proceeds of the sale of the ComPS will ultimately
be used to purchase the Related Note of Morgan Guaranty, the Underwriting
Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters'
Compensation") to the Underwriters $ per Series [B] Preferred Security (or
$ in the aggregate) for the account of the Underwriters.
The ComPS have been approved for listing on the Amex under the symbol [" "],
subject to official notice of issuance. Trading of the ComPS on the Amex is
expected to commence within a 30-day period after the date of this Prospectus
Supplement. Prior to this offering, there has been no market for the ComPS.
The Trust and J.P. Morgan have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
This Prospectus Supplement and related the Prospectus may be used by direct or
indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and
sales related to secondary market transactions in the ComPS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
S-49
<PAGE> 122
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Underwriters, certain agents and their associates may be customers of,
engage in transactions with, and perform services for, J.P. Morgan in the
ordinary course of business.
The Representative is an indirect, wholly-owned subsidiary of J.P. Morgan. The
participation of the Representative in the offer and sale of the ComPS complies
with the requirements of Rule 2720 of the Rules of Conduct of the National
Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of
securities of an affiliate and complies with any restrictions imposed on such
Representative by the Board of Governors of the Federal Reserve System.
Because the NASD is expected to view the Preferred Securities offered hereby as
interests in a direct participation program, the offering is being made in
compliance with Rule 2810 of the NASD's Rules of Conduct. Offers and sales of
Preferred Securities will be made only to (i) "qualified institutional buyers",
as defined in Rule 144A under the Act; (ii) institutional "accredited
investors", as defined in Rule 501(a)(1)-(3) of Regulation D under the Act or
(iii) investors for whom an investment in non-convertible investment grade
commodity-indexed preferred securities is appropriate. The Underwriters may not
confirm sales to any accounts over which they exercise discretionary authority
without the prior written approval of the transaction by the customer.
S-50
<PAGE> 123
PROSPECTUS
$650,000,000
J.P. MORGAN INDEX FUNDING COMPANY I
Preferred Securities guaranteed to the extent set forth herein by
J.P. MORGAN & CO. INCORPORATED
------------------------
J.P. Morgan Index Funding Company I (the "Trust"), a Delaware statutory business
trust, may offer, from time to time, preferred securities of separate series
representing undivided beneficial interests in certain assets of the Trust
("Preferred Securities"). The payment of periodic cash distributions
("distributions") with respect to Preferred Securities out of moneys held by the
Trust 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
Trust, on behalf of holders of Securities (as defined below) of each series,
will invest the proceeds from the issuance of Preferred Securities and related
common securities (the "Common Securities" and, together with the Preferred
Securities, the "Securities") in unsecured notes associated with each such
series (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 Trust 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 associated with a series of Securities may be issued
and sold from time to time by Morgan Guaranty to the Trust in connection with
the investment of the proceeds from the offering of Preferred Securities and
Common Securities of such series of the Trust. J.P. Morgan, through its
obligations under the Guarantee, the Related Note Guarantee and the Amended and
Restated Declaration of Trust, 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
$650,000,000. 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 25 AND "RISK
FACTORS WITH RESPECT TO COMPS" ON PAGE 26 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 Trust 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 Trust 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 Trust
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 Trust 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.
June [ ], 1998.
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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 Trust 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 Trust 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. Such reports, proxy statements and other information concerning J.P.
Morgan may be inspected and copied at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Northeast Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048 and Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a website that contains reports, proxy and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) System. This website
can be accessed at http:/www.sec.gov. Information provided to or filed with the
Commission by J.P. Morgan pursuant to the Exchange Act can be located by
reference to the Commission file number 1-5885. 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 Trust 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 Trust will be owned by J.P. Morgan, a reporting company under the Exchange
Act, (ii) the Trust 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 Trust
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 Trust 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, 1997 (included in its
Annual Report to Stockholders) and J.P. Morgan's Reports on Form 8-K dated
January 15, 1998, February 19, 1998, March 27, 1998, April 14, 1998 and May 5,
1998 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
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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.
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) 648-3380.
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 subsidiaries engaged globally in providing a
wide range of financial services to institutions, corporations, governments,
financial institutions, institutional investors, professional firms, privately
held companies, nonprofit organizations and financially sophisticated
individuals. J.P. Morgan's activities are summarized as follows:
FINANCE AND ADVISORY
The Finance and Advisory sector encompasses the sophisticated advisory, capital
raising, and financing work that J.P. Morgan does for its broad base of clients
around the world -- including corporations, financial institutions, governments,
municipalities, and individuals. J.P. Morgan's expertise is based on an in-depth
knowledge of its clients' needs and of the industries and financial markets in
which they operate.
In partnership with clients, J.P. Morgan's advisory professionals analyze the
risks and rewards of such strategic alternatives as merger, acquisition,
divestiture, privatization, and recapitalization. J.P. Morgan also looks for
ways to unlock value when analyzing a client's capital structure. J.P. Morgan's
debt and equities underwriting business provides clients with the capability to
raise the capital necessary to execute their strategies. High-quality research
is an integral part of this business.
J.P. Morgan's credit activities include meeting clients' financing needs by
arranging and syndicating loans and other credit facilities. They also include
the responsibility for managing the firm's credit risk arising from traditional
credit activities as well as J.P. Morgan's derivatives trading activities.
MARKET MAKING
J.P. Morgan's market making activities provide clients with around-the-clock
access to global markets. J.P. Morgan makes markets in fixed income, equities,
foreign exchange, commodity instruments, and derivatives in both developed and
emerging markets. J.P. Morgan also develops customized transactions to assist
clients in managing risk and enhancing returns. J.P. Morgan provides research to
help clients assess opportunities and track performance. J.P. Morgan takes
positions to facilitate client transactions and to benefit from its role as a
market maker.
J.P. Morgan's clients include banks, other nonbanks, financial institutions,
corporations, governments and their agencies, leveraged funds, pension funds,
mutual funds, and individuals.
J.P. Morgan's fixed income activities include acting as a primary dealer in U.S.
and foreign government securities; making markets in money market instruments,
U.S. government agency securities, corporate debt securities, swaps and other
derivatives; and helping clients manage their exposure to interest rate and
foreign exchange risk.
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J.P. Morgan's emerging markets activities include acting as a dealer and market
maker in securities and derivatives from non-G-10 countries in Latin America,
Eastern Europe, Asia, and Africa. While many of J.P. Morgan's emerging market
activities involve fixed income securities, J.P. Morgan deals in many other
markets and instruments.
J.P. Morgan's equities market making activities include acting as both agent and
principal to facilitate clients' transactions in exchange-listed and
over-the-counter securities. J.P. Morgan also structures equity derivatives for
clients.
J.P. Morgan's foreign exchange capabilities include making markets in spot,
options, and short-term interest rate products, in order to help clients manage
their foreign currency exposures.
J.P. Morgan's commodities activities include advising clients on developing
hedging, investment, and commodity-linked financing strategies. J.P. Morgan also
provides commodity services which may include the settlement of physical trades
in various metal and oil markets and metal borrowing and lending services.
ASSET MANAGEMENT AND SERVICING
J.P. Morgan provides a wide range of investment-related services, including:
global asset management for pension plans, governments, endowments, and
foundations; integrated financial services for high-net worth individuals; fully
bundled services for defined contribution pension plans through American Century
Companies; and mutual fund distribution to intermediaries.
J.P. Morgan's global dedicated research capabilities support portfolio
management across all asset classes and markets. With the acquisition of
O'Connor Realty Advisors, a real estate investment firm, J.P. Morgan has further
broadened its expertise and ability to bring a full range of investment options
to its clients. This spectrum of capabilities is delivered to institutional and
individual investors in both discretionary account and mutual fund form.
In July 1997, J.P. Morgan agreed to purchase a 45% interest in American Century
Companies, the fourth largest U.S. no-load direct mutual fund company. With this
investment, which was concluded in January 1998, J.P. Morgan has gained scale
expertise in technology and operations for distribution and servicing, as well
as complementary investment capabilities that broaden its product offerings
significantly. J.P. Morgan has formed a business partnership with American
Century to pursue jointly the growing retirement plan market, distribution of
mutual funds to third parties such as financial advisors, and other
opportunities in integrated personal financial services.
J.P. Morgan offers ultra high-net worth clients an advice-based integrated array
of financial services that includes tax-advantaged asset structures; a wide
range of investment options, including managed portfolios and brokerage; and
credit and liquidity services. These capabilities form the foundation for an
expansion of services to investors that will be pursued selectively.
J.P. Morgan's futures and options brokerage group provides institutional clients
with worldwide access to major exchanges by acting as brokers in executing and
clearing contracts. Currently, J.P. Morgan has dealers on 51 exchanges around
the world. J.P. Morgan operates, under contract, the Euroclear System, the
world's largest clearance and settlement system for internationally traded
securities. J.P. Morgan provides credit and deposit services to Euroclear
participants. In addition, J.P. Morgan provides certain operational services
such as the administration of American depository receipt (ADR) programs.
EQUITY INVESTMENTS
J.P. Morgan invests for its own account on a global basis in private equity and
equity-related securities in leveraged and unleveraged acquisitions,
privatizations, recapitalizations, rapidly growing companies, expansion
financings, turnaround situations, and other special equity situations. These
investments are made with the objective of maximizing total return, which is a
measure of both long-term appreciation and net recognized gains.
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The Equity Investments group works closely with other areas of J.P. Morgan to
capture the competitive advantage of J.P. Morgan's global presence and expertise
in sourcing, evaluating, managing, and exiting investments. Opportunities often
develop through relationships with clients. J.P. Morgan has also managed initial
public offerings and high-yield debt issues, arranged credit facilities, and
provided mergers and acquisitions advice to portfolio companies at later stages
of their development.
PROPRIETARY INVESTING AND TRADING
J.P. Morgan takes market and credit risk positions for our own account using
both relative value and directional risk-taking strategies to enhance the value
of the firm. J.P. Morgan uses a relative value strategy when they anticipate
changes in relationships between markets and classes of instruments (e.g., a
change in prices between bonds and swaps) or when they believe certain assets
are fundamentally mispriced by the market. J.P. Morgan uses directional
strategies in an attempt to profit from its anticipation of how it believes a
market will move (e.g., absolute rates or prices will go up or down).
Experienced market professionals manage these strategies and use them over many
currencies and types of instruments, including fixed income securities, foreign
exchange, equity securities, commodity products, and related derivatives.
Positions may be held for long or short periods of time, depending on the
strategy and actual market performance. Certain longer-term strategies are
considered to be investment activities and tend to utilize government,
mortgage-backed, and corporate debt securities.
J.P. Morgan also manages its liquidity and capital profile to ensure it has
access to funding at a reasonable cost, even under adverse circumstances, to
support all the business activities of the firm. A strong capital position is an
integral part of J.P. Morgan's liquidity management because it enables the firm
to raise funds as inexpensively as possible in a variety of international
markets.
REGULATION
J.P. Morgan is subject to regulation under the Bank Holding Company Act of 1956
(the "Bank Act"). Under the Bank Act, J.P. Morgan is required to file reports
with the Board of Governors of the Federal Reserve System (the "Board"). J.P.
Morgan is also subject to examination by the Board. The Bank Act prevents J.P.
Morgan and its subsidiaries from engaging in activities not related to banking,
and limits the amount of securities it can acquire of a company engaging in
nonbanking activities. An exception may be made if the Board determines that the
company's activities are closely related to banking. Federal law and Board
interpretations limit the extent to which J.P. Morgan can engage in certain
aspects of the securities business. The Glass-Steagall Act prohibits bank
affiliates that are members of the Federal Reserve System -- including J.P.
Morgan Securities Inc. ("JPMSI"), a "Section 20" subsidiary, -- from being
engaged principally in bank-ineligible underwriting and dealing activities
(mainly corporate debt and equity securities). This prohibition restricts
JPMSI's gross revenues from these activities to a maximum of 25% of total gross
revenues.
J.P. Morgan's largest subsidiary, Morgan Guaranty Trust Company of New York
("Morgan Guaranty"), is a member of the Federal Reserve System and a member of
the Federal Deposit Insurance Corporation ("FDIC"). Its business is subject to
both U.S. federal and state law. It is examined and regulated by U.S. federal
and state banking authorities. J.P. Morgan and its nonbank subsidiaries are
affiliates of Morgan Guaranty within the meaning of the applicable federal
statutes. Morgan Guaranty is subject to restrictions on loans and extensions of
credit to J.P. Morgan and certain other affiliates. It is also restricted on
some other types of transactions with J.P. Morgan, or involving J.P. Morgan's
securities.
Among other wholly owned subsidiaries:
JPMSI is a broker-dealer registered with and subject to regulation by the
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers, the New York Stock Exchange, and other exchanges.
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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.
J.P. Morgan Investment Management Inc. is registered with the Securities and
Exchange Commission as an investment advisor 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 I
J.P. Morgan Index Funding Company I, is a statutory business trust formed on
December 12, 1996 under the Delaware Business Trust Act (the "Business Trust
Act") pursuant to (i) a declaration of trust among the Trustees and J.P. Morgan
and (ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware on December 12, 1996, which was restated pursuant to the
filing of a restated certificate of trust with the Secretary of State of the
State of Delaware on September 30, 1997. On March 26, 1998, J.P. Morgan, as
sponsor, and the Trustees entered into an amended and restated declaration of
trust, dated March 26, 1998 (the "Declaration"), filed as an exhibit to the
Registration Statement of which this Prospectus form a part. The Declaration
will be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). J.P. Morgan Index Funding Company LLC, a Delaware limited
liability company (the "Company") has been merged into the Trust (the "Merger")
pursuant to (i) an Agreement and Plan of Merger between the Trust and the
Company and (ii) a Certificate of Merger merging the Company into the Trust
filed with the Secretary of State of the State of Delaware. By operation of law,
the Trust has become the owner of all assets of the Company, including any
outstanding Related Notes, and has succeeded to all the obligations of the
Company, including any outstanding Preferred Securities, and Common Securities
theretofore issued by the Company, including the 2.5% Series A Securities, and
all the rights of the Company, including in respect of any related note
guarantee executed in connection with such Securities. Following the
effectiveness of the Merger, any such outstanding Preferred Securities and
Common Securities represent an undivided beneficial interest in the
corresponding Related Note.
This description summarizes the material terms of the Declaration and is
qualified in its entirety by reference to the form of Declaration, which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part, and the Trust Indenture Act.
SECURITIES
Upon issuance of any Preferred Securities of any series, the holders thereof
will own all of the issued and outstanding Preferred Securities of such series,
and J.P. Morgan will own all of the issued and outstanding Common Securities of
such series. The certificates for each series will represent a fractional
undivided beneficial interest in certain assets of the Trust consisting of the
corresponding Related Note of Morgan Guaranty and the proceeds thereof, all
monies due and to become due under such Related Note, and the right to receive a
portion of the payments of principal of and interest on such Related Note. J.P.
Morgan will acquire the Common Securities of each series in a principal amount
equal to 0.001% of the total principal amount of such series and will own all
the issued and outstanding Common Securities of the Trust which will represent
0.001% of the total capital of the Trust. The Preferred Securities of any series
and the Common Securities of such series will rank pari passu with each other
and will have equivalent payment terms; provided that (i) if a Note Event of
Default (as defined herein) under the Related Note of such series occurs and is
continuing, the holders of Preferred Securities of such series will have a
priority
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over holders of Common Securities of such series with respect to payments in
respect of distributions and payments upon liquidation, redemption and maturity
and (ii) holders of Common Securities have the exclusive right (subject to the
terms of the Declaration) to appoint, remove or replace the Trustees and to
increase or decrease the number of Trustees. A Note Event of Default under a
Related Note of one series will not prohibit payments in respect of
distributions and payments upon liquidation, redemption and maturity under a
Related Note corresponding to any other series of Securities or under such
Securities. No holder of Securities of any series shall have any claim on, or
right to, any assets allocated to, or associated with, any other series (except
if, and to the extent that, such holder is also a holder of Securities of such
other series). The Trust exists for the exclusive purposes of (a) issuing its
series of Securities, (b) investing the gross proceeds from the sale of the
Securities in Related Notes of Morgan Guaranty and (c) engaging in only such
other activities as are necessary, convenient or incidental thereto. The rights
of the holders of any series of the Securities, including economic rights,
rights to information and voting rights, are set forth in the Declaration (which
term shall include any Declaration Supplement), the Business Trust Act and the
Trust Indenture Act.
POWERS AND DUTIES OF TRUSTEES
The number of trustees (the "Trustees") of the Trust shall initially be five.
Three of such Trustees (the "Regular Trustees") are individuals who are
employees or officers of J.P. Morgan. The fourth such trustee will be U.S. Bank
Trust National Association, which is unaffiliated with J.P. Morgan and which
will serve as the property trustee (the "Property Trustee") and act as the
indenture trustee for purposes of the Trust Indenture Act. The fifth such
trustee is Wilmington Trust Company, which has its principal place of business
in the State of Delaware (the "Delaware Trustee"). Pursuant to the Declaration,
legal title to each Related Note will be held by the Property Trustee for the
benefit of the holders of the corresponding series of the Securities, and the
Property Trustee will have the power to exercise all rights, powers and
privileges with respect to such Related Notes. In addition, the Property Trustee
will maintain exclusive control of a separate segregated non-interest-bearing
bank account for each series of Securities (the "Property Account") to hold all
payments in respect of the corresponding Related Note for the benefit of the
holders of each such series of Securities. The Property Trustee will promptly
make distributions to the holders of a series of Securities of the Trust out of
funds from the corresponding Property Account. The Guarantee is separately
qualified under the Trust Indenture Act and will be held by U.S. Bank Trust
National Association, acting in its capacity as indenture trustee with respect
thereto, for the benefit of the holders of the Preferred Securities. As used in
this Prospectus and any accompanying Prospectus Supplement, the term "Property
Trustee" with respect to the Trust refers to U.S. Bank Trust National
Association acting either in its capacity as a Trustee under the Declaration and
the holder of legal title to the Related Notes or in its capacity as indenture
trustee under, and the holder of, the Guarantee, as the context may require.
J.P. Morgan, as the owner of all the series of Common Securities, will have the
exclusive right (subject to the terms of the Declaration) to appoint, remove or
replace Trustees and to increase or decrease the number of Trustees, provided
that the number of Trustees shall be at least five and the majority of Trustees
shall be Regular Trustees. The Regular Trustees are authorized and directed to
take such action as they deem reasonable in order that the Trust will not be
deemed to be an "investment company" required to be registered under the 1940
Act or that the Trust will not be classified for United States Federal income
tax purposes as an association taxable as a corporation or a partnership and
will be treated as a grantor trust for United States Federal income tax
purposes. In this connection, the Regular Trustees are authorized to take any
action, not inconsistent with applicable law, the certificate of trust of the
Trust or the Declaration, that the Regular Trustees determine in their
discretion to be reasonable and necessary or desirable for such purposes, as
long as such action does not adversely affect the interests of holders of the
Securities. The term of the Trust will be until November 21, 2105, but the Trust
may terminate earlier as provided in the Declaration.
The duties and obligations of the Trustees of the Trust will be governed by the
Declaration. Under the Declaration, the Trust (on behalf of a series of
Securities or otherwise) shall not, and the Trustees of the Trust shall not
cause the Trust (on behalf of a series of Securities or otherwise) to, engage in
any activity other than in connection with the purposes of the Trust or other
than as required or authorized by the
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Declaration. In particular, the Trust (on behalf of a series of Securities or
otherwise) shall not, and the Trustees of the Trust shall cause the Trust (on
behalf of a series of Securities or otherwise) not to, (a) invest any proceeds
received by the Trust from holding the Related Notes, but shall promptly
distribute from the applicable Property Account all such proceeds to holders of
the corresponding series of its Securities pursuant to the terms of the
Declaration and of such series of Securities; (b) acquire any assets other than
as expressly provided in the Declaration; (c) possess Trust Property for other
than a Trust purpose; (d) make any loans, other than loans represented by such
Related Notes; (e) exercise any power or otherwise act in such a way as to vary
the assets of the Trust or the terms of its Securities in any way whatsoever;
(f) issue any securities or other evidences of beneficial ownership of, or
beneficial interests in, the Trust other than its Securities; (g) incur any
indebtedness for borrowed money or (h) (i) direct the time, method and place of
exercising any trust or power conferred upon the Property Trustee of the Trust
with respect to any series of its Securities, (ii) waive any past default that
is waivable under the applicable Related Note or the Declaration, (iii) exercise
any right to rescind or annul any declaration that the principal of all the
Related Note associated with any series deposited in the Trust as trust assets
shall be due and payable or (iv) consent to any amendment, modification or
termination of any such Related Note or the Declaration, in each case where such
consent shall be required, unless in the case of this clause (h) the Property
Trustee shall have received (i) an unqualified opinion of nationally recognized
independent tax counsel recognized as expert in such matters to the effect that
such action will not cause the Trust to be classified for United States Federal
income tax purposes as an association taxable as a corporation or a partnership
and that the Trust will continue to be classified as a grantor trust for United
States Federal income tax purposes and (ii) if required, the approval of the
holders of the Securities for the taking of any action. See "J.P. Morgan Index
Funding Company I -- Voting" and "Description of the ComPS -- Voting Rights".
BOOKS AND RECORDS
The books and records of the Trust will be maintained at the principal office of
the Trust and will be open for inspection by a holder of Preferred Securities or
such holder's representative for any purpose reasonably related to such holder's
interest in the applicable Related Note held by the Trust during normal business
hours. Separate and distinct books and records will be maintained by the Trust
for each series of Securities, and the assets associated with, or related to,
any such series will be held and accounted for separately from the assets of the
Trust generally or from the assets associated with, or related to, any other
series of Securities.
VOTING
Except as set forth below and under "Description of the ComPS -- Voting Rights"
and under "Events of Default" below and as provided under the Business Trust
Act, the Declaration and the Trust Indenture Act, holders of Preferred
Securities will have no voting rights.
If any proposed amendment to the Declaration provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Securities, whether by way of
amendment to the Declaration or otherwise, or (ii) the dissolution or bankruptcy
of the Trust, then the holders of outstanding Securities will be entitled to
vote on such amendment or proposal as a class and such amendment or proposal
shall not be effective except with the approval of the holders of Securities
representing a majority in principal amount of such Securities; provided,
however, that if any amendment or proposal referred to in clause (i) above would
adversely affect only certain series of the Preferred Securities or certain
series of the Common Securities, then only the affected series or class, as
applicable, will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of a
majority in principal amount of such series or class, as applicable, of
Securities.
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THE PROPERTY TRUSTEE
The Property Trustee, for the benefit of the holders of the Securities, is
authorized under the Declaration to exercise all rights with respect to each
Related Note deposited in the Trust as trust assets, including its rights as the
holder of any such Related Note to enforce the Trust's rights under such Related
Note upon the occurrence of a Note Event of Default. The Property Trustee is
also authorized to enforce the rights of the Trust under the Related Note
Guarantee. Holders of at least a majority in principal amount of the Preferred
Securities of all series or of the affected series, as applicable, of the Trust
will have the right to direct the Property Trustee for the Trust with respect to
certain matters under the Declaration and the Related Note Guarantee; provided
that (a) such direction would not conflict with any applicable law or the
Declaration and would not result in any personal liability or expense to the
Property Trustee, (b) such direction would not cause the Trust not to be
properly classified as a grantor trust for U.S. Federal income tax purposes and
(c) the Property Trustee may take any other action deemed proper by the Property
Trustee which is not inconsistent with such direction. In addition, under
certain circumstances, a holder of the outstanding ComPS may directly institute
Direct Action against J.P. Morgan without first instituting a legal proceeding
against the Trust, the Property Trustee or any other person or entity. See "J.P.
Morgan Index Funding Company I -- Events of Default", "Risk Factors With Respect
to All Preferred Securities -- Limitations on Rights Under the Guarantee, the
Related Note Guarantee and the Related Note" and "Description of the Related
Note Guarantee -- Remedies of the Trust and Holders of the ComPS". The
Declaration will provide that the Sponsor will pay the Property Trustee's fees
and expenses and will indemnify the Property Trustee in respect of certain
matters.
The Property Trustee is a depository for funds and performs other services for,
and transacts other banking business with, J.P. Morgan in the normal course of
business.
DISTRIBUTIONS
Pursuant to the Declaration, distributions on any series of Securities must be
paid on the dates payable to the extent that the Property Trustee has cash on
hand in the Property Account relating to such series to permit such payment. The
funds available for distribution to the holders of any series of Securities will
be limited to payments received by the Property Trustee in respect of the
Related Note of such series. If Morgan Guaranty does not make interest payments
on the Related Note of any series, the Property Trustee will not make
distributions on the corresponding series of Securities. Under the Declaration,
except as set forth below, if and to the extent Morgan Guaranty does make
interest payments on the Related Note of any series, the Property Trustee is
obligated to make distributions on the corresponding series of Securities on a
Pro Rata Basis (as defined below). The payment of distributions on each series
of the Preferred Securities is guaranteed by J.P. Morgan on a subordinated basis
as and to the extent set forth under "Description of the Guarantee." The
Guarantee, when taken together with J.P. Morgan's obligations under the Related
Note Guarantee and its obligations under the Declaration, provides a full and
unconditional guarantee from the time of issuance of each series of the
Preferred Securities of amounts due on such Preferred Securities. Such Guarantee
itself, however, covers distributions and other payments on such series of
Preferred Securities only if and to the extent that Morgan Guaranty has made a
payment to the Property Trustee of interest or principal on the Related Note of
such series. As used in this Prospectus, the term "Pro Rata Basis" shall mean
pro rata to each holder of any series of Securities according to the aggregate
principal amount of all Securities of such series held by the relevant holder in
relation to the aggregate principal amount of the Securities of such series
outstanding unless, in relation to a payment, a Note Event of Default under the
Related Note of such series has occurred and is continuing, in which case any
funds available to make such payment shall be paid first to each holder of the
Preferred Securities of such series pro rata according to the aggregate
principal amount of the Preferred Securities of such series held by the relevant
holder in relation to the aggregate principal amount of all the Preferred
Securities of such series outstanding, and only after satisfaction of all
amounts owed to the holders of such Preferred Securities of such series to each
holder of Common Securities of such series pro rata according to the aggregate
principal amount of such Common Securities of such series held by the relevant
holder in relation to the aggregate principal amount of all Common Securities of
such series outstanding.
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<PAGE> 132
EVENTS OF DEFAULT
In the event that the Trust fails to pay dividends or other distributions on the
Securities of any series for 30 days following the date on which such payment
was due in accordance with the terms of such Securities or if a Note Event of
Default occurs and is continuing with respect to the Related Note of any series
(a "Note Event of Default"), an Event of Default under the Declaration will
occur and be continuing with respect to any outstanding Securities of such
series. In such event, the Declaration provides that (a) holders of a majority
in principal amount of Preferred Securities of such series, acting as a single
class, may cause the Trust, on behalf of holders of Securities of such series,
by written direction to the Property Trustee, to waive any such Note Event of
Default or to enforce the Trust's rights, on behalf of holders of Securities of
such series, under the applicable Related Note against Morgan Guaranty or under
the Related Note Guarantee against J.P. Morgan or, in the case of any failure to
pay dividends or other distributions, to cause the Trust to declare and pay such
dividends or distributions; provided, that such payments shall be paid solely
from the proceeds of interest or other payments made on the applicable Related
Note and received by the Trust on behalf of such holders and (b) in the case of
a Note Event of Default that is attributable to the failure of Morgan Guaranty
to pay principal of or interest on the Related Note on the date such principal
or interest is otherwise payable (or in the case of a redemption, on the
redemption date) any holder of the outstanding Preferred Securities may directly
institute a proceeding under the Related Note Guarantee with respect to the
Preferred Securities against J.P. Morgan for enforcement of payment to such
holder of the related principal amount of or interest on the Preferred
Securities of such holder (a "Direct Action") on or after the date of the
occurrence of such Note Event of Default without first instituting a legal
proceeding against the Trust, the Property Trustee or any other person or
entity. Notwithstanding any payments made to such holder of Preferred Securities
by J.P. Morgan in connection with a Direct Action, J.P. Morgan shall remain
obligated to pay the principal of and interest on the Preferred Securities, and
the rights of J.P. Morgan, as Guarantor, shall be subrogated to the rights of
such holder of Preferred Securities with respect to payments on the Preferred
Securities to the extent of any payment made by J.P. Morgan to such holder of
Preferred Securities in such Direct Action. Notwithstanding the foregoing, the
right of any holder of Securities of any series to receive payments or
distributions on such series of Securities in accordance with the terms of the
Declaration or such Securities on or after the respective payment dates
therefor, or to institute suit for the enforcement of any such payment on or
after such payment dates, shall not be impaired without the consent of such
holder.
RECORD HOLDERS
The Declaration provides that the Trustees of the Trust may treat the person in
whose name a certificate representing Preferred Securities is registered on the
books and records of the Trust as the sole holder thereof and of the Preferred
Securities represented thereby for purposes of receiving distributions and for
all other purposes and, accordingly, shall not be bound to recognize any
equitable or other claim to or interest in such certificate or in the Preferred
Securities represented thereby on the part of any person, whether or not the
Trust shall have actual or other notice thereof. Preferred Securities will be
issued in fully registered form and will be represented by a global certificate
registered on the books and records of the Trust in the name of The Depositary
Trust Company ("DTC") or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal with DTC (or
any successor) for all purposes, including the payment of distributions and
receiving approvals, votes or consents under the Declaration and, except as
set forth in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning a beneficial interest in any Preferred
Securities ("Preferred Security Beneficial Owners") registered in the name
of and held by DTC or its nominee; and
(ii) the rights of Preferred Security Beneficial Owners shall be
exercised only through DTC (or any successor) and shall be limited to those
established by law and agreements between such Preferred Security
Beneficial Owners and DTC and/or its participants. With respect to any
Preferred Securities registered in the name of and held by DTC or its
nominee, all notices and other communications required under the
Declaration shall be given to, and all distributions on such Preferred
Securities shall be given or made to, DTC (or its successor).
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<PAGE> 133
The specific terms of the depositary arrangement with respect to the Preferred
Securities of the Trust will be disclosed in the applicable Prospectus
Supplement.
DEBTS AND OBLIGATIONS
The Declaration provides that any person or entity extending credit to,
contracting with, or having any claim against, the Trust with respect to any
series of Securities may look only to the assets of the Trust associated with
such series to satisfy or enforce any debt, liability, obligation or expense
incurred, contracted for or otherwise existing with respect to such series. In
the Declaration, J.P. Morgan has agreed to pay for all debts and obligations
(other than with respect to the Securities) and all costs and expenses of the
Trust, including the fees and expenses of its Trustees and any taxes and all
costs and expenses with respect thereto, to which the Trust may become subject,
except for United States withholding taxes. The foregoing obligations of J.P.
Morgan under the Declaration are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed a (a "Creditor"), whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of J.P. Morgan directly
against J.P. Morgan and J.P. Morgan has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Trust or any other
person before proceeding against J.P. Morgan. J.P. Morgan has agreed in the
Declaration to execute such additional agreements as may be necessary or
desirable in order to give full effect to the foregoing.
The business address of the Trust is c/o J.P. Morgan & Co. Incorporated, 60 Wall
Street, New York, New York 10260-0060, telephone number (212) 648-2323.
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<PAGE> 134
USE OF PROCEEDS
The proceeds to the Trust from the sale of the Preferred Securities offered from
time to time hereby and 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>
Year ended December 31,
=============================================
1997 1996 1995 1994 1993(a)
---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Excluding Interest on Deposits................... 1.27 1.35 1.35 1.40 1.70(a)
Including Interest on Deposits................... 1.20 1.26 1.24 1.28 1.46(a)
</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.
CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
<TABLE>
<CAPTION>
Year ended December 31,
=============================================
1997 1996 1995 1994 1993(a)
---- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Excluding Interest on Deposits................... 1.26 1.34 1.34 1.39 1.69(a)
Including Interest on Deposits................... 1.20 1.25 1.23 1.27 1.46(a)
</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.
DESCRIPTION OF ALL SECURITIES
The Trust is authorized by the Declaration to issue, from time to time, one or
more series of Securities having terms described in the Prospectus Supplement
relating to each. Each series of 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 Securities, including (i) the distinctive
designation of such Securities, (ii) the number of Securities issued in such
series, (iii) the annual distribution rate (or method of determining such rate)
for such Securities and the date or dates upon which such distributions shall be
payable, (iv) whether distributions on such Securities shall be cumulative, and,
in the case of Securities having such cumulative distribution rights, the date
or dates or method of determining the date or dates from which distributions on
such 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 Trust associated with such series of Securities to the holders of such
Securities upon voluntary or involuntary dissolution of the Trust, (vi) the
obligation, if any, of the Trust to purchase or redeem, and the option of the
holders of Securities, if any, to redeem Securities issued by the Trust and the
price or prices at which, the period or periods within which and the terms and
conditions upon which such Securities shall be purchased or redeemed, in whole
or in part, pursuant to such
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<PAGE> 135
obligation, (vii) the voting rights, if any, of such Securities in addition to
those required by law, including the number of votes per Security and any
requirement for the approval by the holders of Securities as a condition to
specified action or amendments to the Declaration, and (viii) any other relevant
rights, preferences, privileges, limitations or restrictions of Securities
consistent with the Declaration 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 of any
series, the Trust will issue related Common Securities. Upon an event of
liquidation of the Trust, the rights of the holders of the Common Securities of
such series 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 of such series. All of the Common Securities
will be owned by J.P. Morgan, the sponsor of the Trust.
Each series of 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 Trust 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 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
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<PAGE> 136
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 (including corn,
soybeans and wheat), 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, that may be
based upon one or more commodities (whether computed on an excess return or
total return basis) and that have been or may be originated and calculated by
Morgan Guaranty, are collectively referred to herein as the "JPM Indices". JPM
Indices that are based upon only one underlying commodity (whether computed on
an excess return or total return basis) are referred to as "JPM Individual
Indices". JPM Indices that are based upon at least two or more underlying
commodities (whether computed on an excess return or total return basis) are
referred to as "JPM Basket Indices".
ComPS are principal-at-risk securities linked directly to the performance of an
Applicable Index. For Bullion ComPS, if the index rises from the starting value
(which is set on the day of pricing), the Redemption Value of such ComPS will be
greater than the original issue price. If the Applicable Index declines from the
starting value, the Redemption Value of such ComPS will be less than the
original issue price. For Excess Return or Total Return ComPS, if the Applicable
Index decreases over the life of the ComPS, or if the percentage increase in the
Applicable Index is less than the amount of the Factor, the Redemption Value of
such ComPS will be less than the Issue Price. If the percentage increase in the
Applicable Index is greater than the amount of the Factor, the Redemption Value
will be greater than the Issue Price. In no circumstances will the Redemption
Value of the ComPS be less than zero, but the Redemption Value could be more or
less than the issue price. Because an investor's principal redemption is linked
to the performance of an Applicable Index calculation, it is important to
understand on what the Applicable Index calculation is based. Subject to the
more specific discussion of each item elsewhere in this Prospectus and in the
relevant Prospectus Supplement, following is a general summary of Bullion ComPS,
Excess Return ComPS and Total Return ComPS:
BULLION COMPS
Bullion ComPS, which are linked to the cash price of bullion (i.e., gold,
silver, platinum or palladium), pay both dividends and principal based on the
price of the applicable bullion. The Principal Amount of a 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
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<PAGE> 137
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 for JPM Individual Indices, which is described more fully
herein under "The JPM Individual 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 Individual 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 determine the daily change in the value of the Applicable Index with the next
designated contract of the same commodity on a periodic basis. This process of
replacement is called "rolling", and the 5-day period during which the
replacement occurs is called the "Rollover Period". For any month during which a
roll occurs, the daily change in value of 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 price change of the newly-designated contract.
An Excess Return Index for JPM Basket Indices which is described more fully
herein under "The JPM Basket Indices--Excess Return Methodology", represents the
cumulative return of holding a basket weighted position in the designated nearby
commodity futures contracts underlying such Applicable Index. Each Basket Excess
Return Index is defined by a strategy that holds futures positions in each of
the basket's commodities for a one month period and then rebalances the volume
of commodities held for the following month based on a constant dollar weighting
scheme. The rebalancing, in which the new volumes are calculated using the
basket's pre-defined percentage weights for each commodity in the basket, occurs
each month on the Rebalance Date. The new contract used to rebalance is the
designated contract for the next month. Because the designated futures contracts
underlying the Basket 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 determine the
daily change in the value of the index with the next designated contract of the
same commodity on a periodic basis. This process of replacement is called
"rolling", and the 5-day period during which the replacement occurs is called
the "Rollover Period". For any month during which a roll occurs, the daily
change in value of a Basket Excess Return Index for all days prior to the
Rollover Period is calculated using the sum for all commodities of the old
contract volumes multiplied by the price change of the old contracts (the sum of
which is the basket's change due to its underlying futures profit and losses or
"Futures P&L"). Beginning with the first day after the beginning of the Rollover
Period, the Futures P&L of a Basket Excess Return Index is calculated based on
80% of the old volume multiplied by the price change of the old contract plus
20% of the new volume multiplied by the price change in the new contract.
Similar 20% adjustments are made in the volumes attributable to each commodity's
contracts price change each day of the Rollover Period such that, by the day
after the Rollover Period ends and all subsequent days until the next Rollover
Period, the daily index change attributable to futures (Futures P&L) is equal to
100% of the sum of the new volume multiplied by the price change in the new
contract for each commodity in the basket.
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<PAGE> 138
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 price change in the designated contracts
underlying such index. Thus, any events which affect the designated contracts
underlying such Excess Return Index may affect the Redemption Value of such
ComPS.
TOTAL RETURN COMPS
ComPS which are linked to a Total Return Index may pay a fixed or floating
dividend, if any, 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 for JPM Individual Indices, which is described more fully
herein under "The JPM Individual Indices--Total Return Methodology", represents
the cumulative return of holding an unlevered position in the designated nearby
commodity futures contracts underlying such Individual 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. Like an Individual Excess Return
Index, 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; however the Individual Total Return Index daily change will also
include a change in value resulting from the daily Collateral Yield. The
designated futures contracts underlying Individual Total Return Indices must
also be "rolled" as described above under "Individual Excess Return ComPS".
A Total Return Index for JPM Basket Indices which is described more fully herein
under "The JPM Basket Indices--Total Return Methodology", represents the
cumulative return of holding a basket weighted position in the designated nearby
commodity futures contracts underlying such Applicable Index plus a collateral
yield on such fluctuating index value using the most recent weekly auctioned
3-month rate for U.S. Treasury Bills. Like the Basket Excess Return Indices,
each Basket Total Return Index is defined by a strategy that holds futures
positions in each of the basket's commodities for a one month period and then
rebalances the volume of commodities held for the following month based on a
constant dollar weighting scheme. However, the Basket Total Return Indices have
an additional return component equal to the 3 month Treasury Bill collateral
yield on the fluctuating index value. The designated futures contracts
underlying the Basket Total Return Indices must be "rebalanced" and "rolled" as
described above under "Basket Excess Return ComPS."
Therefore, ComPS linked to a Total Return Index may bear dividends, if any,
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 price 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.
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CALCULATION OF REDEMPTION VALUE
The Redemption Value of any particular series of ComPS will be determined in
accordance with one of the following methodologies (however, such Redemption
Value will never be less than zero):
Excess Return Index. In the case of ComPS for which the Applicable
Index is an Excess Return Index, the Redemption Value payable in respect of
the ComPS on the Settlement Date will be determined by the Calculation
Agent based on the following formula:
<TABLE>
<C> <C> <C> <S> <C>
Applicable Index Settlement Value
Redemption Value = FA X ( ------------------------------------- - Factor )
Applicable Index Commencement Value
</TABLE>
where "FA" refers to the Face Amount of the ComPS, "Applicable Index
Settlement Value" refers to the arithmetic average of the values of the
Applicable Index for the 10 consecutive days on which open-outcry
trading on either the New York Mercantile Exchange ("NYMEX") or the
London Metal Exchange (the "LME") is scheduled to occur or occurs (each,
a "Trading Day") and on which no Market Disruption Event occurs
immediately following the 20th scheduled Business Day prior to Stated
Maturity (such 10 days, the "Determination Period") (calculated in
accordance with the methodology described below under the caption "The
JPM Indices--Excess Return Index"); provided, that if a Market
Disruption Event remains in effect for longer than 20 consecutive
Trading Days (or such period as may be specified in the applicable
Prospectus Supplement) falling within such Determination Period and in
the reasonable judgment of Morgan Guaranty such Market Disruption Event
is likely to remain in effect, then the Applicable Index Settlement
Value for such days may be determined by Morgan Guaranty in good faith
based on 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
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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.
MODIFICATIONS TO JPM INDICES
Morgan Guaranty reserves the right at its discretion to make any modifications
to the JPM Indices based on the recommendations of the JPMCI Policy Committee.
The JPMCI Policy Committee advises Morgan Guaranty with respect to, among other
things, the composition of the JPM Indices, the price sources upon which the JPM
Indices are based (i.e., the Benchmark Contracts), and the weightings and
calculation methodology of the JPM Indices, with a view toward maintaining the
JPM Indices as appropriate commodity investment benchmarks that serve as a
measure of performance of the commodity markets. Currently, the inclusion
requirements for the futures contracts underlying the JPM Indices require that
such contracts be sufficiently liquid and representative price sources. It is
possible, however, that any such 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
"The ComPS Benchmark Contract Replacement Criteria", 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).
FOR JPM INDIVIDUAL INDICES:
EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE
If at any time no contracts satisfying both clauses (i) and (ii) of the ComPS
Benchmark Contract Replacement Criteria can be found to serve as a Benchmark
Contract for any series of ComPS the Applicable Index for which is a JPM
Individual 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).
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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 a JPM Individual 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
Morgan Guaranty, 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."
FOR JPM BASKET INDICES: CHANGE IN JPM BASKET INDEX WEIGHTING
If at any time no contracts satisfying both clauses (i) and (ii) of the ComPS
Benchmark Contract Replacement Criteria can be found to serve as a Benchmark
Contract for any series of ComPS the Applicable Index for which is a JPM Basket
Index Excess Return Index or Total Return Index, the Benchmark Contract will be
removed from the basket. Unlike the ComPS on JPM Individual Indices, the
Applicable Index Settlement Value for a ComPS for which the Applicable Index is
a JPM Basket Index will not be determined early. Rather the Applicable Index
will continue to be calculated using the JPM Basket Index calculation
methodology by excluding the removed commodity, and using the new weights as
determined by Morgan Guaranty under the advice of the JPMCI Policy Committee.
The new weights will adjust only for the removed commodity, taking its old
arithmetic percentage weight in the Applicable Index and dividing it up among
one or more of its same subindex group members (subindex groups are energy,
precious metals, base metals, and agricultural). Thus, for example, the removal
of an energy-related commodity will not change the energy related weighting in
the JPMCI basket, but it will change the individual weightings of some or all of
the remaining energy components within the energy subindex. For example, if
Natural Gas is removed from the JPM Indices, its 7% weight in the JPMCI Basket
will be divided among the 3 remaining energy commodities (crude oil, heating
oil, and unleaded gasoline) as determined by Morgan Guaranty with the advice of
the JPMCI Policy Committee and the energy subindex weight will remain at 55% for
the basket.
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 a JPM Basket Excess Return Index or 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 of the ComPS Benchmark Contract Replacement Criteria which contract
is subject to an amount of cost or tax less than or equal to such increased
amount or (y) if no contract satisfying clause (x) of this paragraph is
designated by Morgan Guaranty, to cause at its option the removal of the
affected Benchmark Contract from the JPM Indices. Unlike the ComPS on JPM
Individual Indices, the Applicable Index Settlement Value for a ComPS for which
the Applicable Index is a JPM Basket Index will not be determined early. Rather
the Applicable Index will continue to be calculated using the JPM Basket Index
calculation methodology by excluding the removed commodity, and using new
weights as determined by Morgan Guaranty with the advice of the JPMCI Policy
Committee. The new weights will adjust only for the removed commodity, taking
the
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removed commodity's old arithmetic percentage weight in the Applicable Index and
dividing it up among one or more of its subindex group members (subindex groups
are energy, precious metals, base metals, and agricultural). Thus, for example,
the removal of an energy-related commodity will not change the energy related
weighting in the JPMCI basket, but it will change the weightings some or all of
the remaining energy components. For example, if Natural Gas is removed from the
JPM Indices, its 7% weight in the JPMCI Basket will be divided among the 3
remaining energy commodities (crude oil, heating oil, and unleaded gasoline) as
determined by Morgan Guaranty with the advice of the JPMCI Policy Committee and
the energy subindex weight will remain at 55% for the basket.
As discussed below, in order to satisfy the JPMCI Inclusion Criteria, a futures
contract must (i) be priced in U.S. dollars, or if priced in a foreign currency,
the exchange on which the contract is traded must publish an official exchange
rate for conversion of the futures contract price into U.S. dollars and such
currency must be freely convertible into U.S. dollars; (ii) be traded on a
regulated futures exchange located in the United States, Canada, the United
Kingdom, Japan, Singapore or any country which at such time is a member of the
Organization of Economic Cooperation and Development (an "O.E.C.D. country") and
(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 Trust'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 Trust 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 Trust 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 Trust shall pay the Early Redemption Value, together with all accrued but
unpaid dividends from quarterly periods prior to the
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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.
"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
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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 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.
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"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.
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
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<PAGE> 146
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.
CALCULATIONS
As discussed above, the Trust 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 Trust 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 Trust in the ordinary course of business.
LICENSE OF APPLICABLE INDEX
Morgan Guaranty will enter into a license agreement (the "License Agreement")
granting the Trust 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
Trust on a regular basis with the result that the Trust is unable to determine
the Applicable Index Settlement Value and the Early Redemption Value and
Redemption Value payable in respect of such ComPS, the Trust, its Calculation
Agent or its authorized designee (which shall be a major accounting firm
appointed by the Trust) shall be authorized to calculate the Applicable Index.
In such event, Morgan Guaranty will provide the Trust, its Calculation Agent or
such accounting firm with any and all information which may be necessary in
order to enable the Trust, 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.
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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 Trust, on behalf of holders of the Securities of
the applicable series, 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 Trust, on behalf of
holders of the Securities of the applicable series, of its rights as holder of
the applicable Related Note against Morgan Guaranty and of its rights under the
Related Note Guarantee against J.P. Morgan. In addition, upon the occurrence and
during the continuance of a Note Event of Default that is attributable to the
failure of Morgan Guaranty to pay principal of or interest on the Related Note
on the date such principal or interest is otherwise payable (or in the case of a
redemption, on the redemption date), any holder of the outstanding Preferred
Securities may directly institute a Direct Action on or after the date of the
occurrence of such Note Event of Default without first instituting a legal
proceeding against the Trust, the Property Trustee or any other person or
entity. Notwithstanding any payments made to such holder of Preferred Securities
by J.P. Morgan in connection with a Direct Action, J.P. Morgan shall remain
obligated to pay the principal of and interest on the Preferred Securities, and
the rights of J.P. Morgan, as Guarantor, shall be subrogated to the rights of
such holder of Preferred Securities with respect to payments on the Preferred
Securities to the extent of any payment made by J.P. Morgan to such holder of
Preferred Securities in such Direct Action. J.P. Morgan, through its obligations
under the Guarantee, the Related Note Guarantee and the Declaration, 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 Trust 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 certain voting rights relating to a
payment default on or adverse change to the Preferred Securities, but will not
be entitled to vote to appoint, remove or replace the Trustees of the Trust or
to increase or decrease the number of Trustees, 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
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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.
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. Investors in Preferred Securities
have a direct right to direct interest distributions on the applicable Related
Note.
IMPOSITION OF BANK REGULATORY RESTRICTIONS
The Trust's ability on behalf of holders of Securities of any series 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, 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 Trust,
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
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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 JPM basket and sub-indices 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
indices, futures contracts or commodities could adversely affect the value of
similar outstanding ComPS.
POTENTIAL FOR ADVERSE INTERESTS
As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in
trading activities related to the futures contracts or the commodities
underlying the Applicable Index and other instruments or derivatives products on
or related to the Applicable Index, for their accounts where permitted or for
other accounts under their management. Morgan Guaranty, JPMSI and their
affiliates, as well as unaffiliated third parties, may also engage in other
activities related to the Applicable Index, as discussed above. Because Morgan
Guaranty will issue the Related Notes to the Trust on behalf of holders of the
Securities, 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
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longer-dated contracts underlying the Applicable Index during the Rollover
Period were more than the price of the shorter-dated contracts which they will
replace and (ii) the price of the longer-dated contracts were to decline as such
contracts approach maturity (i.e., the price of the longer-dated contracts were
to converge toward the price of the replaced shorter-dated contracts) (only, in
the case of a Total Return Index, if each declines by more than the amount of
the Collateral Return Component). While many of the commodities included in the
JPM Indices have historically exhibited periods of both "backwardation" (i.e.,
the prices of longer-dated contracts are below the prices of shorter-dated
contracts) and contango, there can be no assurance that backwardation will exist
at any or all times. If the Applicable Index is an Excess Return Index or a
Total Return Index, the absence of backwardation in the market for the commodity
underlying the Applicable Index could adversely affect the Applicable Index and,
correspondingly, could adversely affect the value of the ComPS. Additionally,
the issuance and/or the trading of the ComPS could adversely affect the market
for the benchmark contracts underlying such Applicable Index and, accordingly,
could adversely affect the value of such ComPS and could result in a substantial
loss to the holders thereof. See "Description of the ComPS--Calculation of
Redemption Value".
VOLATILITY OF COMMODITY AND COMMODITY FUTURES PRICES
Prices of commodities and commodity futures contracts are extremely volatile and
can be affected by a variety of factors, including weather, governmental
programs and policies, national and international political and economic events,
changes in interest and exchange rates and trading activity in such commodities
and commodity futures contracts. Volatility in the benchmark contracts
underlying any Applicable Index will correlate directly to volatility in such
Applicable Index. Such volatility could lead some investors in the futures
market to withdraw from the applicable futures markets, which could adversely
affect the liquidity of such markets and could adversely affect the value of
such Applicable Index and, correspondingly, the value of the ComPS.
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.
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SUSPENSION OR MATERIAL DISRUPTION OF COMPS, FUTURES OR
COMMODITIES TRADING; TEMPORARY DISTORTIONS
The futures markets and the markets for the commodities underlying the
Applicable Index are subject to temporary distortions or other disruptions due
to conditions of illiquidity in the markets, the participation of speculators,
government regulation and intervention and the other factors referred to in the
preceding paragraph. In addition, U.S. futures exchanges have regulations, and
the LME and certain foreign exchanges on which replacement Benchmark Contracts,
if any, may trade (which exchanges must have information-sharing arrangements
with the Securities and Exchange Commission and be regulated exchanges located
in the United States, Canada, the United Kingdom, Japan, Singapore or an
O.E.C.D. country) may have regulations, which limit the amount of fluctuation of
futures contracts prices which may occur during a single trading day or the
settlement spread between adjoining contracts. Such price limits are generally
referred to as "daily price fluctuation limits" or, more commonly, "daily
limits", and such limitations on settlement spreads are generally referred to as
"spread limits", and the maximum or minimum price of a contract on any given
day, as a result of the effect of such limits, is referred to as a "limit
price", as discussed below. In a particular futures contract, once the limit
price has been reached in such a contract, no trades may be made on that day at
a price above or below the limit price, as the case may be. Limit prices may
have the effect of precluding trading in a particular contract for all or a
portion of a trading day or forcing the liquidation of contracts at
disadvantageous times or prices. Such circumstances, particularly if they occur
during the Rollover Period for the Applicable Index (which is an Excess Return
Index or a Total Return Index) or during the Early Determination Period or the
Determination Period (as defined herein) for such ComPS, could adversely affect
the value of the Applicable Index and/or could constitute a Market Disruption
Event (as defined herein) and, therefore, could adversely affect the value of
such ComPS.
Additionally, because it is intended that each series of ComPS will be listed on
a stock exchange, and because ComPS will likely trade as equity securities in
any such secondary market, trading in ComPS may be subject to interruption or
delay due to extreme volatility in the trading prices of equity securities
generally in any such secondary market, notwithstanding the specific price
movements of the ComPS.
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.
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HISTORICAL CORRELATIONS MAY NOT PREVAIL IN THE FUTURE
Although historically the JPMCI and many of the commodities underlying the JPM
Indices 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 later of fifth Business Day after the last day of
the applicable Early Determination Period or the Determination Period and their
respective Early Determination Date or Stated Maturity. Such delay could be of
indefinite duration, during which time a holder of ComPS will not receive the
Early Redemption Value or Redemption Value thereof, as applicable. With respect
to ComPS for which the Applicable Index is either a Price Reference Index or an
Excess Return Index, in the event that payment of the Redemption Value is
postponed beyond the Stated Maturity, interest will accrue on the Face Amount in
the manner described herein, but no distributions will be payable on such ComPS
after the Stated Maturity thereof. With respect to ComPS for which the
Applicable Index is a Total Return Index, in the event that the payment of the
Redemption Value is postponed beyond the Stated Maturity, no interest, dividends
or distributions in respect of such ComPS will accrue or be payable after the
Stated Maturity. With respect to all ComPS, no dividends or 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.
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FOR JPM INDIVIDUAL INDICES
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 a JPM Individual 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.
FOR JPM BASKET INDICES
If at any time no replacement contracts can be found to serve as a Benchmark
Contract with respect to an Applicable Index for any series of ComPS the
Applicable Index for which is a JPM Basket Excess Return Index or Total Return
Index, the Benchmark Contract will be removed from the JPM Indices. The basket
Applicable Index will continue to be calculated using the JPM Basket Index
calculation methodology by excluding the removed commodity using new weights
(which sum to 100% for the remaining commodities in the Applicable Index)
determined by Morgan Guaranty with the advice of the JPMCI Policy Committee. The
new weights will be published by Morgan Guaranty and will remain in effect until
further notice. Such removal of the affected commodity and new weightings for
the affected Applicable Indices may result in the holders of such ComPS
receiving an amount that is less than what would have been received if the index
methodology was not changed. 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 the
Applicable Index for which is a JPM Basket Excess Return Index or Total Return
Index, 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 removal of the affected Benchmark Contract from the JPM Indices as described
above under "Description of the ComPS--Change in JPM Basket Index Weightings".
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 the removal of the
affected commodity and subsequent reweighting of the Applicable Index, exercise
of such option and discretion may raise an adverse interest. Such removal of
contracts due to the imposition of any increased cost or 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 tax were imposed had remained the
benchmark or in the JPM Basket Indices, as the case may be.
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Any removal or change in contracts underlying the JPM Indices will not cause the
affected indices to drop or rise in value on the day of such change. Rather such
removal or change will cause the Applicable Indices to have their subsequent
daily changes calculated using a new contract or weights as the case may be.
Such removal or change in contracts could cause some holders of the ComPS the
Applicable Index of which is affected by such change or removal to sell their
ComPS and the trading price of such ComPS in any secondary market which then
exists to decline.
EARLY REDEMPTION
All ComPS may be redeemed by the Trust prior to their Stated Maturity upon the
occurrence of a Special Event or, if so specified in the applicable Prospectus
Supplement, redeemed at the option of the holders thereof at certain times. In
the case of a redemption upon the occurrence of a Special Event, the Early
Redemption Value paid by the Trust 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 Trust 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
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<PAGE> 155
of substantial futures or commodities price volatility, since properly
correlating such ComPS either as a hedge of other assets or correlating such
ComPS to the hedge thereof may become more difficult.
THE UNDERLYING MARKETS
FUTURES MARKETS
An exchange-traded futures contract is a bilateral agreement providing for the
purchase and sale of a specified type and quantity of a commodity or financial
instrument during a stated delivery month for a fixed price or, in the case of a
futures contract on an index, providing for the payment and receipt of a cash
settlement. By its terms, a futures contract provides for a specified settlement
month in which the commodity or financial instrument is to be delivered by the
seller (whose position is therefore described as "short") and acquired by the
purchaser (whose position is therefore described as "long") or in which the cash
settlement amount is required to be paid. Prior to the date on which delivery is
to be made under a 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 a 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
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<PAGE> 156
members by means of a telephone trading system. Settlement prices for contracts
with specified settlement dates are determined by a committee selected by the
directors of the LME (the "Quotations Committee") promptly following the morning
trading session, based on the last bid and offer prices for the relevant
commodity at such trading session or, if the Quotations Committee determines
there were no such prices, at such other level as the Quotations Committee may
in its discretion determine at the end of each LME trading day. The Quotations
Committee is similarly responsible for determining LME closing prices. If the
Quotations Committee fails to determine such closing prices on any LME trading
day, such closing prices shall be determined by the London Clearing House, which
is the clearinghouse for the LME.
United States commodity futures exchanges typically have similar procedures for
determining end-of-day settlement prices, although each exchange or type of
commodity may have slightly different procedures. All exchanges have quotations
or settlement price committees which determine the settlement prices using
prescribed formulaic methodologies. However, such committees may, if they
believe the application of the formulaic methodology would yield a settlement
price which is inappropriate, in their own discretion determine a settlement
price which is appropriate.
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.
For agricultural contracts, the formulaic rule to determine the proposed
settlement price uses the middle "tick" or price within the closing range (e.g.,
if there were an odd number of ticks (i.e., separate price levels at which the
contract could trade) in the closing range then the middle tick is chosen; if
there were an even number of ticks within the range, then, of the two middle
ticks, the tick closest to the previous days settlement price is chosen, if
there is no range or only one price then that last price is chosen).
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 of 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 LBMA 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
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<PAGE> 157
addition, all market marking members of the LBMA, in common with all U.K.-based
banks, are subject to capital adequacy and liquidity requirements and regular
supervisory meetings to consider the adequacy of their management, systems and
controls. The Bank of England takes an active role in the LBMA gold market,
including holding certain gold for delivery in its vaults and holding gold in
accounts.
INVESTING IN THE COMMODITIES AND COMMODITY FUTURES MARKETS
Investments in commodities and commodity futures markets offer potential returns
from several sources and strategies, two of which are as follows: (i) the change
in price of the underlying commodity or commodity futures contract ("Price
Return") and (ii) the cumulative return created by a continuous investment in
the same type of futures contract by buying, holding and then selling such
contracts as they approach expiration and reinvesting the notional proceeds of
such sale in the same type of contract with a more distant expiration date (such
cumulative return, "Excess Return", is the sum of the price returns for all such
contracts held during their holding period, and such Excess Return is often
described or accounted for as the sum of Spot Return plus Roll Return).
Price Return. Price Return is the return that arises from changes over
time in prices of futures contracts or in the prices of the commodities
themselves, as applicable. Thus, if on the first day of a given month the
price of the futures contract is $15.00, and on the 30th day of such month
the price of the futures contract is $15.50, the investor in such contract
has earned a price return of 3.33% on the initial notional amount of
$15.00.
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).
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<PAGE> 158
EXAMPLE
The following table illustrates the calculation of the Excess Return of a
continuous investment in nearby futures over a 2 period holding period and shows
how Spot Return plus Roll Return are defined and calculated so that the sum
thereof equals the actual Excess Return calculation.
<TABLE>
<CAPTION>
END OF END OF
DAY 1 PERIOD 1 PERIOD 2 TOTAL
------ -------- -------- -----
<S> <C> <C> <C> <C>
Futures #1......................................... $15.00 $ 15.00
Futures #2......................................... $14.75 $ 14.50 $ 15.00
Return on Futures #1............................... 0.00%
Return on Futures #2............................... NA 3.45%
Return on Excess Return............................ 0.00%(a) 3.45%(b) 3.45%
</TABLE>
- ---------------
(a) return on Futures #1 for first month holding period, rounded to two
decimal places
(b) return on Futures #2 for second month holding period, rounded to two
decimal places
In the preceding example, if the change in value of an index had been calculated
entirely based on Futures #1 beginning on day 1, had ceased to be based on such
contract at the end of Period 1 and had begun to be calculated entirely based on
Futures #2 on such day, and had continued to be based entirely on such contract
to expiration at the end of Period 2, the index would have appreciated by 3.45%,
despite the fact that the price of Futures #1 on day 1 and the price of Futures
#2 at the end of Period 2 were equal (i.e. Spot Return was 0.00%). Thus, while
Futures #1 yielded no price return, Futures #2 yielded a price return of 3.45%
during its holding period. Such a continuous investment in nearby futures
contracts produced a return of 3.45% over the two period holding period, which
can be accounted for as a Spot Return of 0.00% plus a Roll Return of 3.45%. Spot
Return is (($15.00/$15.00) -1) or 0.00%, since the beginning price of Futures #1
is $15.00 and the ending price of Futures #2 is $15.00 over the total holding
period. Because Roll Return is the number that, when added to the Spot Return
calculation, gives the true Excess Return, and because Excess Return is 3.45% in
the above example, Roll Return must be Excess Return minus Spot Return
(3.45%-0.00%), or 3.45%. However, this is only one example of a possible futures
market alignment; in any market, Excess Return, or the sum of Spot Return plus
Roll Return, could be positive or negative over any given holding period.
The price of the longer-dated position may be higher or lower than the price of
the shorter-dated position based on a variety of factors, including the cost of
borrowing, transportation, storage and insurance of 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
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<PAGE> 159
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 basket, 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 industrial, non-financial 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,
precious metal and agriculture components and on LME end-of-day closing prices
for third Wednesday dates for base metal components. 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". JPM Indices
which are based upon at least two or more underlying commodities (whether
computed as an excess return or a total return basket) are referred to as "JPM
Basket 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 Index. At the date of this Prospectus, such
information is available on both Reuters and Bloomberg.
JPM INDIVIDUAL INDICES
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".
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<PAGE> 160
For example, to calculate the value of an Excess Return Index (I(t)) on a
Trading Day not subject to a Market Disruption Event for which I(t-1) equals 100
and on which the only Benchmark Contract moves in value from $14.50 to $15.00
(resulting in an Index change of 3.4482759%),
I(t) = 100 + (100 X 0.034482759)
I(t) = 100 + 3.4482759
I(t) = 103.4482759
TOTAL RETURN METHODOLOGY
The methodology applied by Morgan Guaranty in calculating Total Return JPM
Individual Indices is set forth below. If the Applicable Index of any series of
ComPS is a Total Return Index, the following methodology will be applied by the
Calculation Agent in calculating the Applicable Index:
The value of the relevant Total Return Index for any Trading Day not subject to
a Market Disruption Event will be determined with reference to the following
formula:
I(t) = I(t-1) + Change(t) + R(t)
Where "I(t)" is the value of the relevant Total Return Index on the date
of determination (such date being referred to as "(t)"); "I(t-1)" is the
value of the relevant Total Return Index on the Trading Day not subject
to a Market Disruption Event immediately preceding the date of
determination (such date being referred to as "(t-1)"); and "Change(t)"
is equal to the product of (i) I(t-1) and (ii) the sum of the weighted
percentage changes on the date of determination of the U.S. dollar
prices of the futures contracts underlying the Applicable Index. Each
such weighted percentage change shall be equal to the product of (a) the
U.S. dollar percentage gain or loss on such underlying contracts to the
date of determination from the immediately preceding Trading Day that is
not subject to a Market Disruption Event multiplied by (b) the
applicable futures contract's weight in the Applicable Index for such
date of determination. Also, "R(t)" is the return arising for the period
from (t-1) to (t) from interest payable on the nominal value of the
Applicable Index, which shall be based on the rate determined with
reference to the following formula:
R(t) = I(t-1) X Y(t)
Where "I(t-1)" has the meaning set forth in the preceding paragraph and
Y(t) = [1/(1-Q)](Days/91) - 1
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).
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<PAGE> 161
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" or "delivery date" 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. The "delivery date" is the date on which a delivery of the physical
commodity is contemplated under the terms of the contract.
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<PAGE> 162
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 NYMEX 42,000 gallons Every month
Harbor
6 Natural Gas $/MM BTU Henry Hub, NYMEX 10,000 MM BTU Every month
Louisiana
7 Unleaded Gasoline c/gal New York NYMEX 42,000 gallons Every month
Harbor
8 Light "Sweet" Crude Oil $/BBL Cushing, NYMEX 1,000 bbl Every month
Oklahoma
9 Gold $/troy oz COMEX- COMEX 100 troy oz February, April, June, August,
(.995 fineness) approved December
vaults
10 Silver c/troy oz COMEX- COMEX 5,000 troy oz March, May, July, September,
(.999 fineness) approved December
vaults
11 Platinum $/troy oz NYMEX- NYMEX 50 troy oz January, April, July, October
approved
vaults
12 No. 2 Yellow Corn c/bushel CBOT Delivery CBOT 5,000 bushels March, May, July, December
Sites
13 No. 2 Yellow Soybeans CBOT Delivery CBOT 5,000 bushels January, March, May, July,
c/bushel Sites November
14 Hard Winter Wheat c/bushel CBOT Delivery CBOT 5,000 bushels March, July, December
Sites
</TABLE>
Additional underlying futures contracts may from time to time be added to the
JPM Indices and may thereafter serve as Applicable Indices. Information
substantially similar to that disclosed in the preceding table will be disclosed
in any Prospectus Supplement relating to such additional Applicable Indices.
As discussed above, for JPM Individual Indices and for the Applicable Indices,
the replacement of the contracts serving as the basis for the calculation of
index change will be effected on a proportionate basis over the five day
Rollover Period in order to avoid the risks of effecting such replacement
entirely on a single day (e.g., a day on which the applicable market displays
unusual volatility).
As a result of such process of replacement, the weighting of contracts in the
Applicable Indices shall be such that for the Trading Days in any month up to
and including the first day of the Rollover Period for such month, the Change(t)
(as described above) will be calculated as 100% of the daily change of the
underlying Old Contracts. The Change(t) for the second Trading Day of the
Rollover Period (assuming no Market Disruption Event) shall be calculated based
80% on the change attributable to the Old Contracts plus 20% on the change for
the New Contacts, with similar adjustments made for each day of the Rollover
Period.
- ---------------
(1) The LME trades contracts on every business day for three months and monthly
contracts maturing on the third Wednesday of each of the next 12 or more
months. The most actively traded contracts are the 3-month forward, the
cash, and the contract maturing the third Wednesday of each month.
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<PAGE> 163
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>
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:
- --------------------------------------------------------------------------------
41
<PAGE> 164
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).
JPM BASKET INDICES
JPM Basket Indices are arithmetic weighted baskets consisting of 2 or more
commodities. The base metal, energy, and precious metals JPM Basket Indices have
component weights that are in the same proportion as their weights within the
JPMCI Basket Index. The agricultural JPM Basket Index has equally weighted
components.
The JPMCI subindex component weights are in the same proportion as they are in
the JPMCI basket (e.g., the base metals basket component relative weights are
the same as their relative weight within the JPMCI basket). The JPM Basket Index
arithmetic weights are shown below. Column C shows the weights for the JPMCI
Basket Indices, while column E shows the weights for the JPMCI sub-indices: base
metals, energy, precious metals, and agricultural.
42
<PAGE> 165
- --------------------------------------------------------------------------------
TABLE OF SUBINDEX WEIGHTS:
<TABLE>
<CAPTION>
A B C E
JPMCI D
BASKET MEMBER OF WEIGHT
EXCHANGE COMPONENT WEIGHT WHICH SUBINDEX IN SUBINDEX*
- -------- --------- ------ -------------- ------------
<S> <C> <C> <C> <C>
LME Aluminum 9% Base metals 9/22 or 40.91%
LME Copper 8 Base metals 8/22 or 36.36%
LME Nickel 2 Base metals 2/22 or 9.09%
LME Zinc 3 Base metals 3/22 or 13.64%
-----
22/22 or 100%
NYMEX Crude Oil 33 Energy 33/55 or 60.00%
NYMEX Heating Oil 10 Energy 10/55 or 18.18%
NYMEX Unleaded Gasoline 5 Energy 5/55 or 9.09%
NYMEX Natural Gas 7 Energy 7/55 or 12.73%
-----
55/55 or 100%
COMEX Gold 15 Precious 15/23 or 65.22%
COMEX Silver 5 Precious 5/23 or 21.74%
NYMEX Platinum 3 Precious 3/23 or 13.04%
----- -----
100% 23/23 or 100%
CBOT Corn na Agricultural 1/3 or 33.33%
CBOT Soybeans na Agricultural 1/3 or 33.33%
CBOT Wheat na Agricultural 1/3 or 33.33%
------
3/3 or 100%
</TABLE>
- ---------------
* Subindex percentage weights are shown rounded to two decimal places.
The JPMCI arithmetic weights for the JPM Basket Indices will not change except
under circumstances described herein resulting in the removal of a commodity
from the JPM Indices.
BASKET CALCULATION METHODOLOGY
Each basket's return will be calculated using the JPMCI basket calculation
methodology. For a Total Return Index the Index calculation is as follows (the
Excess Return Index calculation is the same except that it excludes the daily
collateral interest):
Index (today) = Index (prior) + Futures P&L + Daily Collateral Interest
where.
Daily Collateral Interest = Index (prior) X Tbill Return = R(t) as defined in
Total Return
Methodology
under JPM Individual Indices
and
Futures P&L = the futures profit and loss (P&L) for any basket is the sum of
individual Futures P&L calculations for all commodities in the
basket. The futures P&L calculation is of the form:
P&L equals [volume X change in price of designated contract(s)]
REBALANCING JPM BASKET INDICES. To keep a continuous investment in the
commodity, the JPM Basket Indices must periodically change the contract
underlying the Future P&L calculation as the referenced contract nears its
expiration. To accomplish this the index transfers its Future P&L attribution
from the expiring contract to the next nearby designated contract. Such change
in Future P&L attribution does not
43
<PAGE> 166
change the index value, rather it changes the underlying contract referenced for
the following day's Future P&L changes. Each month, the index implements this
over a predefined 5 day "roll period" in which the volume attributed to the
expiring contract is reduced 20% each day (until zero) while the volume
attributed to the new designated contract is increased 20% each day (until
100%). For the JPM Basket Indices, the volumes each month are determined on the
first good trading day preceding the beginning of the Roll Period on which none
of the eleven commodities comprising the JPMCI Basket are subject to a Market
Disruption Event (the "Rebalance Date"), typically the 4th trading day of the
month. The volumes for each commodity in the baskets are determined by taking
the index value multiplied by the commodity weight in the basket divided by the
commodity price on the Rebalance Date, i.e.,
Volume = [Index Value X Commodity Weight]/Commodity Price.
Mathematically this is achieved as detailed below:
We adopt the following notation: (the subscript i always refers by number to the
commodities in JPMCI)
<TABLE>
<CAPTION>
NO. OFFICIAL NAME EXCHANGE
- --- ------------- --------
<S> <C> <C>
1 Aluminum LME
2 Copper LME
3 Nickel LME
4 Zinc LME
5 Heating Oil NYMEX
6 Natural Gas NYMEX
7 Unleaded Gasoline NYMEX
8 Crude Oil NYMEX
9 Gold COMEX
10 Silver COMEX
11 Platinum NYMEX
12 Corn CBOT
13 Soybeans CBOT
14 Wheat CBOT
</TABLE>
w(i) = Constant rebalancing weight for commodity i, e.g. w(3) = 0.02 or 2%
nickel for the JPMCI Basket
V(Oi) = The prior (or "old") number of units of commodity i held before
rebalancing
V(Ni) = The new number of units of commodity i held forward after rebalancing
P(it) = Defined spot price of commodity i at time t
O(it) = Old price of commodity i at time t (e.g. the 1st nearby futures)
N(it) = New price of commodity i at time t (e.g. the 2nd nearby futures)
I(t) = Index value at time t
C = Variable on current rebalancing date
RTB = The most recently available offer discount rate on 13-week U.S. treasury
bill as found in the H.15 (519) report published by the Board of Governors
of the Federal Reserve System.
Q = Quarterly discount rate calculated from RTB
Y = The collateral yield based on Q from (t-1) to (t) where (t) is the date of
determination (not subject to a Market Disruption Event) and (t-1) is the
Trading Day not subject to a Market Disruption Event immediately preceding
the date of determination.
(1) Y = [1/(1-Q)] (Days/91) - 1
Q = RTB X 91/360
Days = The number of calendar days from Trading Day (t-1) to (t)
On the Rebalancing Date, the volumes are reset according to the following
formulae:
(2) I(C) = I(t)
(3) V(NiC) = w()I(C) /N(iC,) for all i = 1,2,3... for all commodities in the
JPMCI-style basket
44
<PAGE> 167
To determine V(NiC) for any of the component sub-indices the relevant sub-index
value is used and the weight term is changed so that the sum of commodities in
the subindex still equals 1 (as shown in Column E of the table of Subindex
Weights on page [43]). for example, in the precious metals subindex the
component weights are: Gold: 65.22%; Silver: 21.74% and Platinum: 13.04% (15/23,
5/23, and 3/23 respectively).
Note that neither the index nor sub-index values change at the rebalancing time.
The rebalancing sets the volumes for the new monthly period.
To determine the index value for the JPMCI-style baskets at any time within the
month the following equations are used:
For the JPM Basket (Excess Return Indices)
(4a)I(t) = I(t-1) + Combined Futures P/L
For the JPM Basket (Total Return Indices)
(4b)I(t) = I(t-1) + Combined Futures P/L + Daily Collateral Interest(t)
(5) Daily Collateral Interest(t) = I(t-1) X Y(t) = R(t)
Equation (5) accrues the interest for the JPM Basket Total Return Indices. The
collateral interest is based on the yield (equation (1)) and the initial value
of the index for such period (i.e. settlement value for the Index at (t-1), the
last good Trading Day not subject to a Market Disruption Event), reflecting the
fact that this is the position that would have been collateralized. Futures P/L
on weekends and exchange holidays is zero. Interest accrues on an actual days
basis over weekends and holidays at the previous day's rate applicable to the
index (I(t-1)).
(6) Individual-Futures P/L Calculation for JPM Basket Indices
<TABLE>
<CAPTION>
End of Trading Day P/L Calculation for Trading Day not subject to a Market Disruption Event
<S> <C>
5 (O(i5) - O(i4) )V(Oi)
6 0.8(O(i6) - O(i5) )V(Oi) + 0.2(N(i6) - N(i5) )V(Ni)
7 0.6(O(i7) - O(i6) )V(Oi) + 0.4(N(i7) - N(i6) )V(Ni)
8 0.4(O(i8) - O(i7) )V(Oi) + 0.6(N(i8)- N(i7) )V(Ni)
9 0.2(O(i9) - O(i8) )V(Oi) + 0.8(N(i9) - N(i8) )V(Ni)
10 (N(i10) - N(i9) )V(Ni)
j (j>10 or j<5) (N(ij) - N(ij-1) )V(Ni)
</TABLE>
The Combined Futures P&L for the applicable basket is the sum of individual
Futures P&L calculations for all commodities in the basket. The Futures P&L
calculations shown from trading day ten above continue into and include the
fourth trading day of the next month in determining the value of the index at
any given time. The calculation on Trading Days five through ten reflects the
effect of rolling from the old contract into the new over a five day period.
Although 20% of the volume is rolled on the fifth Trading Day the amount held at
the start of the day is 100% of the old contract, as the roll will only occur at
the end of the Trading Day at the settlement price. Therefore, to determine the
profit or loss on that fifth Trading Day the index uses 100% of the old contract
volume, as that was the contract held during the course of the day by the index.
MARKET DISRUPTION EVENT ADJUSTMENTS:
For any commodity in the basket, if any day during the roll period is subject to
a Market Disruption Event for such commodity, the roll for such commodity will
not take place on such day, however the roll for all unaffected commodities will
take place. Although some commodity rolls are taking place, the Futures P&L
calculation is defined as zero for the Applicable Index for any Trading Day
subject to a Market Disruption Event, and the Applicable Index is not officially
calculated. For the affected commodity, the Futures P&L calculation will
continue to use the volume fraction in place on the first Trading Day subject to
a Market Disruption Event for such commodity. The change in volumes for the
affected commodity will be postponed until the next Trading Day of the Rollover
Period on which a Market Disruption Event
45
<PAGE> 168
affecting such commodity ceases to be in effect. On such Trading Day, the
replacement for that day and all preceding days will be effected for such
affected commodity at the end of the day. If the Market Disruption Event remains
in effect for the remainder of the Rollover Period, the affected commodity's old
contract volume will be replaced with the new contract volume to the full extent
not previously replaced at the end of the next succeeding Trading Day on which
such Market Disruption Event cease to be in effect.
On the first Trading Day not subject to a Market Disruption Event for all
commodities in the Applicable Index, such day referred to as "(t)", the Futures
P&L Calculation for the period from (t-1) to (t) will be implemented using the
sum of the daily P&L Calculations for all commodities from the first Trading Day
subject to a Market Disruption Event until Trading Day (t). However such daily
P&L Calculations are subject to adjustments for the price changes and volume
fractions used as follows:
(I) price changes for each commodity during this period are subject to the
following adjustments: (a) for any Trading Day on which a commodity is
subject to a Market Disruption Event the change in price is defined as
zero (whether a settlement price was published or not), (b) for the first
Trading Day on which such commodity was not subject to a Market Disruption
Event the price change is defined as the price change over the time period
the commodity was subject to a Market Disruption Event (i.e., it is the
price change from the Trading Day immediately prior to the onset of the
Market Disruption Event affecting such commodity to the first Trading Day
not subject to such Market Disruption Event affecting the commodity), and
(c) for commodities not subject to a Market Disruption Event on such day
and the immediately preceding Trading Day, price changes for such Trading
Day are the same daily price change as noted in Equation (6).
(II) volume fractions used for each daily P&L Calculation during this period
are (a) for any Trading Day on which a commodity is subject to a Market
Disruption Event, or for the first Trading Day such commodity was not
subject to such Market Disruption Event, the volume fraction used for such
commodity is the same volume fraction in effect on the first Trading Day
on which the commodity became subject to the Market Disruption Event as
noted in Equation (6) and (b) for commodities not subject to a Market
Disruption Event on such Trading Day and the immediately preceding Trading
Day, the volume fraction is the same volume fraction as noted in Equation
(6) for such Trading Day.
Example of a Rollover Period with a Market Disruption Event for a commodity in a
Basket Index:
<TABLE>
<CAPTION>
Price Change for
Old Contract New Contract Old Contract New Contract affected commodity
Trading Day of Month Volume Fraction Volume Fraction Price Price Old Contract New Contract
<S> <C> <C> <C> <C> <C> <C>
1-4 100% 0% 20 22
5 100 0 20 22 $0 $0
6 80 20 21 24 1 2
7 (MDE*) 60 40 23* 23* 0(defined) 0(defined)
8 60 40 23 22 2(23-21) -2(22-24)
9 20 80 21 22 -2 0
10 0 100 20 22 -1 0
11-month end
</TABLE>
In the example above, for an applicable basket excess or total return index,
because of the occurrence of a Market Disruption Event on Trading Day 7, the
basket index would not be officially calculated and no roll would occur for such
affected commodities (however the roll would occur using the usual scheduled
volume fractions for all unaffected commodities in the index). Since no Market
Disruption Event occurs on Trading Day 8, an index value is determined on
Trading Day 8, and the affected commodity's P&L calculation would use a price
change from Trading Day 6 to Trading Day 8 for the affected commodity and the
volume fraction of 60% (the scheduled volume fraction applicable for the Trading
Day 7, the first day on which the Market Disruption Event began). Thus the index
is defined on Trading Day 6; not defined on Trading Day 7 due to the occurrence
of a market Disruption Event, and then defined again on Trading Day 8. Trading
Day 8's index [I(t)] would equal I(t-1), the index on Trading Day 6, plus the
sum of the
46
<PAGE> 169
P&L Calculations for each commodity for Trading Days 7 and 8, plus (if a total
return index) the Collateral Return Component calculated using I(t-1) as the
notional index level, for the days from (t-1) to (t), and using the Tbill rate
applicable for Trading Day 7, the first day subject to the Market Disruption
Event.
The actual methodology applied by Morgan Guaranty in calculating Excess and
Total Return JPM Basket Indices is set forth above. If the Applicable Index of
any series of ComPs is a JPM Basket Index, such methodology will be applied by
the Calculation Agent in calculating the Applicable Index.
For JPM Basket Excess Return Indices, the value of the relevant JPM Basket
Excess 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) + Combined Futures P&L
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 "Combined
Futures P&L" is equal to the sum of equation (6) above for the
commodities in the relevant Applicable Index, subject to Market
Disruption Event adjustments. Equation (6) shows the Futures P&L
calculation for the relevant Trading Days applicable for each commodity
in the relevant Applicable Index, subject to Market Disruption Event
adjustments for volume, fraction and price changes.
For example, to calculate the value of a JPM Basket Excess Return Index (I(t))
which has three equally weighted component commodities on a Trading Day not
subject to a Market Disruption Event for which I(t-1) equals 100 and assuming
(i) the volumes attributable to the three commodities are 5, 10 and 8 and (ii)
the change in the relevant Benchmark Contracts are $1.00, $0.00 and $(0.50),
respectively, would be:
I(t) = 100 + [(5 X 1) + (10 X 0) + (8 X (0.5)]
I(t) = 100 + 1
I(t) = 101
FOR JPM BASKET TOTAL RETURN INDICES
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) + Combined Futures P&L + 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 "Combined
Futures P&L" is equal to the sum of equation (6) above for the
commodities in the relevant Applicable Index, subject to Market
Disruption Event adjustments. Equation (6) shows the Futures P&L
calculation for the relevant Trading Days applicable for each commodity
in the relevant Applicable Index, subject to Market Disruption Event
adjustments for volume, fraction and price changes. And "R(t)" is the
return arising for the period from (t-1) to (t) from interest payable on
the nominal value of the Applicable Index, which shall be based on the
rate determined with reference to the following formula:
R(t) = I(t-1) X Y(t)
Where "I(t-1)" has the meaning set forth in the preceding paragraph and
Y(t) = [1/(1-Q)](Days/91) - 1
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
47
<PAGE> 170
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 JPM Basket Total Return Index for any
Trading Day not subject to a Market Disruption Event for which I(t-1) equals 100
which has three equally weighted component commodities and assuming (i) the
volumes attributable to the three commodities are 5, 10 and 8 and (ii) the
change in the relevant Benchmark Contracts are $1.00, $0.00 and $(0.50)
respectively, 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 + [(5 X 1) + (10 X 0) + (8 X (0.5)] + 100 X
[(1/(1-0.0126388889)](1/91) - 1)
I(t) = 100 + 1.0 + (100 X 0.0001397838)
I(t) = 100 + 1.0 + .01397838
I(t) = 101.01397838
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:
JPMCI POLICY COMMITTEE
<TABLE>
<CAPTION>
NAME TITLE FUNCTION
---- ----- --------
<S> <C> <C>
John Coulter (Chairman).............. Managing Director, J.P. Global Commodities, London
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............... Senior Consultant, Brattle Economic Consultant and
Group former Visiting Fellow,
Institute of International
Economics
Jeanne Feldhusen..................... Managing Director, J.P. Head of Fixed Income
Morgan Research
</TABLE>
48
<PAGE> 171
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.
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 Securities. The following description sets forth certain general terms
and provisions of each Related Note to which any series of 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 the
Securities of such series. 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.
49
<PAGE> 172
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 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.
NOTE EVENTS OF DEFAULT
If any Note Event of Default shall occur with respect to any Related Note and be
continuing, the Property Trustee on behalf of holders of Securities of the
applicable series 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 "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 Trust to comply with any of its covenants or agreements
contained in the relevant Related Note; and (iv) certain events of bankruptcy,
insolvency, receivership or reorganization involving Morgan Guaranty or certain
affiliates. If any Note Event of Default described in clause (i), (ii) or (iii)
above occurs and is continuing, the Property Trustee, on behalf of holders of
Securities of the applicable series, 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 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 Property
Trustee, on behalf of holders of Securities of the applicable series, may waive
certain past defaults and their consequences with respect to such Related Note.
Pursuant to the Declaration, the holders of Preferred Securities in certain
circumstances have the right to direct the Property Trustee to exercise on their
behalf certain of its rights as the holder of the relevant Related Note. A
default or event of default under a Related Note corresponding to one series of
Securities will not constitute a default or event of default under a Related
Note corresponding to any other series of Securities.
MODIFICATION OF ANY RELATED NOTE
Morgan Guaranty and the Property Trustee may, without the consent of the holders
of any 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
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surrender any rights of Morgan Guaranty, for the benefit of the Property
Trustee; 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
Property Trustee, 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. The
Guarantee will be separately qualified under the Trust Indenture Act and will be
held by U.S. Bank Trust National Association, acting in its capacity as
indenture trustee with respect thereto.
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 Trust, as and when
due, regardless of any defense, right of set-off or counterclaim that the Trust
may have or assert. The following payments with respect to each series of
Preferred Securities (the "Guarantee Payments"), to the extent not paid by the
Trust, 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 Trust, on behalf of holders of
Securities of such series, of interest or principal on the Related Note
associated with such Preferred Securities, and (ii) upon a voluntary or
involuntary dissolution of the Trust (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 with
respect to such Preferred Securities to the extent the Trust has funds available
therefor and (B) the amount of assets of the Trust consisting of the Related
Note associated with such Preferred Securities and the proceeds thereof
remaining available for distribution to holders of such Preferred Securities
upon such dissolution of the Trust. J.P. Morgan's obligation to make a Guarantee
Payment may be satisfied by direct payment of
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the required amounts by J.P. Morgan to the holders of Preferred Securities or by
causing the Trust to pay such amounts to such holders.
The Guarantee will be a guarantee with respect to the Preferred Securities of
each series issued by the Trust 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 Trust will not pay distributions on
the related Preferred Securities and will not have funds available therefor. See
"Description of the Related Notes".
So long as any Preferred Securities remain outstanding, J.P. Morgan will not
declare or pay dividends on, or redeem, purchase, acquire or make a distribution
or liquidation payment with respect to, any of its common stock or preferred
stock or make any Guarantee Payment with respect thereto if at such time (i)
J.P. Morgan shall be in default with respect to its Guarantee Payments or other
payment obligations under the Guarantee or (ii) there shall have occurred any
event of default under the Declaration; provided, however, that the foregoing
restrictions shall not apply to (a) dividends, redemptions, purchases,
acquisitions, distributions or payments made by J.P. Morgan by way of issuance
of shares of its capital stock, (b) payments of accrued dividends by J.P. Morgan
upon the redemption, exchange or conversion of any preferred stock of J.P.
Morgan as may be outstanding from time to time in accordance with the terms of
such preferred stock, (c) cash payments made by J.P. Morgan in lieu of
delivering fractional shares upon the redemption, exchange or conversion of any
preferred stock of J.P. Morgan as may be outstanding from time to time in
accordance with the terms of such preferred stock, (d) repurchases, redemptions
or other acquisitions of shares of capital stock of J.P. Morgan in connection
with any employment contract, benefit plan or other similar arrangement with or
for the benefit of employees, officers, directors of consultants, or (e) any
declaration of a dividend in connection with the implementation of a
stockholders' rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of such rights pursuant thereto.
MODIFICATION OF THE GUARANTEE; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights of
holders of Preferred Securities (in which case no consent will be required), the
Guarantee may be amended by J.P. Morgan and the Property Trustee only with the
prior approval of the holders of not less than a majority in aggregate Principal
Amount at such time of the holders of each series of affected 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
The Guarantee will be deposited with U.S. Bank Trust National Association, as
indenture trustee, to be held for the benefit of holders of the Preferred
Securities. U.S. Bank Trust National Association shall enforce such Guarantee on
behalf of the holders of the Preferred Securities. The holders of not less than
a majority in aggregate principal amount of the Preferred Securities of each
affected series have the right to direct the time, method and place of
conducting any proceeding for any remedy available in respect of the Guarantee,
including the giving of directions to U.S. Bank Trust National Association. In
addition, any holder of Preferred Securities may institute a legal proceeding
directly against J.P. Morgan to enforce its rights under the Guarantee, without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other person or entity. Subject to the award by a court of competent
jurisdiction of legal fees in connection with any such legal proceeding, each
holder will be required to bear its own costs in connection with instituting a
legal proceeding directly against J.P. Morgan, which cost may be significant.
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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 Trust, 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).
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 with respect to obligations
under other guarantee agreements which J.P. Morgan may enter into from time to
time to the extent that such agreements provide for comparable guarantees by
J.P. Morgan of payment on other preferred securities issued by the predecessor
of the Trust or by other trusts sponsored by 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 Property Trustee, for the benefit of holders
of Securities of various series. 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
Property Trustee for the benefit of holders of the Securities.
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 Property Trustee, for the benefit of holders of
Securities, 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
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Property Trustee, for the benefit of holders of Securities, or by causing Morgan
Guaranty to pay such amounts to the Property Trustee, for the benefit of holders
of Securities.
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
Property Trustee; provided that no such amendment shall adversely affect the
holders of the Preferred Securities without the consent of a majority in
aggregate Principal Amount at such time of the holders of Preferred Securities
of each affected series, voting as a single class. 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 Property Trustee, for the benefit of holders of Securities of
each series, as the holder of each Related Note then outstanding.
REMEDIES OF THE TRUST AND HOLDERS OF COMPS
The Trust has the 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 Declaration, the holders of Preferred Securities
in certain circumstances (including a payment default under the Related Note
Guarantee by J.P. Morgan) have the right to direct the Trust, through the
Property Trustee, to exercise certain of its rights as the holder of the Related
Note Guarantee. In addition, upon the occurrence and during the continuance of a
Note Event of Default that is attributable to the failure of Morgan Guaranty to
pay the principal of or interest on the Related Note on the date such principal
or interest is otherwise payable (or in the case of a redemption, on the
redemption date), J.P. Morgan acknowledges that a holder of the outstanding
Preferred Securities may directly institute Direct Action on or after the date
of the occurrence of such Note Event of Default. Notwithstanding any payments
made to such holder of Preferred Securities by J.P. Morgan in connection with a
Direct Action, J.P. Morgan shall remain obligated to pay the principal of and
interest on the Preferred Securities, and the rights of J.P. Morgan, as
Guarantor, shall be subrogated to the rights of such holder of Preferred
Securities with respect to payments on the Preferred Securities to the extent of
any payment made by J.P. Morgan to such holder of Preferred Securities in such
Direct Action.
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 Property Trustee, on behalf of holders of Securities of each applicable
series, 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 Property Trustee 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).
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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 Trust 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
Trust 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
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 Trust 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 Trust or by agents of the Trust designated by the Trust. 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
Trust 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 Trust 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 Trust will authorize agents,
underwriters or dealers to solicit offers from certain types of institutions to
purchase Offered Securities from the Trust 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 Trust to indemnification by J.P. Morgan or the Trust against
certain civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments that such agents, dealers or underwriters
may
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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 Trust 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
Certain matters of Delaware law relating to the validity of the Securities will
be passed upon by Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware,
special Delaware counsel to the Trust. 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.
EXPERTS
The audited financial statements contained in J.P. Morgan's Annual Report on
Form 10-K for the year ended December 31, 1997 (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.
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ANNEX I
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used in
the Prospectus Supplement. The Declaration, 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 Declaration, the Guarantee,
the Related Note Guarantee and the relevant Related Note, as applicable, for
complete definitions of such terms.
BACKWARDATION...........describes a period during which the prices of
longer-dated Benchmark Contracts are below the prices of
shorter-dated contracts.
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 any series of the Trust
representing an undivided beneficial interest in the
corresponding series Related Note, to be owned by J.P.
Morgan.
CONTANGO................describes a period during which the prices of
longer-dated Benchmark Contracts are above the prices of
shorter-dated contracts.
DECLARATION.............the Amended and Restated Declaration of Trust among J.P.
Morgan, as sponsor, and the trustees named therein dated
as of March 26, 1998.
DISTRIBUTIONS...........if any, as specified in the applicable Prospectus
Supplement.
DTC.....................the Depository Trust Company.
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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, as
amended.
EXCHANGE ACT............the Securities Exchange Act of 1934, as amended.
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 Trust has funds available therefor, and
(B) the amount of assets of the Trust 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 Trust 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
Trust (a "Change in 1940 Act Law"), there is more than
an insubstantial risk that the Trust 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.
JPM BASKET INDICES......JPM Indices that are based upon at least two or more
underlying commodities (whether computed on an excess
return or total return basis).
JPM INDICES.............variations of the JPMCI, including the permutations of
the JPMCI in the form of sub-indices, that may be based
upon one or more commodities
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(whether computed on an excess return or total return
basis) and that have been or may be originated and
calculated by Morgan Guaranty.
JPM INDIVIDUAL
INDICES.................JPM Indices that are based upon only one underlying
commodity (whether computed on an excess return or total
return basis).
JPMCI...................the J.P. Morgan Commodity Index.
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 dissolution of the Trust, whether voluntary or
involuntary.
NASDAQ..................The Nasdaq Stock Market.
1940 ACT................the Investment Company Act of 1940, as amended.
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.
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 any series of the Trust,
representing an undivided beneficial interest in the
corresponding series Related Note.
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.
SECURITIES..............the Common Securities and the Preferred Securities.
SECURITIES ACT..........the Securities Act of 1933, as amended.
SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, as specified in the
applicable Prospectus Supplement.
A-3
<PAGE> 182
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
Trust will redeem Preferred Securities and Common
Securities of the applicable series 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 Trust
shall have called for redemption in whole or in part the
Preferred Securities and Common Securities of the
applicable series.
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 Trust.
TAX EVENT...............the receipt by the Trust 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 Trust 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 Trust 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.
TRUST...................J.P. Morgan Index Funding Company I.
TRUST INDENTURE ACT.....the Trust Indenture Act of 1939, as amended.
A-4
<PAGE> 183
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of securities
being registered, other than underwriting compensation and related hedging
costs, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 241,379
Legal Fees and Expenses..................................... 250,000*
American Stock Exchange Listing Fees........................ 50,000*
Accounting Fees and Expenses................................ 25,000*
Trustee's Fees and Expenses (including counsel fees)........ 31,500*
Rating Agency Fees.......................................... 400,000*
Printing and Engraving Fees................................. 50,000*
Miscellaneous............................................... 25,000
----------
Total............................................. $1,072,879*
==========
</TABLE>
- ---------------
* Estimated
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Article Seventh of the Restated Certificate of Incorporation of J.P. Morgan &
Co. Incorporated (the "Registrant") provides, in effect, that, to the extent and
under the circumstances permitted by Section 145 of the General Corporation Law
of Delaware, the Registrant shall indemnify directors, officers, employees and
agents of the Registrant, or persons serving at the written request of the
Registrant as directors, officers, employees or agents of another corporation or
enterprise, including Morgan Guaranty, against loss and expenses.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Delaware Court of
II-1
<PAGE> 184
Chancery or the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director, officer, employee or
agent of a corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith. It also provides that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or otherwise, and it empowers the
corporation to purchase and maintain insurance in such amounts as the Board of
Directors deems appropriate on behalf of a director, officer, employee or agent
of the corporation against any liability asserted against him or incurred by him
in any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The indemnification permitted by Article Seventh of the Restated Certificate of
Incorporation of the Registrant has been extended to all officers and directors
of the Registrant's wholly owned direct and indirect subsidiaries, and to such
officers and directors in their respective capacities as directors and officers
of other corporations 25% or more of the voting securities of which is owned,
directly or indirectly, by the Registrant. The Registrant has purchased
liability insurance of the type referred to in Section 145. Subject to a
$250,000 deductible for each loss, the policy covers the Registrant with respect
to its obligation to indemnify directors and officers of the Registrant and its
wholly owned direct and indirect subsidiaries. In addition, the policy covers
directors and officers of the Registrant and its wholly owned direct and
indirect subsidiaries with respect to certain liabilities which are not
reimbursable by the Registrant. Subject to certain exclusions from the coverage,
the insurance provides for payment of loss in excess of the applicable
deductible to an aggregate limit of $90,000,000 for the three-year policy term.
Insurance coverage does not extend to certain claims, including claims based
upon or attributable to the insured's gaining personal profit or advantage in
which he is not legally entitled, claims brought about or contributed to by the
dishonesty of the insured, and claims under Section 16(b) of the Securities
Exchange Act of 1934 for an accounting of profits resulting from the purchase or
sale by the insured of the Registrant's securities. In addition, the Registrant
has purchased catastrophic loss insurance which provides, among other things,
excess insurance coverage over the $90,000,000 officer and director policy.
Subject to certain exclusions from the coverage, the insurance provides for
payment of loss, in the case of the officer and director excess coverage, to an
aggregate limit of $400,000,000 for the three-year policy term.
II-2
<PAGE> 185
ITEM 16. EXHIBITS.
<TABLE>
<C> <C> <S>
1(a)(1) -- Form of Underwriting Agreement for Preferred Securities*
3(a)(1) -- Certificate of Trust of J.P. Morgan Index Funding Company I*
3(a)(2) -- Restated Certificate of Trust of J.P. Morgan Index Funding
Company I*
3(b)(1) -- Declaration of Trust of J.P. Morgan Index Funding Company I*
3(b)(2) -- Amended and Restated Declaration of Trust of J.P. Morgan
Index Funding Company I*
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 (incorporated by reference to J.P.
Morgan's Current Report on Form 8-K dated April 11, 1996)
4(a)(1) -- Form of Certificate for Securities for Preferred Securities
(included in Exhibit 3(b)(2))*
4(b)(1) -- Form of Amended and Restated Guarantee Agreement with
respect to Preferred Securities issued by the Predecessor of
J.P. Morgan Index Funding Company I*
4(b)(2) -- Form of Guarantee Agreement with respect to Preferred
Securities issued by J.P. Morgan Index Funding Company I*
4(c) -- Form of Related Note Guarantee Agreement*
4(d) -- Form of Related Note*
4(e)(1) -- Declaration of Trust of J.P. Morgan Index Funding Company I
(included in Exhibit 3(b)(1))*
4(e)(2) -- Amended and Restated Declaration of Trust of J.P. Morgan
Index Funding Company I (included in Exhibit 3(b)(2))*
4(f) -- Form of License Agreement between Morgan Guaranty and J.P.
Morgan Index Funding Company I*
4(g) -- Form of Certificate for Securities for Preferred Securities
(included in Exhibit 3(b)(2))*
5(a) -- Opinion of Gene A. Capello*
5(b) -- Opinion of Morris, Nichols, Arsht & Tunnell, Delaware
counsel*
5(c) -- Opinion of Cravath, Swaine & Moore*
12 -- Computation of Consolidated Ratio of Earnings to Fixed
Charges and Consolidated Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (incorporated by
reference to J.P. Morgan's Annual Report on Form 10-K for
the year ended December 31, 1997 and J.P. Morgan's Current
Reports on Form 8-K dated January 15, 1998, February 19,
1998 and March 27, 1998)
23(a) -- Consent of Price Waterhouse LLP
23(b) -- Consent of Gene A. Capello (included in Exhibit 5(a))*
23(c) -- Consent of Morris, Nichols, Arsht & Tunnell (included in
Exhibit 5(b))*
23(d) -- Consent of Cravath, Swaine & Moore (included in Exhibit
5(c))*
24 -- Powers of Attorney
25 -- Statement of Eligibility of Property Trustee on Form T-1*
</TABLE>
- ---------------
+ Previously filed as an exhibit to Registration Statement No. 33-55851 and
incorporated by reference herein.
* Previously filed.
ITEM 17. UNDERTAKING.
The Registrants hereby undertake that, for purposes of determining any liability
under the Securities Act of 1933, as amended (the "Securities Act"), each filing
of J.P. Morgan's Annual Report pursuant to
II-3
<PAGE> 186
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;
(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.
II-4
<PAGE> 187
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 AMENDMENT TO
ITS 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 4TH DAY OF JUNE, 1998.
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
AMENDMENT TO THE 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, President June 4, 1998
- --------------------------------------------------- and Director, (Principal
(DOUGLAS A. WARNER III) Executive Officer)
/s/ PAUL A. ALLAIRE* Director June 4, 1998
- ---------------------------------------------------
(PAUL A. ALLAIRE)
/s/ RILEY P. BECHTEL* Director June 4, 1998
- ---------------------------------------------------
(RILEY P. BECHTEL)
/s/ LAWRENCE A. BOSSIDY* Director June 4, 1998
- ---------------------------------------------------
(LAWRENCE A. BOSSIDY)
/s/ MARTIN FELDSTEIN* Director June 4, 1998
- ---------------------------------------------------
(MARTIN FELDSTEIN)
/s/ ELLEN V. FUTTER* Director June 4, 1998
- ---------------------------------------------------
(ELLEN V. FUTTER)
/s/ HANNA H. GRAY* Director June 4, 1998
- ---------------------------------------------------
(HANNA H. GRAY)
/s/ WALTER A. GUBERT* Vice Chairman of the Board June 4, 1998
- --------------------------------------------------- and Director
(WALTER A. GUBERT)
/s/ JAMES R. HOUGHTON* Director June 4, 1998
- ---------------------------------------------------
(JAMES R. HOUGHTON)
</TABLE>
<PAGE> 188
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES L. KETELSEN* Director June 4, 1998
- ---------------------------------------------------
(JAMES L. KETELSEN)
/s/ JOHN A. KROL* Director June 4, 1998
- ---------------------------------------------------
(JOHN A. KROL)
/s/ ROBERTO G. MENDOZA* Vice Chairman of the Board and June 4, 1998
- --------------------------------------------------- Director
(ROBERTO G. MENDOZA)
/s/ MICHAEL E. PATTERSON* Vice Chairman of the Board and June 4, 1998
- --------------------------------------------------- Director
(MICHAEL E. PATTERSON)
/s/ LEE R. RAYMOND* Director June 4, 1998
- ---------------------------------------------------
(LEE R. RAYMOND)
/s/ RICHARD D. SIMMONS* Director June 4, 1998
- ---------------------------------------------------
(RICHARD D. SIMMONS)
/s/ KURT F. VIERMETZ* Director June 4, 1998
- ---------------------------------------------------
(KURT F. VIERMETZ)
/s/ DOUGLAS C. YEARLY* Director June 4, 1998
- ---------------------------------------------------
(DOUGLAS C. YEARLY)
/s/ JOHN A. MAYER* Chief Financial Officer (Principal June 4, 1998
- --------------------------------------------------- Financial Officer)
(JOHN A. MAYER)
/s/ DAVID H. SIDWELL* Managing Director and Controller June 4, 1998
- --------------------------------------------------- (Principal Accounting Officer)
(DAVID H. SIDWELL)
*By: /s/ GENE A. CAPELLO
---------------------------------------------
(GENE A. CAPELLO, ATTORNEY-IN-FACT)
</TABLE>
<PAGE> 189
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, J.P.
MORGAN INDEX FUNDING COMPANY I 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 AMENDMENT TO ITS 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 4TH DAY OF JUNE, 1998.
J.P. MORGAN INDEX FUNDING COMPANY I,
By J.P. MORGAN & CO. INCORPORATED, as Sponsor
By /s/ GENE A. CAPELLO
------------------------------------------------------------------------------
(GENE A. CAPELLO, VICE PRESIDENT AND ASSISTANT GENERAL COUNSEL)
<PAGE> 190
EXHIBIT INDEX.
<TABLE>
<C> <C> <S>
1(a)(1) -- Form of Underwriting Agreement for Preferred Securities*
3(a)(1) -- Certificate of Trust of J.P. Morgan Index Funding Company I*
3(a)(2) -- Restated Certificate of Trust of J.P. Morgan Index Funding
Company I*
3(b)(1) -- Declaration of Trust of J.P. Morgan Index Funding Company I*
3(b)(2) -- Amended and Restated Declaration of Trust of J.P. Morgan
Index Funding Company I*
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 (incorporated by reference to J.P.
Morgan's Current Report on Form 8-K dated April 11, 1996)
4(a)(1) -- Form of Certificate for Securities for Preferred Securities
(included in Exhibit 3(b)(2))*
4(b)(1) -- Form of Amended and Restated Guarantee Agreement with
respect to Preferred Securities issued by the Predecessor of
J.P. Morgan Index Funding Company I*
4(b)(2) -- Form of Guarantee Agreement with respect to Preferred
Securities issued by J.P. Morgan Index Funding Company I*
4(c) -- Form of Related Note Guarantee Agreement*
4(d) -- Form of Related Note*
4(e)(1) -- Declaration of Trust of J.P. Morgan Index Funding Company I
(included in Exhibit 3(b)(1))*
4(e)(2) -- Amended and Restated Declaration of Trust of J.P. Morgan
Index Funding Company I (included in Exhibit 3(b)(2))*
4(f) -- Form of License Agreement between Morgan Guaranty and J.P.
Morgan Index Funding Company I*
4(g) -- Form of Certificate for Securities for Preferred Securities
(included in Exhibit 3(b)(2))*
5(a) -- Opinion of Gene A. Capello*
5(b) -- Opinion of Morris, Nichols, Arsht & Tunnell, Delaware
counsel*
5(c) -- Opinion of Cravath, Swaine & Moore*
12 -- Computation of Consolidated Ratio of Earnings to Fixed
Charges and Consolidated Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (incorporated by
reference to J.P. Morgan's Annual Report on Form 10-K for
the year ended December 31, 1997 and J.P. Morgan's Current
Reports on Form 8-K dated January 15, 1998, February 19,
1998 and March 27, 1998)
23(a) -- Consent of Price Waterhouse LLP
23(b) -- Consent of Gene A. Capello (included in Exhibit 5(a))*
23(c) -- Consent of Morris, Nichols, Arsht & Tunnell (included in
Exhibit 5(b))*
23(d) -- Consent of Cravath, Swaine & Moore (included in Exhibit
5(c))*
24 -- Powers of Attorney
25 -- Statement of Eligibility of Property Trustee on Form T-1*
</TABLE>
- ---------------
+ Previously filed as an exhibit to Registration Statement No. 33-55851 and
incorporated by reference herein.
* Previously filed.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and the
related Prospectus Supplements constituting part of this Registration Statement
on Form S-3 of J.P. Morgan & Co. Incorporated of our report dated January 14,
1998, which appears on page 41 of J.P. Morgan & Co. Incorporated's 1997 Annual
Report on Form 10-K for the year ended December 31, 1997 (included in J.P.
Morgan & Co. Incorporated's Annual Report to Stockholders). We also consent to
the reference to us under the heading "Experts" in such Prospectus and
Prospectus Supplements.
/s/ Price Waterhouse LLP
New York, New York
June 3, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Douglas A. Warner III, Roberto G. Mendoza, Michael E. Patterson, Rachel F.
Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power
to act without the others, as the undersigned's true and lawful attorney-in-fact
and agent, with full and several power of substitution, for the undersigned and
in the undersigned's name, place and stead, in any and all capacities, to sign
any and all Registration Statements under the Securities Act of 1933 as amended,
for the purpose of registering the offering of (i) securities of J.P. Morgan &
Co. Incorporated in connection with any public offering of such securities or
(ii) securities under, and interests in, any plan established by J.P. Morgan &
Co. Incorporated or Morgan Guaranty Trust Company of New York for the benefit of
their employees or employees of affiliated companies; to sign any and all
amendments (including post-effective amendments) to such Registration
Statements; and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
they or the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the
4th day of June, 1998.
/S/ L. A. BOSIDDY
<PAGE> 2
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Douglas A. Warner III, Roberto G. Mendoza, Michael E. Patterson, Rachel F.
Robbins, James C. P. Berry and Gene A. Capello and each of them, with full power
to act without the others, as the undersigned's true and lawful attorney-in-fact
and agent, with full and several power of substitution, for the undersigned and
in the undersigned's name, place and stead, in any and all capacities, to sign
any and all Registration Statements under the Securities Act of 1933 as amended,
for the purpose of registering the offering of (i) securities of J.P. Morgan &
Co. Incorporated in connection with any public offering of such securities or
(ii) securities under, and interests in, any plan established by J.P. Morgan &
Co. Incorporated or Morgan Guaranty Trust Company of New York for the benefit of
their employees or employees of affiliated companies; to sign any and all
amendments (including post-effective amendments) to such Registration
Statements; and to file the same with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
they or the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on the
4th day of June, 1998.
/S/ WALTER GUBERT
