<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Registration Nos. 333-38633 and
333-38633-01
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
Subject to completion,
Dated October [ ], 2000
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 14, 1998)
$[49,025,000]
CONSUMER PRICE INDEXED SECURITIES (CPIS), SERIES C PREFERRED SECURITIES
ISSUED BY: J.P. MORGAN INDEX FUNDING COMPANY I
[1,850,000] SHARES OF SERIES C PREFERRED SECURITIES AT $[26.50] PER SHARE
INDEXED TO THE NON-SEASONALLY ADJUSTED U.S. CONSUMER PRICE INDEX OR "CPI" (AS
DEFINED IN THIS PROSPECTUS SUPPLEMENT); GUARANTEED TO THE EXTENT SET FORTH IN
THIS PROSPECTUS SUPPLEMENT BY
J.P. MORGAN & CO. INCORPORATED
------------------------
ISSUER:
- A statutory business trust formed by J.P. Morgan for the purpose of issuing
securities, including the Series C Securities and other securities of separate
series, and lending the proceeds of such issuances to Morgan Guaranty, the
principal banking subsidiary of J.P. Morgan. J.P. Morgan, through its
obligations described in this Prospectus Supplement, will provide a full and
unconditional guarantee, on a subordinated basis, of all payments due on the
CPIS. This guarantee does not guarantee the return of the Issue Price, rather
it guarantees the payment of a calculated amount, indexed to the CPI, which
may be more or less than the Face Amount or the Issue Price.
GENERAL:
- Issue Price of $[26.50] per share
- Face Amount at maturity of [$40.00] per share
- Full principal-at-risk security with no guaranteed return
- The CPIS do not pay any dividends or interest
- January 15, 2010 final redemption date
- CPIS represent an undivided beneficial interest in a note issued by Morgan
Guaranty, the value of which is indexed to the CPI. Thus the CPIS have the
market risk of the CPI and the credit risk of J.P. Morgan
- Applied for listing on American Stock Exchange under the symbol "JPI"
PAYMENT AT MATURITY:
- Face Amount plus (Ending Index minus Forward Index); but not less than zero
- The Forward Index = [213.0], roughly [120-126%] of the Reference CPI level (as
defined herein) on the day of pricing. The Ending Index will be the Reference
CPI level at maturity
INDEX:
- "Reference CPI" is a 3 month lagged version of CPI used by the United States
Department of the Treasury to calculate the inflation indexed principal for
its inflation indexed securities. The CPI is the non-seasonally adjusted U.S.
City Average All Items Consumer Price Index for All Urban Consumers published
monthly by the Bureau of Labor Statistics of the U.S. Department of Labor.
BEFORE YOU DECIDE TO INVEST IN THE CPIS, CAREFULLY READ THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, ESPECIALLY THE RISK FACTORS
BEGINNING ON PAGE S-9.
The CPIS are indexed securities; they are not a fund, nor are they bank
deposits. The CPIS are not insured by the FDIC or any other Federal agency. The
CPIS are not futures contracts and do not represent an actual investment in
futures contracts. The CPIS are obligations of the issuer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the CPIS or passed upon the adequacy of
this Prospectus Supplement or the attached Prospectus. Any representation to the
contrary is a criminal offense.
<TABLE>
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PUBLIC PROCEEDS TO THE TRUST UNDERWRITING
OFFERING PRICE (BEFORE EXPENSES) COMMISSIONS(1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series C Preferred Security $[26.50] $[26.50] $[ ]
-----------------------------------------------------------------------------------------------------------
Total $[49,025,000] $[49,025,000] $[ ]
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Because the proceeds of the CPIS will be used to purchase an obligation of
Morgan Guaranty, Morgan Guaranty has agreed to pay the Underwriters a
commission.
------------------------
The CPIS offered hereby are offered by the Underwriters subject to various
conditions. The Underwriters expect to deliver the CPIS in book-entry form only
through the Depository Trust Company on or about November [ ], 2000. If you
purchase at least 30,000 CPIS in any single transaction and you comply with the
holding period requirement described under "Underwriting--Supplemental
Information Concerning the Plan of Distribution" in this Prospectus Supplement,
the price will be [25.97] per CPIS ([98]% of the Issue Price). In that case, the
underwriting discounts and commission will be [ ] per CPIS.
J.P. MORGAN & CO.
November [ ], 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
STRUCTURAL OVERVIEW....................... S-3
SUMMARY OF THE PRINCIPAL TERMS OF THE
OFFERING................................ S-4
SUMMARY INFORMATION--Q&A.................. S-5
What are the CPIS?...................... S-5
What is the Consumer Price Index or
CPI?................................. S-5
What is the Reference CPI?.............. S-5
What will I receive at the Stated
Maturity?............................ S-5
Can I opt to redeem early?.............. S-6
Can the Ending Index be determined
early?............................... S-6
Are there other redemption
provisions?.......................... S-6
Will I receive dividends or interest?... S-6
Can you tell me about the issuer and
guarantees?.......................... S-6
Tell me about the related note and use
of proceeds?......................... S-7
Where will the CPIS be listed?.......... S-7
Do I have any voting rights?............ S-7
What about taxes?....................... S-7
Are there any risks associated with my
investment?.......................... S-7
In what form will the CPIS be issued?... S-7
WHERE CAN YOU FIND MORE INFORMATION?...... S-8
Consolidated Ratio of J.P. Morgan's
Earnings to Fixed Charges............ S-8
Consolidated Ratio of J.P. Morgan's
Earnings to Combined Fixed Charges
and Preferred Stock Dividends........ S-8
RISK FACTORS.............................. S-9
Indexation of the Redemption Value...... S-9
Special Event Redemption................ S-9
Early Redemption Value.................. S-9
Limited Voting Rights................... S-9
Listing May Not Ensure Liquid Market and
Trading Price May not Reflect Actual
Economic Value....................... S-9
Early Determination of Ending Index..... S-9
Factors Affecting the Value of the
CPIS................................. S-10
Imposition of Bank Regulatory
Restrictions......................... S-10
Effect of Trading in U.S. Inflation
Linked Notes, Treasury Notes and
Other Instruments.................... S-10
Potential for Adverse Interests......... S-11
Risk of Index Contingencies............. S-11
Changes and Improvements in CPI
Methodology.......................... S-12
Reference CPI is Lagged 3 Months........ S-12
J.P. Morgan Cannot Control the Bureau of
Labor Statistics or Treasury
Department........................... S-12
Volatility of and Adverse Changes to
CPI.................................. S-12
Market Disruption Events................ S-14
Extension of Settlement Date or Stated
Maturity............................. S-14
Historical Correlations May Not Prevail
in the Future........................ S-14
Changes in Laws or Regulations or
Interpretations...................... S-14
Certain Considerations Regarding
Hedging.............................. S-14
Limitation on Rights under the
Guarantee, the Related Note Guarantee
and the Declaration.................. S-14
Uncertain Tax Consequences.............. S-15
J.P. MORGAN & CO. INCORPORATED............ S-16
J.P. MORGAN INDEX FUNDING COMPANY I....... S-16
USE OF PROCEEDS........................... S-20
DESCRIPTION OF THE CPIS................... S-21
DESCRIPTION OF THE RELATED NOTE........... S-35
DESCRIPTION OF THE GUARANTEE.............. S-37
DESCRIPTION OF THE RELATED NOTE
GUARANTEE............................... S-39
EFFECT OF OBLIGATIONS UNDER THE GUARANTEE,
THE RELATED NOTE GUARANTEE AND THE
RELATED NOTE............................ S-40
UNITED STATES FEDERAL INCOME TAXATION..... S-41
UNDERWRITING.............................. S-44
LEGAL MATTERS............................. S-46
EXPERTS................................... S-46
STABILIZATION............................. S-46
CONTENT OF PROSPECTUS..................... S-46
LIMITATION ON OFFERS AND SOLICITATIONS.... S-46
GLOSSARY OF TERMS......................... SA-1
</TABLE>
PROSPECTUS
<TABLE>
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PAGE
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<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.......... 5
Use of Proceeds.............................. 10
Consolidated Ratios of J.P. Morgan........... 10
Description of All Securities................ 10
Description of the ComPS..................... 11
Risk Factors with Respect to All Preferred
Securities................................. 20
Risk Factors with Respect to ComPS........... 22
The Underlying Markets....................... 27
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
The JPM Indices.............................. 30
JPMCI Policy Committee....................... 41
Description of the Related Notes............. 42
Description of the Guarantee................. 43
Description of the Related Note Guarantee.... 45
Plan of Distribution......................... 46
Legal Matters................................ 47
Experts...................................... 47
ANNEX I
Glossary of Terms............................ A-1
</TABLE>
S-2
<PAGE> 3
STRUCTURAL OVERVIEW
[DIAGRAM]
1. THE TRUST. The issuer of the CPIS is a Delaware statutory business trust
formed by J.P. Morgan for the purpose of issuing the Series C Securities and
other securities of separate series and lending the proceeds thereof to Morgan
Guaranty Trust Company. J.P. Morgan will own 100% of the Series C Common
Securities. The Trust will be disregarded for United States Federal income tax
purposes.
2. THE CPIS. The CPIS issued by the trust represent undivided beneficial
preferred interests in certain assets of the trust consisting of the Related
Note and the proceeds thereof. The Redemption Value and the Early Redemption
Value are indexed to the CPI. The Redemption Value and Early Redemption Value
may be more or less than the Face Amount. The Trust intends to issue additional
series of Securities and already has Series A and B Securities outstanding. No
holder of Securities of a series shall have any claim on, or any right to, any
assets allocated to, or associated with, Securities of any other series.
3. CPIS PROCEEDS USED TO PURCHASE AN OBLIGATION OF MORGAN GUARANTY. Proceeds
of the CPIS and related Series C Common Securities will be used by the Trust on
behalf of holders of the Series C Securities to purchase from Morgan Guaranty
the Related Note with a maturity of January 15, 2010 and having the same
economic terms as the CPIS.
4. REPAYMENT OF RELATED NOTE. Morgan Guaranty will repay the Related Note in
whole or part to the extent required to repay Series C Securities upon any Early
Redemption Date and in whole at 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 payments on the Related Note as provided pursuant to the
terms of the Related Note.
6. GUARANTEE. J.P. Morgan will guarantee to the holders of the CPIS, on a
subordinated basis, the payment of (i) the Early Redemption Value or the
Redemption Value to the extent that, in each case, Morgan Guaranty has made
payment of amounts due on the Related Note and (ii) upon liquidation of the
Trust, 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 the CPIS.
J.P. Morgan's obligations under the Guarantee, the Related Note Guarantee and
the Declaration constitute a full and unconditional guarantee with respect to
the CPIS. This guarantee does not guarantee the return of principal; rather it
guarantees the payment of a calculated amount, indexed to the CPI, which may be
more or less than the Issue Price.
On September 13, 2000, The Chase Manhattan Corporation and J.P. Morgan announced
that they have agreed to merge. The merged firm will be named J.P. Morgan Chase
& Co. The merger is expected to close in the first quarter of 2001 and is
subject to approval by shareholders of both companies, as well as by U.S.
Federal and state and foreign regulatory authorities. Once the merger is
complete, the CPIS will be guaranteed by the new entity, J.P. Morgan Chase & Co.
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> 4
SUMMARY OF THE PRINCIPAL TERMS OF THE OFFERING
SECURITIES OFFERED..........
Series C Preferred Securities (the "CPIS") indexed to
the U.S. Consumer Price 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. Morgan Guaranty
Trust Company of New York ("Morgan Guaranty"), the
issuer of the Related Note held by the Trust, is a
wholly-owned subsidiary of J.P. Morgan. On September
13, 2000, the Chase Manhattan Corporation ("Chase")
and J.P. Morgan announced their agreement to merge.
The merger is expected to close in the first quarter
of 2001, subject to shareholder and regulatory
approval. (Where appropriate, references to J.P.
Morgan include references to the merged entity, J.P.
Morgan Chase & Co.)
INITIAL OFFERING PRICE PER
CPIS
(THE "ISSUE PRICE").......
[$26.50]; although certain large initial buyers which
satisfy a holding period requirement will purchase at
98% of this amount.
AGGREGATE ISSUE PRICE.......
$[49,025,000].
STATED MATURITY.............
January 15, 2010, subject to extension in the case of
a Market Disruption Event.
REDEMPTION VALUE............
At Stated Maturity, the Face Amount plus Index Amount;
but not less than zero.
FACE AMOUNT...............
[$40.00].
INDEX AMOUNT..............
Ending Index minus Forward Index (the result of which
may be positive or negative).
FORWARD INDEX...........
[213.0] or approximately [120% to 126%] of the
Reference CPI level at issuance.
ENDING INDEX............
The Reference CPI level at the Stated Maturity. Such
level is the 3 month lagged CPI level as described
herein.
INDEX.......................
U.S. Consumer Price Index or CPI. The CPI is the
non-seasonally adjusted U.S. City Average All Items
Consumer Price Index for All Urban Consumers ("CPI")
published monthly by the Bureau of Labor Statistics of
the U.S. Department of Labor (the "Bureau of Labor
Statistics").
CALCULATION AGENT...........
Morgan Guaranty.
DIVIDENDS...................
No dividends or interest will be paid on the CPIS.
CASH REDEMPTION PRIOR TO
STATED MATURITY:
OPTIONAL REDEMPTION.......
At the holders' option, on January 15, 2002, and each
January 15 thereafter prior to Stated Maturity, at the
Early Redemption Value as described herein.
SPECIAL EVENT
REDEMPTION..................
Under certain circumstances, upon the occurrence of a
Tax Event or an Investment Company Event, at the Early
Redemption Value as described herein.
EARLY DETERMINATION OF
ENDING INDEX................
Upon the occurrence of certain events affecting the
liquidity of (i) the 4.25% U.S. Treasury Inflation
Protected Securities due January 15, 2010 (the
"Reference TIPS"), or (ii) the 6.50% U.S. Treasury
Security due February 15, 2010 (the "Reference
Government Notes", together with the Reference TIPS,
the "Reference Treasuries", and either a "Reference
Treasury"), the Ending Index may be fixed and such
fixed value will be used upon any subsequent early
redemption and at Stated Maturity. See "Description of
the CPIS--Early Determination of the Ending Index".
EARLY REDEMPTION VALUE......
The discounted present value of the estimated
Redemption Value on the applicable Early Redemption
Date (such amount may be more or less than the Face
Amount, but not less than zero). See "Description of
the CPIS--Optional Redemption" and "--Special Event
Redemption".
VOTING RIGHTS...............
Holders of the CPIS 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. See "Description of
the CPIS--Voting Rights".
USE OF PROCEEDS.............
The proceeds to the Trust from the sale of the CPIS
and related Series C Common Securities will be used to
purchase the Related Note from 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".
FEDERAL INCOME TAX
TREATMENT...................
The U.S. Federal income tax consequences of an
investment in the CPIS are complex and uncertain. The
CPIS represent an interest in the Related Note for
Federal income tax purposes. Morgan Guaranty and the
holders of the CPIS will agree to treat the Related
Note as a contract claim that is not an option, unless
otherwise required by the IRS. Morgan Guaranty also
intends to take the position that holders that are
U.S. persons will not have to accrue any amounts in
income with respect to the CPIS before receiving
payments with respect thereto except possibly on an
early determination of the Ending Index or when the
Ending Index can be determined in the month preceding
the Stated Maturity. It is possible, however, that
other tax results might arise. In particular, U.S.
holders may be required to accrue income over the life
of the CPIS or may be required to mark-to-market the
CPIS each year. The Trust will withhold 30% from
amounts paid to non-U.S. holders of the CPIS in excess
of the Issue Price of the CPIS. Pension plans
(including individual retirement accounts) should
consult their tax advisors concerning the application
of the "unrelated business taxable income" rules to
income from the CPIS.
S-4
<PAGE> 5
SUMMARY INFORMATION--Q&A
This summary includes questions and answers that highlight selected information
from the Prospectus and this Prospectus Supplement to help you understand the
CPIS. You should carefully read the Prospectus and this Prospectus Supplement to
fully understand the terms of the CPIS, the CPI, the Reference CPI and the tax
and other considerations that are important to an investor in making a decision
about whether to invest in the CPIS. You should carefully review the "Risk
Factors" section, which highlights certain risks associated with an investment
in the CPIS, to determine whether an investment in the CPIS is appropriate for
you.
WHAT ARE THE CPIS?
The CPIS represent undivided beneficial preferred interests in certain assets of
the Trust consisting of the Related Note and the proceeds thereof. The Related
Note has identical economic terms as the CPIS. The CPIS are indexed such that
the Redemption Value and the Early Redemption Value may be more or less than the
Face Amount, but may not be less than zero.
The Stated Maturity of the CPIS is January 15, 2010. However, upon the
occurrence of certain Market Disruption Events, the final redemption may be
delayed. See "Description of the CPIS--Market Disruption Events". The CPIS may
be redeemed earlier due to certain special events, which are described in this
Prospectus Supplement, or annually, at the option of a holder, beginning on
January 15, 2002.
WHAT IS THE CONSUMER PRICE INDEX OR CPI?
The CPIS are indexed to the consumer price index or CPI. The CPI for these
purposes is the non-seasonally adjusted U.S. City Average All Items Consumer
Price Index published monthly by the Bureau of Labor Statistics of the U.S.
Department of Labor. The CPI is a measure of the average change in consumer
prices over time in a fixed market basket of goods and services, including food,
clothing, shelter, fuels, transportation, charges for doctors' and dentists'
services, and drugs. User fees (such as water and sewer service) and sales and
excise taxes paid by the consumer are also included. Income taxes and investment
items (such as stocks, bonds, and life insurance) are not included.
The CPI includes expenditures by urban wage earners and clerical workers,
professional, managerial, and technical workers, the self-employed, short-term
workers, the unemployed, retirees and others not in the labor force. In
calculating the index, the Bureau of Labor Statistics calculates price changes
for the various items and these price changes are averaged together with weights
that represent their importance in the spending of urban households in the
United States. The contents of the market basket of goods and services and the
weights assigned to the various items are updated periodically by the Bureau of
Labor Statistics to take into account changes in consumer expenditure patterns.
The CPI is expressed in relative terms based on a reference period for which the
level is set at 100 (currently the base reference period used by the Bureau of
Labor Statistics is 1982-1984).
WHAT IS THE REFERENCE CPI?
The CPI level used to determine the Redemption Value or Early Redemption Value
is referred herein as Reference CPI. It is a 3 month lagged version of the CPI.
Reference CPI means, for the first day of any calendar month, the CPI for the
third preceding calendar month (which is typically released and published by the
Bureau of Labor Statistics in the second preceding calendar month). Such
Reference CPI is the same CPI used by the United States Treasury Department in
connection with its U.S. Treasury Inflation Protected Securities.
For example, the Reference CPI for April 1 in any year is the CPI for January of
such year, which is usually released and published by the Bureau of Labor
Statistics in February of such year. The Reference CPI for any day of a month,
other than the first day of such month, is the linear interpolation between the
Reference CPI for the first day of that month and the first day of the
immediately following month. For the CPIS, we will round the applicable
Reference CPI to two decimal places.
WHAT WILL I RECEIVE AT STATED MATURITY?
The CPIS are full principal-at-risk securities and you may receive more or less
than the Face Amount. At Stated Maturity, unless previously redeemed as
described below, an investor will receive the Redemption Value, which is equal
to the Face Amount plus the Index Amount (which equals the Ending Index minus
the Forward Index). Although this result can be negative, in no circumstances
will the Redemption Value be less than zero. Certain Market Disruption Events
could delay the determination and payment of the Redemption Value. See
"Description of the CPIS--Redemption at Maturity".
The Redemption Value of the CPIS is linked directly to the performance of the
CPI. If, at Stated Maturity, the Reference CPI has decreased or has not
increased to at least the Forward Index level set on the day of pricing, then
the Redemption Value will be less than the Face Amount. For example, if the
Reference CPI at Stated Maturity is 40 points higher than the Forward Index, the
Redemption Value will be $40 higher than the Face Amount. If the Reference CPI
at Stated Maturity is 30 points lower than the Forward Index, then the
Redemption Value will be $30 lower than the Face Amount. The Reference CPI must
increase by approximately [2.30%] per year for the Redemption Value to equal the
Face Amount (in other words, for the Reference CPI at Stated Maturity to equal
the Forward Index).
S-5
<PAGE> 6
Hypothetical Examples
As noted above, the Redemption Value is dependent on the Ending Index (the
Reference CPI at Stated Maturity), and is calculated by the equation:
Redemption Value = Face Amount +
Ending Index - Forward Index.
The following four examples show hypothetical Redemption Values (1) greater than
the Face Amount, (2) equal to the Face Amount, (3) less than the Face Amount and
(4) at zero value. In each of the examples the Face Amount equals $40.00, the
Forward Index equals 213.0, the term equals 9.167 years (9 years and 2 months),
and the Reference CPI on the Issue Date equals 173.0, thus only the Ending Index
is needed to determine the Redemption Value.
Example 1 (Redemption Value greater than the Face Amount): If the Reference CPI
increases by an average of approximately 4% per year over the life of the CPIS,
then the Ending Index will equal 247.85. Thus, for this example:
Redemption Value = $40.00 + 247.85 - 213.0, or
Redemption Value = $74.85.
Example 2 (Redemption Value equal to the Face Amount): If the Reference CPI
increases by an average of approximately 2.30% per year over the life of the
CPIS, then the Ending Index will equal 213.0. Thus, for this example:
Redemption Value = $40.00 + 213.0 - 213.0, or
Redemption Value = 40.00.
Example 3 (Redemption Value less than the Face Amount): If the Reference CPI
increases by an average of approximately 1% per year over the life of the CPIS,
then the Ending Index will equal 189.52. Thus for this example:
Redemption Value = $40.00 + 189.52 - 213.0, or
Redemption Value = $16.52.
Example 4 (Redemption Value equals zero): If the Reference CPI does not
increase or decreases over the life of CPIS, then the CPIS will be redeemed at
no value. For example, if the Reference CPI decreases by an average of
approximately 1% per year over the life of the CPIS, then the Ending Index will
equal 157.77 at Stated Maturity. Thus for this example:
Redemption Value = $40.00 + 157.77 - 213.0, therefore
Redemption Value = $0.00.
As Example 4 demonstrates, even though the above equation actually equals
$-15.23, the Redemption Value cannot be less than zero.
CAN I OPT TO REDEEM EARLY?
Beginning in 2002, each holder of the CPIS may cause the Trust to redeem some or
all of such holder's CPIS at the Early Redemption Value. Holders wishing to
redeem early must give notice as specified in this Prospectus Supplement
approximately one month prior to the Early Redemption Date. The Early Redemption
Value represents the discounted present value of the projected Redemption Value
determined on the Early Determination Date (five Business Days prior to such
Early Redemption Date) in accordance with the terms described in this Prospectus
Supplement. However, it is likely, under usually-prevailing market conditions,
that the Early Redemption Value will be less than amount a holder could have
realized by selling such CPIS on such Early Determination Date in the market
(excluding commission costs), since the formula for determining the Early
Redemption Value does not account for any time premium and uses a conservative
methodology including a 30 basis point Buyback Spread which results in a lower
Early Redemption Value.
CAN THE ENDING INDEX BE DETERMINED EARLY?
Yes. Upon the occurrence of certain events affecting the outstanding amount
either of the Reference Treasuries, Morgan Guaranty has the right to cause the
Ending Index to be fixed. Such Fixed Ending Index is determined using the same
methodology for determining the Early Ending Index for an Optional Redemption
(including the 30 basis point Buyback Spread). Following such an event, the
Ending Index will remain fixed and will be used in calculating the Redemption
Value or Early Redemption Value.
ARE THERE OTHER REDEMPTION PROVISIONS?
Yes. Upon the occurrence and during the continuation of certain special events
(either a Tax Event or an Investment Company Event, each as defined in this
Prospectus Supplement), Morgan Guaranty will have the right to redeem the
Related Note in whole or in part, and thus cause the Trust to redeem a similar
amount of the CPIS.
WILL I RECEIVE DIVIDENDS OR INTEREST?
No. The CPIS do not pay any dividends or interest.
CAN YOU TELL ME ABOUT THE ISSUER AND GUARANTEES?
The issuer is J.P. Morgan Index Funding Company I, a statutory business trust
formed by J.P. Morgan for the purpose of issuing the Series C Securities and
other Securities of separate series and lending the proceeds from such issuances
to Morgan Guaranty. 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 all payments due
on the CPIS.
Previously, J.P. Morgan Index Funding Company, LLC (the "Company"), a Delaware
limited liability company, was 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 the 2.5% Series A Securities
that were issued by the Company prior to the merger. Additionally, the Trust
issued Series B Securities on March 3, 1999.
On September 13, 2000, The Chase Manhattan Bank Corporation and J.P. Morgan
announced that they have
S-6
<PAGE> 7
agreed to merge. The merged firm will be named J.P. Morgan Chase & Co. The
merger is expected to close in the first quarter of 2001 and is subject to
approval by shareholders of both companies, as well as by U.S. Federal and state
and foreign regulatory authorities. Once the merger is complete, the CPIS will
be guaranteed by the new entity, J.P. Morgan Chase & Co.
TELL ME ABOUT THE RELATED NOTE AND USE OF PROCEEDS?
The Related Note will be issued as an unsecured obligation of Morgan Guaranty.
The timing and amount of payments on the Related Note mirror the aggregate
financial terms of the CPIS.
The Trust will use the proceeds from the sale of the CPIS to purchase the
Related Note from Morgan Guaranty. Morgan Guaranty will use the proceeds thereof
for general corporate purposes and for hedging its obligations under the Related
Note.
WHERE WILL THE CPIS BE LISTED?
We have applied for listing of the CPIS on the American Stock Exchange (the
"AMEX") under the symbol "JPI". Trading of the CPIS on the American Stock
Exchange 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
CPIS. You should be aware that listing the CPIS on the American Stock Exchange
will not necessarily ensure that a liquid trading market will be available for
the CPIS.
DO I HAVE ANY VOTING RIGHTS?
Very limited. Holders of the CPIS will have certain 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.
WHAT ABOUT TAXES?
The U.S. Federal income tax consequences of an investment in the CPIS are
complex and uncertain. The CPIS represent an interest in the Related Note for
U.S. Federal income tax purposes. Pursuant to the terms of the CPIS, Morgan
Guaranty and you will agree to treat the Related Note as a contract claim that
is not an option, unless otherwise required by the IRS. Morgan Guaranty also
intends to take the position that you will not be required to accrue any amounts
in income with respect to the CPIS before receiving payments with respect
thereto except possibly on an early determination of the Ending Index or when
the Ending Index can be determined in the month preceding the Stated Maturity.
Assuming these positions concerning the CPIS are respected, you will likely have
ordinary gain or loss upon the payment of the CPIS at maturity or upon
redemption, although you may have capital gain or loss upon the sale or other
disposition of the CPIS to a third party.
It is possible, however, that other tax results might arise. For example, the
Related Note could be treated as a cash settled option, in which case you would
be required to mark-to-market the CPIS each year. Alternatively, the Related
Note could be treated as a contingent payment debt obligation, in which case you
would be required to accrue original issue discount in income over the life of
the CPIS.
Pension plans (including individual retirement accounts) should consult their
tax advisors concerning the application of the "unrelated business taxable
income" rules to income from the CPIS.
In the case of non-U.S. holders of the CPIS, the Trust will withhold 30% from
amounts paid to such holders in excess of the Issue Price. Non-U.S. holders can,
however, apply to the Internal Revenue Service for a refund of any amounts so
withheld on the theory that no withholding tax was due. No assurance can be
given that any such refund claim will be successful.
For further information, see "United States Federal Income Taxation" in this
Prospectus Supplement.
ARE THERE ANY RISKS ASSOCIATED WITH MY INVESTMENT?
Yes. An investment in the CPIS is subject to certain risks, including full
principal risk. Please refer to the section "Risk Factors" in this Prospectus
Supplement.
IN WHAT FORM WILL THE CPIS BE ISSUED?
The CPIS will be represented by one or more global securities that will be
deposited with and registered in the name of Depository Trust Company or its
nominee. This means you will not receive a certificate for your security.
S-7
<PAGE> 8
WHERE CAN YOU FIND MORE INFORMATION?
J.P. Morgan files reports, proxy statements and other information with the SEC.
Its SEC filings are also available over the Internet at the SEC's web site at
HTTP://WWW.SEC.GOV. You may also read and copy any document J.P. Morgan files at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information on
the public reference rooms and their copying charges. You may also inspect J.P.
Morgan's SEC reports and other information at the New York Stock Exchange, Inc.,
20 Broad Street, New York, New York, 10005.
We will send you copies of its SEC filings, excluding exhibits, at no cost upon
request. Please address your request to the Office of the Secretary, J.P. Morgan
& Co. Incorporated, 60 Wall Street, New York, New York 10260-0060; telephone
number (212) 648-3380.
More information about the Treasury Department's inflation linked securities and
the Bureau of Labor Statistics determination and methodology for the CPI may be
found at WWW.PUBLICDEBT.TREAS.GOV and WWW.BLS.GOV respectively.
CONSOLIDATED RATIO OF J.P. MORGAN'S EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 1999 1998 1997 1996 1995
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Excluding Interest on Deposits 1.40 1.42 1.16(a) 1.27 1.35 1.35
Including Interest on Deposits 1.32 1.32 1.12 1.20 1.26 1.24
</TABLE>
---------------
(a) The twelve months ended December 31, 1998, the ratio of earnings to fixed
charges, excluding the fourth quarter 1998 after tax charge of $86 million
($143 million before tax) related to cost reduction programs; excluding the
third quarter 1998 after tax gain of $34 million ($56 million before tax)
related to the sale of J.P. Morgan's investment management business in
Australia; excluding the second quarter 1998 after tax gain of $79 million
($131 million before tax) related to the sale of J.P. Morgan's global trust
and agency services business; and excluding the first quarter 1998 after tax
charge of $129 million ($215 million before tax) related to restructuring of
business activities, was 1.17 excluding interest on deposits and 1.13
including interest on deposits.
CONSOLIDATED RATIO OF J.P. MORGAN'S EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
--------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 1999 1998 1997 1996 1995
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Excluding Interest on Deposits 1.40 1.42 1.16(a) 1.27 1.35 1.35
Including Interest on Deposits 1.32 1.32 1.12 1.20 1.26 1.24
</TABLE>
---------------
(a) For the twelve months ended December 31, 1998, the ratio of earnings to
combined fixed charges and preferred stock dividends, excluding the fourth
quarter 1998 after tax charge of $86 million ($143 million before tax)
related to cost reduction programs; excluding the third quarter 1998 after
tax gain of $34 million ($56 million before tax) related to the sale of J.P.
Morgan's investment management business in Australia; excluding the second
quarter 1998 after tax gain of $79 million ($131 million before tax) related
to the sale of J.P. Morgan's global trust and agency services business; and
excluding the first quarter 1998 after tax charge of $129 million ($215
million before tax) related to restructuring of business activities, was
1.17 excluding interest on deposits and 1.13 including interest on deposits.
S-8
<PAGE> 9
RISK FACTORS
Your investment in the CPIS will involve certain risks. The CPIS are not
principal-protected. At Stated Maturity, if the Ending Index is less than the
Forward Index, the Redemption Value will be less than the Face Amount, and may
be as low as zero (but not less than zero). In addition, your investment in the
CPIS entails risks not associated with investment in conventional debt or
preferred securities or even other inflation linked securities. You should
consider carefully the following discussion of risks before you decide that an
investment in the CPIS is suitable for you.
INDEXATION OF THE REDEMPTION VALUE
The CPIS are full principal-at-risk securities. The Redemption Value payable at
Stated Maturity will be determined, pursuant to the terms described in this
Prospectus Supplement, by adding the Face Amount to the difference between the
Ending Index (the Reference CPI level at Stated Maturity) and the Forward Index.
At Stated Maturity, if the Reference CPI level has decreased or has not
increased by more than [20-30]%, the Redemption Value will be less than the Face
Amount. To reach the Forward Index level, the Reference CPI must rise
approximately [2.30%] per year over the term of the CPIS. In the event of no
inflation or sustained deflation (negative inflation or falling price levels),
the CPIS may have no value at Stated Maturity.
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Tax Event (as described herein), Morgan Guaranty will
have the right to, or in the case of an Investment Company Event (as described
herein) be obligated to, redeem the Related Note for cash in whole or, if a
partial redemption will end such Special Event, in an amount sufficient to end
such Special Event, with the result that the Trust will redeem a similar
proportion of the CPIS for cash at the Early Redemption Value. As described in
more detail below, a Special Event may occur at any time. See "Description of
the CPIS--Special Event Redemption" for more detail. It is possible that the
occurrence of a Special Event could cause the market price of the CPIS in any
existing secondary market to decline.
EARLY REDEMPTION VALUE
The CPIS may be redeemed prior to their Stated Maturity upon (1) the occurrence
of a Special Event or (2) annually beginning in 2002, at the option of the
holders, on an Optional Redemption Date. In the case of a Special Event
Redemption, the Early Redemption Value may be less than what the Redemption
Value would have otherwise been had the Special Event not caused the CPIS to be
redeemed early. In the case of an Optional Redemption, it is likely, under
usually-prevailing market conditions, that the Early Redemption Value will be
less than the amount a holder could have realized by selling such CPIS on such
Early Determination Date (excluding commission costs), since the early
redemption formula does not account for any time premium and uses conservative
methodology (including a 30 basis point Buyback Spread), which reduces the Early
Redemption Value.
LIMITED VOTING RIGHTS
Holders of the CPIS will have certain voting rights relating to a payment
default on or an adverse change to the CPIS, 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 with J.P.
Morgan as the holder of the Series C Common Securities and other series of
common securities issued by the Trust. See "Description of the CPIS--Voting
Rights".
LISTING MAY NOT ENSURE LIQUID MARKET AND TRADING PRICE MAY NOT REFLECT ACTUAL
ECONOMIC VALUE
We have applied for listing of the CPIS on the AMEX under symbol "JPI", subject
to official notice of issuance. Trading of the CPIS 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 CPIS. Listing the CPIS
on the AMEX does not necessarily ensure that a liquid trading market will
develop for the CPIS.
If the trading market for the CPIS is limited, there may be a limited number of
buyers when you decide to sell your CPIS if you do not wish to hold your
investment until the Stated Maturity. This may affect the price you receive upon
such sale.
EARLY DETERMINATION OF ENDING INDEX
If either or both of the Reference Treasuries are subject to a buyback or are
called by the Department of Treasury or the outstanding amount of such Reference
Treasury is reduced by at least 10% from the greatest outstanding amount since
issuance of the CPIS (each a "Reference Treasury Event"), then Morgan Guaranty
has the right, but not the obligation, within 30 days of such Reference Treasury
Event, to permanently fix the Ending Index (the "Fixed Ending Index").
Currently, there
S-9
<PAGE> 10
are approximately [$11.5] billion in Reference TIPS and $[23.3] billion in
Reference Government Notes issued and outstanding. The value of the Fixed Ending
Index will be determined using the then current market inputs and the
methodology used for determining the Early Ending Index in the event of an
Optional Redemption. However, the CPIS will not be redeemed or called and will
remain outstanding until Stated Maturity or an early redemption. Such early
fixation of the Ending Index may adversely affect the trading value of the CPIS
and their Redemption Value relative to what it may have been if such early
fixation had not occurred. Morgan Guaranty will be the Calculation Agent and may
have interests adverse to the holders of the CPIS in determining whether to fix
the Ending Index early.
FACTORS AFFECTING THE MARKET VALUE OF THE CPIS
The value of the CPIS in the secondary market will be affected by the supply of
and demand for the CPIS and other key factors including, but not limited to: the
level of the CPI, the market's forecast for future inflation ("expected
inflation"), volatility of the CPI, the remaining time to Stated Maturity,
interest rates and the perceived credit quality of Morgan Guaranty and J.P.
Morgan. Assuming all other conditions remain constant, a change in a specific
factor, as discussed below, could impact the market value of the CPIS:
- CPI Level: We expect the market value of the CPIS to depend on the level of
the CPI. As discussed under "Description of the CPIS", decreases in the
Reference CPI should directly correlate to adverse changes in the value of the
CPIS.
- Expected Inflation: We expect the market value of the CPIS will also depend
on the expected inflation for the remaining term of the CPIS. Here, we use the
term expected inflation to mean the rate of inflation that the market expects
through Stated Maturity and which can be approximated as the difference
between the yields on U.S. Government Treasury Notes and TIPS with maturities
similar to that of the CPIS. Reductions in the market's forecast for expected
inflation should cause an adverse change in the value of the CPIS as it would
lower the expected payout at maturity. For example, at some point prior to
Stated Maturity, although the Reference CPI level may have increased at a rate
greater than [2.30]% per year (the rate of increase required over the life of
the CPIS for the Redemption Value to equal the Face Amount) from issuance,
expected inflation for the remaining term may have fallen such that the CPIS
could trade at a price lower than the Issue Price.
- Volatility of the CPI: Volatility is the term used to describe the size and
frequency of fluctuations in a particular index or market. If the volatility
of the CPI increases or decreases, the trading value of the CPIS may be
adversely affected.
- Remaining Time to Stated Maturity: The CPIS may trade at a value above that
which would be expected based on the Reference CPI level, expected inflation
and interest rates. Any such difference may reflect a time premium resulting
from expectations concerning the value of the CPI during the period to the
Stated Maturity. However, as the time remaining to Stated Maturity decreases,
the time premium may decrease, adversely affecting the trading value of the
CPIS.
- Interest Rates: The trading value of the CPIS may be affected by changes in
interest rates. In general, if interest rates increase (and inflation and
expected inflation stay the same), the trading value of the CPIS may be
adversely affected.
- Credit Quality: A decline in the perceived credit quality of Morgan Guaranty
or J.P. Morgan could cause the trading price of the CPIS to decline.
In addition, cumulative early redemptions which reduce the number of outstanding
CPIS to very low levels and reduce liquidity could result in the eventual
delisting of the CPIS from the AMEX.
IMPOSITION OF BANK REGULATORY RESTRICTIONS
The Trust's ability to make redemptions and other payments on the CPIS is
dependent upon Morgan Guaranty making payments on the Related Note as and when
required, or the collection of such payments by the Trust, on behalf of the CPIS
holders, under the Related Note Guarantee. 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, could become
subject to restrictions imposed by bank regulatory authorities. 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.
EFFECT OF TRADING IN U.S. INFLATION LINKED NOTES, U.S. GOVERNMENT TREASURY NOTES
AND OTHER INSTRUMENTS
Morgan Guaranty and other affiliates of J.P. Morgan are actively involved in the
trading of TIPS (including the Reference TIPS), U.S. Government Treasury Notes
(including the Reference Government Notes) and other instruments and derivative
S-10
<PAGE> 11
products based thereon. Morgan Guaranty in particular is an active participant
in inflation linked swaps and related derivatives markets. J.P. Morgan
Securities Inc. ("JPMSI") and other affiliates of J.P. Morgan and Morgan
Guaranty may also issue or underwrite or assist unaffiliated entities in the
issuance or underwriting of other securities or financial instruments with
returns indexed to the CPI or another inflation index.
Trading in the above referenced securities, contracts and instruments by Morgan
Guaranty, its affiliates (including JPMSI) and unaffiliated third parties could
adversely affect the trading value of the CPIS by, among other effects,
influencing the level of expected inflation or the market demand for CPI linked
securities. Also, additional issuances of securities linked or referenced to the
CPI or similar inflation indices could adversely affect the value of the CPIS.
POTENTIAL FOR ADVERSE INTERESTS
As noted above, certain of our subsidiaries and affiliates expect to engage in
trading activities related to inflation linked securities and other instruments
or derivative products based on or related to the CPI, for their accounts and
for other accounts under their management. Certain of our subsidiaries and
affiliates, as well as unaffiliated third parties, may also engage in other
activities related to the CPI, as discussed above. Because Morgan Guaranty will
issue the Related Note to the Trust, all such activities could create interests
of Morgan Guaranty adverse to the holders of the CPIS. For example, the
introduction of competing products into the marketplace, such as other
securities linked to the CPI, could adversely affect the value of the CPIS. To
the extent that J.P. Morgan or one of its affiliates serves as issuer, agent or
underwriter for such securities, their interests with respect to such products
may be adverse to those of the holders of the CPIS.
Morgan Guaranty will serve as Calculation Agent with respect to the CPIS and as
such will be responsible for calculating the Reference CPI and redemption
amounts. Morgan Guaranty will also be responsible for determining whether a
Market Disruption Event has occurred. In performing these duties, Morgan
Guaranty may have interests adverse to the interests of the holders of the CPIS,
such as instances when Morgan Guaranty as the Calculation Agent is required to
exercise discretion.
We have entered into an arrangement with one of our subsidiaries to hedge the
market risk associated with our obligation to pay any redemption amount. Such
subsidiary expects to make a profit in connection with such arrangement. We did
not seek competitive bids for such an arrangement from unaffiliated parties.
RISK OF INDEX CONTINGENCIES
We will use the same index contingencies the Treasury Department uses for the
Reference TIPS (as described in 31 CFR 356 "Department of the Treasury Circular,
Public Debt Series No. 1--93" (the "U.S. Public Debt Circular")). These index
contingencies include how the Reference CPI will be affected by (1) revisions in
previously reported CPI levels, (2) rebasing of the CPI by the Bureau of Labor
Statistics to a new reference period, (3) material adverse changes, in the
judgement of the Treasury Secretary, to the CPI by legislation or Executive
Order or (4) delays in reporting the CPI. We will use the index contingency
remedies as pronounced by the Treasury Department even if such remedies produce
lower Reference CPI levels than might otherwise have occurred and adversely
affect holders of the CPIS. Determinations of the Secretary of Treasury in this
regard will be final.
At present, according to the Treasury Department, only certain fundamental
changes are considered "index contingencies". For example, a change in the CPI
would be considered fundamental and become an index contingency if it affected
the character of the CPI. However, technical changes made by the Bureau of Labor
Statistics to the CPI to improve its accuracy as a measure of the cost of living
would not be considered fundamental. Technical changes include, but are not
limited to: (1) the specific items (e.g., apples or major appliances) priced for
the Index; (2) the way individual price quotations are aggregated to construct
component price indices for these items, (3) the method for combining these
component price indices to obtain the comprehensive, all-items CPI and (4) the
procedures for incorporating new goods into the Index and making adjustments for
quality changes in existing goods. Determinations by the Secretary of Treasury
as to what constitutes a fundamental change and therefore what constitutes an
index contingency will be final.
For example, in September 2000, the Bureau of Labor Statistics reissued and
revised the previously published monthly CPI levels for the year 2000. The
reported index number for each month from January, 2000, through August, 2000,
was increased by 0.0 to 0.2 index points. Such revisions altered the previously
reported percentage change in the CPI from December, 1999, to August, 2000, from
2.6% to 2.7%. The Bureau of Labor Statistics said the revisions reflected an
error in adjusting for quality improvement when a housing unit changed its air
conditioning system. The error actually extended back to January 1999, but
Bureau of Labor Statistics officials concluded that the impact on the 1999 data
would be too small to merit revising the whole series back that far (the change
would have affected each month's reported value by 0.1 at most). According to
the U.S. Public Debt Circular a CPI revision would not change Reference CPI that
has been already reported by the
S-11
<PAGE> 12
Treasury and thus the Treasury will continue to use the previously reported
(lower) CPI levels. If such a CPI revision were to occur in the future and
affected a Reference CPI level used to determine a payment for the CPIS we will
continue to use the Reference CPI level used by the Treasury even if it produced
a lower valuation for the holder of the CPIS.
CHANGES AND IMPROVEMENTS IN CPI METHODOLOGY
The Bureau of Labor Statistics has made numerous changes and improvements to the
CPI over the last 25 years and is likely continue to do so. Examples of
methodological improvements include the technical changes described in the
previous paragraph, the use of regression models to adjust for the quality
improvements in various goods (TVs, PCs, etc.), the introduction of geometric
averages to account for consumer substitution within CPI categories and changing
the housing/shelter formula to improve rental equivalence estimation. These and
future changes could reduce the level of increase in the CPI and could lower the
value of the CPIS.
The Bureau of Labor Statistics occasionally rebases the CPI. The current
standard reference base period is 1982-1984 = 100. The CPI was last rebased in
January, 1988. Prior to the release of the CPI for January 1988, the standard
reference base was 1967 = 100. If the Bureau of Labor Statistics rebases the CPI
during the time the CPIS are outstanding, we will continue to calculate the
Reference CPI using the existing base year in effect for the CPI used at
issuance of the CPIS as long as the old version is published. The conversion to
a new reference base will not affect the measurement of the percent changes in
the Index from one time period to another, except for rounding differences. Thus
rebasing will affect the published "headline" number often quoted in the
financial press, however the Reference CPI calculation should not be adversely
affected by any such rebasing. Determinations of the Secretary of Treasury in
regard to all Reference CPI levels, contingencies and remedies, including
possible changes due to rebasing, will be final.
REFERENCE CPI IS LAGGED 3 MONTHS
The Reference CPI level used to determine the Redemption Value of the CPIS is
the same Reference CPI level used in the Reference TIPS. The Reference TIPS and
the CPIS use a Reference CPI for the first day of each calendar month that is
the CPI for the third preceding calendar month. For example, the CPI that we use
for April 1 in any year is the CPI for January in such year, which is typically
reported in February of such year. The Reference CPI for any date other than the
first day of a given month is determined by a linear interpolation between the
CPI for the first day of the month and the CPI on the first day of the next
month. Because the Reference CPI at maturity is not the most recently published
CPI level, the Redemption Value could be less than if the most recently
published CPI level at maturity was used.
J.P. MORGAN CANNOT CONTROL THE BUREAU OF LABOR STATISTICS OR TREASURY DEPARTMENT
J.P. Morgan has no control over consumer prices, the Reference CPI or the
agencies involved in its calculation. These agencies could make changes to the
calculation of the CPI or decisions relating to Index Contingencies which
adversely affect the holders of the CPIS. Also, the Treasury Department could
call its debt and reduce the amount of Reference TIPS outstanding. Currently
there are approximately [ $11.5 ] billion in Reference TIPS and $[23.3] billion
in Reference Government Notes outstanding. A reduction of either such
outstanding Reference Treasury by 10% or more from their greatest outstanding
amount from issuance of the CPIS could cause Morgan Guaranty to fix the Ending
Index early. For more information concerning early determination of the Ending
Index and its effect on the CPIS, see "Description of the CPIS--Early
Determination of the Ending Index".
VOLATILITY OF AND ADVERSE CHANGES TO CPI
Consumer prices can be volatile. Historical changes in the CPI should not be
taken as an indication of future performance during the term of the CPIS. The
following tables set forth the monthly level of the CPI for the past 5 years
(Table 1) and the December year end level since 1947 (Table 2) as published by
the Bureau of Labor Statistics. Potential investors in the CPIS should note that
inflation has not risen every year. Specifically, in 1949 the CPI fell 2.1% and
in 1954 the CPI fell 0.7%.
S-12
<PAGE> 13
TABLE 1: MONTHLY CPI LEVELS FROM 1995 AS REPORTED BY BUREAU OF LABOR STATISTICS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 150.3 150.9 151.4 151.9 152.2 152.5 152.5 152.9 153.2 153.7 153.6 153.5
1996 154.4 154.9 155.7 156.3 156.6 156.7 157.0 157.3 157.8 158.3 158.6 158.6
1997 159.1 159.6 160.0 160.2 160.1 160.3 160.5 160.8 161.2 161.6 161.5 161.3
1998 161.6 161.9 162.2 162.5 162.8 163.0 163.2 163.4 163.6 164.0 164.0 163.9
1999 164.3 164.5 165.0 166.2 166.2 166.2 166.7 167.1 167.9 168.2 168.3 168.3
2000 168.8 169.8 171.2 171.3 171.5 172.4 172.8 172.8 173.7
</TABLE>
The above Table 1 shows the CPI for each month over the past five years as
reported by Bureau of Labor Statistics. The Reference CPI is lagged three
months, thus the Reference CPI for April 1 of any year would be the January
levels shown in the table for such year.
TABLE 2: YEAR-END DECEMBER CPI LEVELS REPORTED BY BUREAU OF LABOR STATISTICS.
ANNUAL CHANGE AND 9 YEAR CHANGE.
<TABLE>
<CAPTION>
-----------------------
ANNUAL 9 YR
YEAR CPI CHANGE CHANGE
---- ----- ------ ------
<S> <C> <C> <C>
1947 23.4 -- --
1948 24.1 3.0% --
1949 23.6 -2.1% --
1950 25.0 5.9% --
1951 26.5 6.0% --
1952 26.7 0.8% --
1953 26.9 0.7% --
1954 26.7 -0.7% --
1955 26.8 0.4% --
1956 27.6 3.0% 17.9%
1957 28.4 2.9% 17.8%
1958 28.9 1.8% 22.5%
1959 29.4 1.7% 17.6%
1960 29.8 1.4% 12.5%
1961 30.0 0.7% 12.4%
1962 30.4 1.3% 13.0%
1963 30.9 1.6% 15.7%
1964 31.2 1.0% 16.4%
1965 31.8 1.9% 15.2%
1966 32.9 3.5% 15.8%
1967 33.9 3.0% 17.3%
1968 35.5 4.7% 20.7%
1969 37.7 6.2% 26.5%
1970 39.8 5.6% 32.7%
1971 41.1 3.3% 35.2%
1972 42.5 3.4% 37.5%
1973 46.2 8.7% 48.1%
</TABLE>
<TABLE>
<CAPTION>
-----------------------
ANNUAL 9 YR
YEAR CPI CHANGE CHANGE
---- ----- ------ ------
<S> <C> <C> <C>
1974 51.9 12.3% 63.2%
1975 55.5 6.9% 68.7%
1976 58.2 4.9% 71.7%
1977 62.1 6.7% 74.9%
1978 67.7 9.0% 79.6%
1979 76.7 13.3% 92.7%
1980 86.3 12.5% 110.0%
1981 94.0 8.9% 121.2%
1982 97.6 3.8% 111.3%
1983 101.3 3.8% 95.2%
1984 105.3 3.9% 89.7%
1985 109.3 3.8% 87.8%
1986 110.5 1.1% 77.9%
1987 115.4 4.4% 70.5%
1988 120.5 4.4% 57.1%
1989 126.1 4.6% 46.1%
1990 133.8 6.1% 42.3%
1991 137.9 3.1% 41.3%
1992 141.9 2.9% 40.1%
1993 145.8 2.7% 38.5%
1994 149.7 2.7% 37.0%
1995 153.5 2.5% 38.9%
1996 158.6 3.3% 37.4%
1997 161.3 1.7% 33.9%
1998 163.9 1.6% 30.0%
1999 168.3 2.7% 25.8%
</TABLE>
Sources: Bureau of Labor Statistics and Morgan Guaranty. Both Tables 1 and 2
show the CPI for 1982-84 base period.
With respect to the foregoing CPI levels reported by Bureau of Labor Statistics,
past performance is not necessarily indicative of future performance and levels.
S-13
<PAGE> 14
MARKET DISRUPTION EVENTS
Market Disruption Events may delay the determination of the Redemption Value or
Early Redemption Value. If a Market Disruption Event occurs on an Early
Determination Date or at Stated Maturity, the repayment of the early or final
redemption amounts may be delayed. In certain circumstances involving continuing
Market Disruption Events, the Calculation Agent may use its discretion to
determine the Reference CPI. The Reference CPI determined by the Calculation
Agent under such circumstances may be lower than the actual Reference CPI
eventually reported (or determined by the Treasury Department). This would
result in investors receiving less than they would otherwise have been entitled
to receive. Such determinations by the Calculation Agent will be final absent
manifest error. See "Description of the CPIS--Market Disruption Events".
EXTENSION OF SETTLEMENT DATE OR STATED MATURITY
If the Reference CPI cannot be determined on any Early Determination Date or at
Stated Maturity due to a Market Disruption Event, the applicable settlement date
for the payments determined on such dates would be postponed until the later of
the applicable redemption date or 5 business days after the determination of
such Reference CPI for such date. Such delay could be of indefinite duration,
during which time a holder of the CPIS will not receive the Early Redemption
Value or Redemption Value thereof, as applicable.
HISTORICAL CORRELATIONS MAY NOT PREVAIL IN THE FUTURE
Although historically the CPI has shown some negative correlation with returns
on other securities, such as stocks and bonds, there can be no assurance that
such correlations will prevail in the future. As a result, investors who invest
in the CPIS in reliance on these correlations should individually assess the
likelihood of such correlations continuing.
TABLE 3: CORRELATION(R) OF QUARTERLY PERCENTAGE CHANGES FOR TWO 10-YEAR PERIODS,
FOR CPI VERSUS.
<TABLE>
<CAPTION>
----------------------
1980-1989 1990-1999
--------- ---------
<S> <C> <C>
U.S. large capitalization equities total return -14% -47%
U.S. Government bond index total return -29% -19%
</TABLE>
Source: Morgan Guaranty
CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS
The value of the CPIS are highly dependent upon the level of the CPI over time.
The CPI has been subject to public debate and congressional hearings in the past
and may continue to be so in the future. Also, new laws and regulations could be
passed which adversely affect the CPI and thus adversely affect the holders of
the CPIS.
Additionally, upon the occurrence of certain events affecting the amount of
Reference Treasuries outstanding, Morgan Guaranty has the right to cause the
Ending Index to be fixed. Following such an event, the Ending Index will remain
fixed and will be used in calculating any early or final redemption amount.
CERTAIN CONSIDERATIONS REGARDING HEDGING
Prospective purchasers of the CPIS who intend to hedge against the risk
associated with inflation should recognize the complexities of utilizing the
CPIS in this manner. Although the CPIS are designed to produce a pre-tax real
rate of return which rises and falls in conjunction with movements in the
Reference CPI level, the formulas under which the Redemption Value and Early
Redemption Value are calculated are not guaranteed to produce distributions to
holders having readily definable relationships with other CPI indexed
instruments and products. There can be no assurance that the CPI level will rise
at all during the life of the instrument. Also, investing in the CPIS should not
be considered a complete investment program.
LIMITATION ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE
DECLARATION
Each of the Guarantee and the Related Note Guarantee has certain limitations. In
addition, J.P. Morgan's obligations under the Guarantee, the Related Note
Guarantee and the Declaration are subordinated to its debtors and pari passu
with certain other equity holders. Taken together, these obligations of J.P.
Morgan provide a full and unconditional, subordinated guarantee of the payments
due on the CPIS. See "Description of the Guarantee" and "Description of the
Related Note Guarantee".
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<PAGE> 15
On September 13, 2000, Chase and J.P. Morgan announced that they have agreed to
merge. The merged firm will be named J.P. Morgan Chase & Co. The merger is
expected to close in the first quarter of 2001 and is subject to approval by
shareholders of both companies, as well as by U.S. Federal and state and foreign
regulatory authorities. Once the merger is complete, the CPIS will be guaranteed
by the new entity, J.P. Morgan Chase & Co.
UNCERTAIN TAX CONSEQUENCES
The U.S. Federal income tax consequences of an investment in the CPIS are
complex and uncertain. Prospective purchasers may be required to accrue income
in each year over the life of the CPIS or pay tax based on the market value of
the CPIS each year, even though no cash will be paid on the CPIS until their
maturity or early redemption. In addition, any gain on the redemption of the
CPIS will likely be ordinary income rather than capital gain, and any gain upon
the sale or other disposition of the CPIS may be ordinary income rather than
capital gain. As to holders of the CPIS that are not U.S. persons, the Trust
will withhold 30% from amounts paid to them in excess of the Issue Price.
For holders of CPIS that are pension plans (including individual retirement
accounts) the application of the "unrelated business taxable income" rules to
income from the CPIS is uncertain.
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<PAGE> 16
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.
On September 13, 2000, Chase and J.P. Morgan announced that they have agreed to
merge. The merged firm will be named J.P. Morgan Chase & Co. The merger is
expected to close in the first quarter of 2001 and is subject to approval by
shareholders of both companies, as well as by U.S. Federal and state and foreign
regulatory authorities.
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 C Common Securities, of the Trust. The Declaration will be qualified
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
The Trust currently has Series A and Series B Securities outstanding.
The following description summarizes the material terms of the Declaration and
is qualified in its entirety by reference to the Declaration, which has been
filed as an exhibit to the Registration Statement of which this Prospectus
Supplement is a part, and the Trust Indenture Act.
SERIES C SECURITIES
Upon issuance of the CPIS, the holders thereof will own all the issued and
outstanding Series C Preferred Securities, and J.P. Morgan will own all the
issued and outstanding Series C Common Securities. Each Series C Security will
represent a fractional undivided beneficial interest in certain assets of the
Trust consisting of the Related Note and the proceeds thereof. J.P. Morgan will
acquire the Series C Common Securities in a principal amount equal to 0.001% of
the total principal amount of the Series C 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 CPIS and the Series C 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 the CPIS will have
priority over holders of Series C Common Securities with respect to payments in
respect of distributions and payments upon liquidation, redemption and maturity
and (ii) holders of Series C 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 purposes of (a) issuing Securities, including the
Series C Securities, (b) investing the gross proceeds from the sale of such CPIS
and the Series C Common Securities in the Related Note and investing the
proceeds of such other 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 C Securities,
including economic rights, rights to information and voting rights, are set
forth in the Declaration (which term shall include any supplement to the
Declaration), 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 C Securities, and the
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<PAGE> 17
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 C Securities (the "Property Account") to hold all
payments in respect of the Related Note for the benefit of the holders of the
Series C Securities. The Property Trustee will promptly make distributions to
the holders of the Series C 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
CPIS 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 and 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 C Securities pursuant to the terms of the
Declaration and of the Series C 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 debt obligations 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 C 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 C
Securities or other series of Securities associated with other debt obligations
of Morgan Guaranty; (g) incur any indebtedness for borrowed money; or (h)(1)
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 C Securities
or other series of Securities, (2) waive any past default that is waivable under
the Related Note (or other related notes) or the Declaration, (3) exercise any
right to rescind or annul any declaration that the principal of the Related Note
(or other related notes) deposited in the Trust as trust assets shall be due and
payable or (4) consent to any amendment, modification or termination of the
Related Note (or other debt obligations) 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 (1) 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 (2) if required, the
approval of the holders of the Series C Securities or other series of Securities
for the taking of any such action. See "--Voting" and "Description of the
CPIS--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.
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<PAGE> 18
VOTING
Except as set forth below, under "--Events of Default", under "Description of
the CPIS--Voting Rights" and as provided under the Business Trust Act, the
Declaration and the Trust Indenture Act, holders of the CPIS 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 (for these
purposes, the principal amount of the CPIS shall equal the Early Redemption
Value on the date of any such vote); 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 C 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 Face Amount of the outstanding
CPIS 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 and (b) such direction would not cause the Trust not to be
properly classified as a grantor trust for U.S. Federal income tax purposes. 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 CPIS may institute a 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", "--Events of Default", "Description of the CPIS--General"
and "Description of the Related Note Guarantee--Remedies of the Trust and
Holders of the CPIS". The Declaration provides that J.P. Morgan, as 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 C 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 C Securities will be limited to
payments received by the Property Trustee in respect of the Related Note. If
Morgan Guaranty does not make payments on the Related Note, the Property Trustee
will not make distributions on the Series C Securities. Under the Declaration,
except as set forth below, if and to the extent Morgan Guaranty does make
payments on the Related Note, the Property Trustee is obligated to make
distributions on the Series C Securities on a Pro Rata Basis (as defined below).
The payment of distributions on the CPIS 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
CPIS of amounts due on the CPIS. Such Guarantee itself, however, covers
distributions on the CPIS only to the extent that Morgan Guaranty has made a
payment to the Property Trustee on the Related Note. As used in this Prospectus
Supplement, the term "Pro Rata Basis" shall mean pro rata to each holder of
Series C Securities according to the aggregate value of all Series C Securities
held by the relevant holder 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
CPIS pro rata according to the aggregate Early Redemption Value of the CPIS held
by the relevant holder on the date of such payment, and only after satisfaction
of all amounts owed to the holders of the CPIS to each holder of Series C Common
Securities pro rata according to the aggregate value of the Series C Common
Securities held by the relevant holder.
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<PAGE> 19
EVENTS OF DEFAULT
In the event that the Trust fails to pay distributions on the Series C
Securities for 30 days following the date on which such payment is due in
accordance with the terms of such Series C 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 C Securities. In such event,
the Declaration provides that (a) holders of a majority in Face Amount of the
CPIS, acting as a single class, may cause the Trust, on behalf of holders of the
Series C 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 C Securities and
(b) in the case of a Note Event of Default that is attributable to the failure
of Morgan Guaranty to make payments on the Related Note on the date such
payments are otherwise due, any holder of the outstanding CPIS may 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 the CPIS by J.P. Morgan in connection with such direct
action, J.P. Morgan shall remain obligated to make payments on the CPIS, and the
rights of J.P. Morgan, as Guarantor, shall be subrogated to the rights of such
holder of the CPIS with respect to payments on the CPIS to the extent of any
payment made by J.P. Morgan to such holder of the CPIS in such direct action.
The right of any holder of Series C Securities to receive payments or
distributions on such Series C Securities in accordance with the terms of the
Declaration or such Series C 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 the CPIS is registered on the books and
records of the Trust as the sole holder thereof and of the CPIS 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 CPIS represented thereby on the part of
any person, whether or not the Trust shall have actual or other notice thereof.
The CPIS 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 of the CPIS (the "CPIS
Beneficial Owners") registered in the name of and held by DTC or its nominee;
and (ii) the rights of the CPIS Beneficial Owners shall be exercised only
through DTC (or any successor) and shall be limited to those established by law
and agreements between such CPIS Beneficial Owners and DTC and/or its
participants. With respect to any of the CPIS 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 CPIS 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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<PAGE> 20
USE OF PROCEEDS
The Trust will invest the proceeds from the sale of the CPIS and the related
Series C 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 CPIS, 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 the offering of the CPIS by taking long and
short positions in Reference Treasuries, U.S. Government Treasury Notes or in
listed or over-the-counter futures or options contracts or other derivative or
synthetic instruments related to the CPI. There can be no assurance that Morgan
Guaranty's initial hedging did not, and that its continued hedging will not,
affect the price for the CPIS, the TIPS, U.S. Government Treasury Notes or the
economic terms of the CPIS. In addition, J.P. Morgan and its affiliates may from
time to time purchase or otherwise acquire a long or short position in the CPIS
and may, in their sole discretion, hold or resell the CPIS. Morgan Guaranty may
also take positions in U.S. Government Treasury Notes 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 the Reference TIPS or
other derivative contracts or synthetic instruments related to the CPI, Morgan
Guaranty may liquidate a portion or all of its holdings, as applicable, at or
about the time of any early determination date or the stated maturity of the
Related Note (which correspond to any Early Determination Dates and the Stated
Maturity of the CPIS). 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 the CPIS.
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<PAGE> 21
DESCRIPTION OF THE CPIS
You will find information about the CPIS in two documents: this Prospectus
Supplement and the accompanying Prospectus. The Prospectus describes general
information about the Trust and J.P. Morgan. This Prospectus Supplement
describes the CPIS and how they work. Since the CPIS differ in some respects
from the general securities described in the Prospectus, in all cases you should
rely on the information provided in this Prospectus Supplement and disregard any
contradictory information in the Prospectus. Specifically, the CPIS are not
ComPS (as described in the Prospectus) and do not use the indices or
methodologies of the ComPS.
SUMMARY
The Redemption Value payable at the Stated Maturity (the "Redemption Value") is
the sum of the Face Amount plus the Index Amount (which is equal to the Ending
Index minus the Forward Index). Such Redemption Value may be more or less than
the Face Amount but not less than zero.
The CPIS may be redeemed on an Early Redemption Date upon an Optional Redemption
by a holder of the CPIS or upon the occurrence of a Special Event by the Trust.
Such Early Redemption Value will be determined, pursuant to the terms herein, by
estimating what the Ending Index level would have been at Stated Maturity using
then current market inputs and the methodology described herein (the "Early
Ending Index"), using that amount to estimate what the Redemption Value would
have been at Stated Maturity and then determining the present value of that
amount. Such Early Redemption Value may be more or less than the Face Amount but
may not be less than zero. See "--Index" for more information on the CPI and
"--Optional Redemption" for more details on the early redemption calculations.
Upon the occurrence of a Reference Treasury Event, the Ending Index may be
permanently fixed (the "Fixed Ending Index") thereby fixing the amount repayable
at Stated Maturity. Upon such Reference Treasury Event , the Fixed Ending Index
shall be determined in the same manner as the Early Ending Index. Once fixed,
the Fixed Ending Index shall be used to determine any Redemption Value or Early
Redemption Value. See "--Early Determination of the Ending Index".
As described herein, the Reference CPI used to determine any redemption amount
will be the CPI level used to adjust the inflation indexed principal amount in
the Reference TIPS. Such Reference CPI is a 3 month lagged version of CPI,
subject to adjustment as described herein. Although the CPIS use the same
Reference CPI as the TIPS, unlike the TIPS, the CPIS are full principal-at-risk
securities.
GENERAL
The CPIS will be issued pursuant to the Declaration, a copy of which is filed as
an exhibit to the Registration Statement relating to this Prospectus Supplement
and the Prospectus. The Declaration authorizes the Trust to issue Common and
Preferred Securities. All Common Securities will be owned by J.P. Morgan.
Redemptions of the CPIS and the related Series C Common Securities will be made
on a pro rata basis among the CPIS and the related Series C 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 C Common Securities to receive payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
CPIS. 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 redemptions 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 payments in respect of the CPIS when Morgan Guaranty has not made
payment of principal on the Related Note. In such event, the remedy of a holder
of the CPIS is to direct the Trust to enforce its rights under the Related Note
and the Related Note Guarantee. In addition, upon the occurrence and during the
continuation of a Note Event of Default that is attributable to the failure of
Morgan Guaranty to make payments on the Related Note on the date such amounts
are otherwise payable (or in the case of a redemption, on the Redemption Date),
any holder of the outstanding CPIS may 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 the CPIS by J.P.
Morgan in connection with a direct action, J.P. Morgan shall remain obligated to
make payments on the CPIS, and the rights of J.P. Morgan, as Guarantor, shall be
subrogated to the rights of such holder of the CPIS with respect to payments on
the CPIS to the extent of any payment made by J.P. Morgan to such holder of the
CPIS in such direct action. See "--Voting Rights" and "Effect of Obligations
Under the Guarantee, the Related Note Guarantee and the Related Note".
S-21
<PAGE> 22
ISSUE PRICE AND FACE AMOUNT
The CPIS will have an Issue Price of $[26.50] each and a Face Amount of
$[40.00].
DIVIDENDS AND INTEREST
No dividends or interest on the CPIS will be paid.
REDEMPTION AT MATURITY
Unless previously redeemed by an Optional or Special Event Redemption, the CPIS
will mature on [January 15, 2010], unless postponed due to a Market Disruption
Event; see "--Market Disruption Events". At Stated Maturity, the holders of the
CPIS will be entitled to receive cash per CPIS equal to the sum of:
Face Amount plus Index Amount (which equals the Ending Index minus the Forward
Index); or, with numbers written in:
$[40.00] + (Ending Index - [213.0]);
provided that the above Redemption Value cannot be less than zero. (Note, it is
possible for the Ending Index to be less than the Forward Index and thus for the
CPIS to pay less than the Face Amount.)
The Ending Index is the Reference CPI level at Stated Maturity and will be the
same Reference CPI used to calculate the inflation indexed principal in the
Reference TIPS. Thus, the Reference CPI for the first day of any calendar month
for the Reference TIPS and CPIS is the CPI for the third preceding calendar
month, as reported by the Bureau of Labor Statistics in the second preceding
calendar month. For example, the Reference CPI for April 1 in any year is the
CPI for January of such year, which is usually published in February of such
year. The Reference CPI for any day in a month other than the first day of such
month is the linear interpolation between the Reference CPI for the first day of
the month and the first day of the immediately following month. Thus the
Reference CPI for the Stated Maturity is lagged 3 months and should be
determinable at least one month prior to Stated Maturity. The determination of
the Reference CPI is subject to various Index Contingencies. See "--Index
Contingencies" for further details.
The Forward Index is [213.0] and was set on the day of pricing. It was
approximately [120-126]% of the spot level of Reference CPI at pricing.
The Redemption Value of the CPIS is linked directly to the performance of the
CPI. For example, if the Ending Index (the Reference CPI level at Stated
Maturity) is 40 points higher than the Forward Index, the Redemption Value will
be $40 higher than the Face Amount. If the Ending Index at Stated Maturity is 30
points lower than the Forward Index then the Redemption Amount will be $30 lower
than the Face Amount. If, by the Stated Maturity of the CPIS, the CPI does not
increase to at least the Forward Index level set on the day of pricing, then the
Redemption Value will be less than the Face Amount. The CPI must rise
approximately [2.30%] per year until Stated Maturity to reach the Forward Index.
If at the Stated Maturity, a Market Disruption Event shall have occurred and be
continuing, the Determination Date shall be the day on which there no longer
exists a Market Disruption Event as determined by the Calculation Agent in its
sole discretion. See "--Market Disruption Events".
HYPOTHETICAL RETURNS
Over the past 50 years the 9-year CPI change has varied from approximately 12%
to 121%. There can be no assurance that the actual CPI change over the life of
the CPIS will be in this range or that the CPI will rise at all.
TABLE 4: HYPOTHETICAL REDEMPTION TABLE
The table below illustrates, for a range of hypothetical Ending Index levels, on
the Stated Maturity (assuming a term of 9.17 years (9 years and 2 months), an
Issue Price of $26.50, a Face Amount of $40.00, a Reference CPI at issuance of
173.0 and a Forward Index of 213.0) the following:
- the change in the Reference CPI level over the life of the instrument,
- the implied annual compound inflation rate over the life of the instrument to
achieve the ending CPI level from the assumed beginning level,
- the hypothetical Redemption Value,
- the hypothetical Redemption Value as a percentage of the Issue Price,
S-22
<PAGE> 23
- the hypothetical pre-tax rate of return on the CPIS and
- the hypothetical pre-tax real rate of return on the CPIS (derived by
discounting the hypothetical redemption by the increase in CPI to create a
deflated or "real" principal redemption amount to used to calculate a real
rate of return).
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
IMPLIED HYPOTHETICAL
INFLATION VALUE REDEMPTION
HYPOTHETICAL CHANGE IN RATE PER REDEMPTION VALUE AS % PRETAX PRETAX CPIS
ENDING INDEX INDEX YEAR VALUE OF ISSUE PRICE CPIS IRR(A) REAL IRR(B)
------------ --------- --------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
129.8 -25.0% -3.09% $ 0.00 0.0% -100.0% -100.0%
138.4 -20.0% -2.40% $ 0.00 0.0% -100.0% -100.0%
147.1 -15.0% -1.76% $ 0.00 0.0% -100.0% -100.0%
155.7 -10.0% -1.14% $ 0.00 0.0% -100.0% -100.0%
164.4 -5.0% -0.56% $ 0.00 0.0% -100.0% -100.0%
173.0 0.0% 0.00% $ 0.00 0.0% -100.0% -100.0%
181.7 5.0% 0.53% $ 8.65 32.6% -11.5% -12.0%
190.3 10.0% 1.05% $ 17.30 65.3% -4.5% -5.5%
199.0 15.0% 1.54% $ 25.95 97.9% -0.2% -1.7%
199.5 15.3% 1.57% $ 26.50 100.0% 0.0% -1.5%
207.6 20.0% 2.01% $ 34.60 130.6% 3.0% 0.9%
213.0 23.1% 2.30% $ 40.00 150.9% 4.6% 2.2%
216.3 25.0% 2.46% $ 43.25 163.2% 5.5% 3.0%
224.9 30.0% 2.90% $ 51.90 195.8% 7.6% 4.6%
233.6 35.0% 3.33% $ 60.55 228.5% 9.4% 5.9%
242.2 40.0% 3.74% $ 69.20 261.1% 11.0% 7.0%
250.9 45.0% 4.14% $ 77.85 293.8% 12.5% 8.0%
259.5 50.0% 4.52% $ 86.50 326.4% 13.8% 8.9%
268.2 55.0% 4.90% $ 95.15 359.1% 15.0% 9.6%
276.8 60.0% 5.26% $103.80 391.7% 16.1% 10.3%
285.5 65.0% 5.61% $112.45 424.3% 17.1% 10.9%
294.1 70.0% 5.96% $121.10 457.0% 18.0% 11.4%
302.8 75.0% 6.30% $129.75 489.6% 18.9% 11.9%
311.4 80.0% 6.62% $138.40 522.3% 19.8% 12.3%
320.1 85.0% 6.94% $147.05 554.9% 20.6% 12.7%
328.7 90.0% 7.25% $155.70 587.5% 21.3% 13.1%
337.4 95.0% 7.56% $164.35 620.2% 22.0% 13.5%
346.0 100.0% 7.85% $173.00 652.8% 22.7% 13.8%
354.7 105.0% 8.15% $181.65 685.5% 23.4% 14.1%
363.3 110.0% 8.43% $190.30 718.1% 24.0% 14.4%
372.0 115.0% 8.71% $198.95 750.8% 24.6% 14.6%
380.6 120.0% 8.98% $207.60 783.4% 25.2% 14.9%
</TABLE>
---------------
<TABLE>
<S> <C> <C> <C> <C> <C>
1
----
Redemption Price term
(a) Pre-tax IRR = ( ---------------- ) - 1
Issue Price
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
1
Redemption Price ----
------------------- term
(b) Pre-tax Real IRR = (( 1 + Change in Index )) - 1
-------------------
Issue Price
</TABLE>
The above table is for illustration purposes only. The actual Redemption Value
and the resulting total, pre-tax nominal, and pre-tax real rate of return will
depend entirely on the actual Reference CPI determined at Stated Maturity and
the terms of the CPIS.
S-23
<PAGE> 24
THE CONSUMER PRICE INDEX
The CPIS are indexed to the same Reference CPI level used to calculate the
inflation indexed principal in the 4.25% Treasury Inflation Protected Securities
due January 15, 2010, issued by the United States Department of the Treasury.
The CPI for these purposes is the non-seasonally adjusted U.S. City Average All
Items Consumer Price Index published monthly by the Bureau of Labor Statistics
of the U.S. Department of Labor. The CPI is a measure of the average change in
consumer prices over time in a fixed market basket of goods and services,
including food, clothing, shelter, fuels, transportation, charges for doctors'
and dentists' services, and drugs. User fees (such as water and sewer service)
and sales and excise taxes paid by the consumer are also included. Income taxes
and investment items such as stocks, bonds, and life insurance are not included.
The CPI includes expenditures by urban wage earners and clerical workers,
professional, managerial, and technical workers, the self-employed, short-term
workers, the unemployed, retirees and others not in the labor force. In
calculating the Index, price changes for the various items are averaged together
with weights that represent their importance in the spending of urban households
in the United States. The contents of the market basket of goods and services
and the weights assigned to the various items are updated periodically to take
into account changes in consumer expenditure patterns. The CPI is expressed in
relative terms based on a reference period for which the level is set at 100
(currently the base reference period used by the Bureau of Labor Statistics is
1982-1984). For example, since the CPI for the 1982-84 reference period is 100,
an increase of 16.5 percent from that period would be shown as 116.5.
The Bureau of Labor Statistics has made numerous technical and methodological
improvements and changes to the CPI over the last 25 years, and it is likely to
continue to do so. Technical changes made by the Bureau of Labor Statistics to
the CPI to improve its accuracy include, but are not limited to, changes in: (1)
the specific items (e.g., apples or major appliances) to be priced for the
Index; (2) the way individual price quotation are aggregated to construct
component price indices for these items; (3) the method for combining these
component price indices to obtain the comprehensive, all-items CPI; and (4) the
procedures for incorporating new goods into the Index and making adjustments for
quality changes in existing goods. Examples of recent methodological
improvements include the use of regression models to adjust for the quality
improvements in various goods (TVs, PCs, etc.), the introduction of geometric
averages to account for consumer substitution within CPI categories, and
changing the housing/shelter formula to improve rental equivalence estimation.
These changes and any future changes could reduce the level of the CPI and hence
lower the Redemption Value of the CPIS.
The Bureau of Labor Statistics occasionally rebases the CPI. The current
standard reference base period is 1982-1984 = 100. The CPI was last rebased in
January, 1988. Prior to the release of the CPI for January 1988, the standard
reference base was 1967 = 100. If the Bureau of Labor Statistics rebases the CPI
during the time the CPIS are outstanding, we will continue to calculate the
Reference CPI using the existing base year in effect for the CPI used at
issuance of the CPIS as long as the old CPI is still published. The conversion
to a new reference base does not affect the measurement of the percent changes
in a given index series from one time period to another, except for rounding
differences. Thus rebasing will affect the published "headline" number often
quoted in the financial press, however, the Reference CPI calculation for the
CPIS should not be adversely affected by any such rebasing since the old-based
CPI can be calculated by using the percent changes of the new rebased CPI to
calculate the levels of the old CPI series (since the two series should have the
same percent changes). Determinations of the Secretary of Treasury in regard to
all Reference CPI levels, contingencies, and remedies will be final.
REFERENCE CPI
The Reference CPI for the first day of any calendar month is the CPI for the
third preceding calendar month, as is usually reported by Bureau of Labor
Statistics in the second preceding calendar month. For example, the Reference
CPI applicable to April 1 in any year is the CPI for January of such year, as
reported in February of such year. The Reference CPI for any day of the month
other than the first day of such month is the linear interpolation between the
Reference CPI for the first day of the month and the first day of the
immediately following month. Thus the Reference CPI at the Stated Maturity,
because it is lagged 3 months, should be determinable prior to Stated Maturity.
For purposes of interpolation, calculations with regard to the Reference CPI by
the U.S. Treasury Department for a specific date are truncated to six decimal
places and rounded to five decimal places. The formula for the Reference CPI for
a specific date using linear interpolation is:
<TABLE>
<S> <C> <C>
t-1
Reference CPI(Date) = Reference CPI(M) + ( --- ) (Reference CPI(M + 1)- Reference CPI(M)).
D
</TABLE>
Where:
- Reference CPI(Date) = the determination date;
- D = the number of days in the month in which the Reference CPI(Date)
falls;
- t = the calendar day corresponding to the Reference CPI(Date);
S-24
<PAGE> 25
- Reference CPI(M) = Reference CPI for the first day of the calendar month
in which the Reference CPI(Date) falls;
- Reference CPI(M + 1) = Reference CPI for the first day of the calendar
month immediately following the Reference CPI(Date).
For example, the Reference CPI for April 15, 1996 is calculated as follows:
<TABLE>
<S> <C> <C>
15-1
Reference CPI(April 15, '96) = Reference CPI(April 1, '96) + ( ---- ) (Reference CPI(May 1, '96) - Reference CPI(April 1, '96)).
30
</TABLE>
Where:
- D = 30;
- t = 15;
- Reference CPI(April 1, 1996) = 154.40, the non-seasonally adjusted CPI
for January 1996;
- Reference CPI(May 1, 1996) = 154.90, the non-seasonally adjusted CPI for
February 1996.
Putting these values in the equation above:
<TABLE>
<S> <C> <C>
14
Reference CPI(April 15, '96 )= 154.40 + ( -- ) (154.90 - 154.40), or
30
</TABLE>
Reference CPI(April 15, '96) = 154.633333.
For the CPIS, we will round such level to two decimal places or 154.63 in the
above example. (The Reference CPI as used in the TIPS is rounded to five decimal
places.)
The above figures are for illustration purposes only.
INDEX CONTINGENCIES
We will use the same Index Contingencies that the Treasury Department uses for
the Reference TIPS (as described in the U.S. Public Debt Circular). These Index
Contingencies include how the Reference CPI will be affected by (1) revisions in
previously reported CPI levels, (2) rebasing of the CPI by the Bureau of Labor
Statistics to a new reference period, (3) material adverse changes to the CPI by
legislation or Executive Order, as determined by the Secretary of Treasury, or
(4) delays in reporting the CPI. We will use the Index Contingency remedies as
pronounced by the Treasury Department even if such remedies produce lower
Reference CPI levels than might otherwise have occurred, which in turn may
adversely affect holders of the CPIS. Determinations of the Secretary of
Treasury in this regard will be final.
According to the Treasury Department, only certain fundamental changes in the
CPI are considered "Index Contingencies". A change in the CPI would be
considered fundamental and become an Index Contingency if it affected the
character of the CPI. However, according to the Treasury Department, technical
changes made by the Bureau of Labor Statistics to the CPI to improve its
accuracy as a measure of the cost of living would not be considered fundamental
and so, could not be Index Contingencies.
Technical changes include, but are not limited to changes in: (1) the specific
items (e.g., apples or major appliances) to be priced for the Index, (2) the way
individual price quotations are aggregated to construct component price indices
for these items, (3) the method for combining these component price indices to
obtain the comprehensive, all-items CPI, and (4) the procedures for
incorporating new goods into the Index and making adjustments for quality
changes in existing goods. Determinations by the Secretary of Treasury as to
what constitutes a fundamental change will be final.
S-25
<PAGE> 26
Fundamental changes or events which constitute Index Contingencies and how such
contingencies would be treated will follow the Treasury Department's rules
concerning Index Contingencies and its TIPS. Currently, as listed in the U.S.
Public Debt Circular, these include:
- If a previously reported CPI is revised by the Bureau of Labor Statistics, the
Treasury will continue to use the previously reported CPI and not the revised
CPI.
- If the CPI is rebased to a different year, the Treasury Department will
continue to use the CPI based on the base reference period in effect when the
security (in this case, the Reference TIPS) was first issued, as long as that
CPI continues to be published by the Bureau of Labor Statistics.
- If the applicable CPI is (1) discontinued, (2) in the judgment of the
Secretary of Treasury, fundamentally altered in a manner materially adverse to
the interests of an investor in the TIPS or (3) in the judgment of the
Secretary of Treasury, altered by legislation or Executive Order in manner
materially adverse to the interests of an investor in the TIPS, the Treasury
Department, after consulting with the Bureau of Labor Statistics or any
successor agency will substitute an appropriate alternative index. The
Treasury Department will then notify the public of the substitute index and
how it will be applied. Determinations of the Secretary of Treasury in this
regard will be final.
- If the CPI for a particular month is not reported by the last day of the
following month, the Treasury Department will announce an index number based
on the last twelve-month change in the CPI available. Any calculations of the
Treasury Department's payment obligations on the TIPS that rely on that
month's CPI will be based on the index number that the Treasury Department has
announced.
For example, if the CPI for a particular month M is not reported on a timely
basis by the last day of the following month, the formula for calculating the
index number used by the Treasury Department for TIPS is:
CPI(M) = CPI(M-1) X (CPI(M-1)/CPI(M-13))(1/12).
Generalizing for the last reported CPI issued N months prior to month M:
CPI(M) = CPI(M-N) X (CPI(M-N)/CPI(M-N - 12))(N/12).
If it is necessary to use these formulas to calculate an index number, it will
be used for all subsequent calculations that rely on that month's index number
and will not be replaced by the actual CPI when it is reported (except that when
it becomes necessary to use the above formulas to derive an index number, the
last CPI that has been reported will be used to calculate CPI numbers for months
which the CPI has not been timely reported).
Using the historical data in the following table, we can look at an example of
how the Reference CPI would be calculated assuming the Bureau of Labor
Statistics delayed reporting the CPI and the Treasury Department determined the
applicable Reference CPI using the above formula:
TABLE 5: HISTORICAL CPI FOR EACH MONTH
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 159.1 159.6 160.0 160.2 160.1 160.3 160.5 160.8 161.2 161.6 161.5 161.3
1998 161.6 161.9 162.2 162.5 162.8 163.0 163.2 163.4 163.6 164.0 164.0 163.9
</TABLE>
Assume the December 1998 level as reported by the Bureau of Labor Statistics
(usually reported one month later in January 1999) was delayed and not reported
as of February 1, 1999. Because the Reference CPI is lagged three months, the
Reference CPI for March 1999 is the December 1998 level. If the Bureau of Labor
Statistics delayed publishing such level, the Treasury Department would have
determined the Reference CPI for March 1999 using the above general formula.
Since the delay is just 1 month, the formula is:
CPI(Dec 1998) = (CPI(Nov 1998)) X (CPI(Nov 1998)/CPI(Nov 1997))(1/12).
Thus, if the Bureau of Labor Statistics had failed to publish CPI for December
1998 in a timely manner, Reference CPI for March 1999 would have been:
164.0 X (164.0/161.5)(1/12) = 164.21.
Such a delay in reporting of CPI will only affect the CPIS if such delayed CPI
level would affect a Reference CPI used for the calculation of the Redemption
Value, Early Ending Index or Fixed Ending Index.
S-26
<PAGE> 27
The above figures are for illustration purposes only. Again, determinations of
the Secretary of Treasury as to what constitutes an Index Contingency and its
remedies will be final.
OPTIONAL REDEMPTION
Beginning in 2002, the CPIS will be subject to Optional Redemption prior to
their Stated Maturity at the election of the holders thereof on each January 15
(each an "Optional Redemption Date"). In order to effect an Optional Redemption,
any redeeming holder will be required to provide notice to a Participant or
Direct Participant in DTC of the number of the CPIS to be redeemed by such
holder on such Optional Redemption Date and such Participant or Direct
Participant must communicate such notice to DTC no earlier than 20 scheduled
Business Days prior and no later than 10 scheduled Business Days prior to the
applicable Optional Redemption Date. The DTC will then provide notice to the
Trust (which will notify the Property Trustee) or its Transfer Agent of the
total number of CPIS 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 pm New York time on the first Business Day following 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 Date, five scheduled Business Days, prior
to the Early Redemption Date, unless extended by a Market Disruption Event, will
not commence until the Trust has received the Applicable Notice and the
applicable Optional Redemption Date will be subject to extension in the event
that a Market Disruption Event delays the determination of the Early Redemption
Value. The redeeming holders will be entitled to the Early Redemption Value for
all such CPIS redeemed.
If a Market Disruption Event shall have occurred on the Early Determination
Date, the Early Determination Date shall be the day on which there no longer
exists a Market Disruption Event as determined by the Calculation Agent in its
sole discretion.
The Early Redemption Value will be determined by making a conservative
projection of what the Early Ending Index would be at the Stated Maturity, using
then current market inputs and the methodology described herein, subtracting the
Forward Index and adding that result (which may be a negative number) to the
Face Amount, giving an estimate of what the Redemption Value would be at Stated
Maturity. The present value of this amount is then estimated, giving the Early
Redemption Value.
The early redemption formula is a conservative estimate of the present value of
the forecasted redemption amount using current interest rates and credit spreads
for discounting. The formula for the Early Ending Index is conservatively
determined and includes a 30 basis point Buyback Spread which further reduces
the value determined. Because of the conservatism, investors should be aware
that it is likely, under usually-prevailing market conditions, that the Early
Redemption Value will be less than the amount a holder could have realized by
selling such CPIS on such Early Determination Date (excluding commission costs)
in any secondary market that may exist.
The Early Redemption Value ("ERV") will be determined using the following
formula:
ERV = (FA + EI(Early) - FI) X PVF.
Where:
- FA = Face Amount = $[40.00];
- EI(Early) = Early Ending Index (derived below);
- FI = Forward Index = [213.0];
- PVF = Present Value Factor (derived below).
EI(Early) is derived using the formula: EI(Early) = RCPI X FIF.
Where:
- RCPI = Reference CPI on the Early Determination Date;
- FIF = Future Inflation Factor (derived below).
S-27
<PAGE> 28
FIF is derived using the formula: (1 + EIR)(N).
Where:
- N = Number of years remaining until Stated Maturity (2N = 2 X N);
- EIR = Expected Inflation Rate (derived below).
<TABLE>
<S> <C>
BY
1 + ---
2 2
EIR = is derived using the formula: ( ------------------------ ) - 1 .
TY Buyback Spread
1 + --- + --------------
2 2
</TABLE>
Where:
- BY = Base Yield = The ask side yield on the Reference Government
Notes (6.50% due Feb. 15, 2010) as determined by polling 3
dealers in such instruments;
- TY = TIPS Yield = The bid side yield on the Reference TIPS as
determined by polling 3 dealers in such instruments;
- Buyback Spread = 30 basis points (0.30%).
The Expected Inflation Rate (EIR) is derived from the Fischer
Relation, which states:
(1 + Nominal Rate) = (1 + Real Rate) x (1 + Expected Inflation
Rate). In this case, we are using the yield on the Reference
Government Notes as a proxy for the Nominal Rate and the yield on
the Reference TIPS as a proxy for the Real Rate. Thus, the expected
inflation rate is readily determinable. (Note, because the
convention in the U.S. for quoting yields assumes semi-annual
compounding, so each yield must divided by 2 and the results
squared).
<TABLE>
<S> <C>
BY
1 + ---
2 2 N
So, substituting the EIR into the FIF equation: ( 1 + ( ------------------------ ) - 1 ) ,
TY Buyback Spread
1 + --- + --------------
2 2
</TABLE>
<TABLE>
<S> <C>
BY
1 + ---
2 2N
which simplifies to (FIF =): ( ------------------------ ) .
TY Buyback Spread
1 + --- + --------------
2 2
</TABLE>
<TABLE>
<S> <C>
BY
1 + ---
2 2N
Thus, the EI becomes: R C P I x ( ------------------------ ) .
Early TY Buyback Spread
1 + --- + --------------
2 2
</TABLE>
<TABLE>
<S> <C>
1
PVF = Present Value Factor: ---------------------------------------- .
Zero Yield Applicable Spread 2N
( 1 + ---------- + ----------------- )
2 2
</TABLE>
Where:
- Zero Yield = The semi-annual compound rate implied in the discount
factor to Stated Maturity determined by the Calculation Agent by
polling 3 swap dealers, one of which may be Morgan Guaranty. The
discount factor represents the value the swap dealers would pay today
for the right to receive $1 at the Stated Maturity. Zero Yield solves
the equation:
<TABLE>
<S> <C>
1
discount factor = -------------------- .
Zero Yield 2N
( 1 + ---------- )
2
</TABLE>
S-28
<PAGE> 29
- The "Applicable Spread" will equal to (1) in the case of a liquidation
of J.P. Morgan, zero, or (2) in the case of all other redemptions, the
greater of zero and the difference between the Funding Spread and the
Swap Spread. If the Swap Spread is greater than the Funding Spread
then the Applicable Spread will be zero.
- Swap Spread refers to the difference between the swap rate for a given
maturity and the yield of the benchmark government bond in that
maturity sector. The "Swap Spread" for these purposes will be equal to
the offer side U.S. dollar swap spread for the maturity closest to the
Remaining Maturity as determined by the Calculation Agent (except
that, in the case of determination for which the Remaining Maturity is
one year or less, the difference between then current yields on U.S.
Dollar LIBOR-based deposits and yields on Treasury Bills with
maturities approximately equal to the remaining maturity as determined
by the Calculation Agent).
- The Funding Spread shall be the yield spread between (1) the average
quotations from three dealers in such instruments chosen in the
discretion of the Calculation Agent, one of which may be Morgan
Guaranty, for notional issuances of debt securities by Morgan Guaranty
in a notional amount equal to the Face Amount of the CPIS 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 Related Note and (2) US
government securities of approximately similar maturities, as such
yield spread may be reasonably determined by the Calculation Agent.
- If the source supplying any of the yield or spread data is unavailable
or ceases to report such data, the Calculation Agent shall calculate
such yield or spread in good faith.
<TABLE>
<S> <C>
BY
1 + ---
2 2N 1
Thus ERV = ( FA + ( RCPI x ( ------------------------ ) ) - FI ) x ---------------------------------------- ,
TY Buyback Spread Zero Yield Applicable Spread 2N
1 + --- + -------------- ( 1 + ---------- + ----------------- )
2 2 2 2
</TABLE>
<TABLE>
<S> <C>
BY
1 + ---
2 2N
FA + RCPI x ( ------------------------ ) - FI
TY Buyback Spread
1 + --- + --------------
2 2
which simplifies to (ERV =): ----------------------------------------------- .
Zero Yield Applicable Spread 2N
( 1 + ---------- + ----------------- )
2 2
</TABLE>
The Reference CPI on the applicable Early Determination Date will be determined
for such day by interpolation as described in "-- Reference CPI".
For all interim calculations we will round to 6 decimals. The final result (the
Early Redemption Value) will be rounded to 2 decimals.
HYPOTHETICAL OPTIONAL REDEMPTION
An example calculation of the Early Redemption Value is as follows:
Assumptions:
- Face Amount = $40.00;
- Forward Index = 213.0;
- Reference CPI on the Early Determination Date = 185.0;
- Remaining Term (years) = 7;
- Base Yield = 6.1%;
- TIPS Yield = 4.1%;
- Zero Yield = 6.85%;
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<PAGE> 30
- Applicable Spread = 0.05%;
- Buyback Spread = 30 basis points (0.30%).
<TABLE>
<S> <C>
0.061
1 + -----
2 2x7
Thus, the EI = 185.0 x ( ----------------- ) , which equals 207.75.
Early 0.041 0.003
1 + ----- + -----
2 2
</TABLE>
<TABLE>
<S> <C>
1
The PVF = -------------------------- , or 0.621975.
0.0685 0.0005 2x7
( 1 + ------ + ------ )
2 2
</TABLE>
As a result, the ERV = (40.00 + 207.75 - 213.0) x 0.621975, which equals $21.61.
The above figures are for illustration purposes only.
EARLY DETERMINATION OF THE ENDING INDEX
If the Reference Treasuries are subject to a buyback or are called by the
Treasury Department or if the outstanding amount of either such Reference
Treasury is reduced by 10% or more from the greatest outstanding amount since
issuance of the CPIS (a "Reference Treasury Event") then Morgan Guaranty has the
right, but not the obligation, on such date or within 30 days of such date, to
permanently fix the Ending Index (the "Fixed Ending Index"). However, the CPIS
will not be redeemed or called and will remain outstanding until Stated Maturity
or a Special Event or Optional Redemption. Currently, there are approximately
[$11.5] billion in Reference TIPS and [$23.3] billion in Reference Government
Notes issued and outstanding. Such early determination of the Ending Index may
adversely affect the trading value of the CPIS and its redemption value relative
to what it may have been if such early fixing of the Ending Index had not
occurred. Morgan Guaranty will be the Calculation Agent and may have interests
adverse to the holders of the CPIS in determining whether to fix the Ending
Index early.
The value of the Fixed Ending Index will be fixed using the same methodology for
determining the Early Ending Index in an Optional Redemption. Thus, the Fixed
Ending Index ("EI(Fixed)") will be derived per the following formula:
<TABLE>
<S> <C>
BY
1 + ---
2 2N
EI = RCPI x ( -------------------------) .
Fixed TY Buyback Spread
1 + --- + --------------
2 2
</TABLE>
Where:
- RCPI = Reference CPI on the Early Determination Date;
- BY = Base Yield = The ask side yield on the Reference Government Notes
(6.50% due Feb. 15, 2010) as determined by polling 3 dealers in such
instruments;
- TY = TIPS Yield = The bid side yield on the Reference TIPS as
determined by polling 3 dealers in such instruments;
- Buyback Spread = 30 basis points (0.30%);
- N = Number of years remaining until Stated Maturity (2N = 2 x N).
When determining the Fixed Ending Index under the above circumstances, Morgan
Guaranty may, at it sole discretion, reduce the Buyback Spread, however it is
not obligated to do so. By reducing the Buyback Spread, Morgan Guaranty would
increase the value of the Fixed Ending Index relative to the value it would have
calculated if such Buyback Spread was not reduced. (See "-- Optional Redemption"
for further details on the determination of the Early Ending Index.)
Once the Fixed Ending Index has been derived as the result of a Reference
Treasury Event, it will be used in any determination of a Redemption Value or
Early Redemption Value (replacing the Early Ending Index in an Optional or
Special Event Redemption).
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<PAGE> 31
SPECIAL EVENT REDEMPTION
The CPIS will be subject to redemption by the Trust prior to Stated Maturity
upon the occurrence of a Tax Event or an Investment Company Event (each, a
"Special Event"), as described herein. The Early Redemption Value payable to the
holders of the CPIS on such Special Event Redemption shall be determined in the
same manner as an Optional Redemption.
"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) any amount payable on the Related Note in excess of the
amount received by Morgan Guaranty for 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 Special Event shall occur and be continuing, J.P. Morgan shall:
(a) in the case of an Investment Company Event, 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 10 scheduled Business Days'
notice to DTC, in which case the Trust shall redeem in cash on a pro rata
basis the CPIS and related Series C Common Securities having an aggregate
amount equal to the amount of the Related Note so redeemed, at a price per
CPIS 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, either apply the terms of clause (a) or allow
the Related Note and the CPIS to remain outstanding, 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 the CPIS, 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 the CPIS
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 an Optional Redemption by a holder of the CPIS on an Optional
Redemption Date, any such redeeming holder will be required to provide notice of
the number of the CPIS 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 20 scheduled Business Days prior to, but no later than 10 scheduled
Business Days prior to, the applicable Optional Redemption Date.
S-31
<PAGE> 32
In the case of a redemption of the CPIS 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 10 scheduled Business Days prior to such Early
Redemption Date stating, among other things, the date of such redemption.
The related Series C Common Securities will be redeemed on a Pro Rata Basis with
the CPIS 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 Early Redemption Value on all the CPIS then
outstanding, all the CPIS will be redeemed prior to the redemption of any Series
C Common Securities. CPIS 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 Redemption Value or Early Redemption Value, as applicable, is
conditioned upon delivery or book-entry transfer of such CPIS (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 Redemption Value or the Early Redemption Value, as
applicable, will be made by the delivery of cash no later than the applicable
Settlement Date with respect to such CPIS (subject to delay in the case of a
Market Disruption Event) or, if later, the time of delivery or book-entry
transfer of such CPIS. If the Trust, on behalf of holders of Series C Securities
holds money sufficient to pay the Redemption Value or the Early Redemption
Value, as applicable, of the CPIS on the applicable Settlement Date, then
immediately at the close of business on such Settlement Date, such CPIS will
cease to be outstanding whether or not such CPIS are delivered to the Trust, and
all rights of the holder of such CPIS shall terminate and lapse, other than the
right to receive the Redemption Value or the Early Redemption Value, as
applicable, upon delivery of the CPIS.
Provided that Morgan Guaranty has paid to the Trust, on behalf of holders of
Series C 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 C
Securities will irrevocably deposit with DTC no later than the close of business
on the applicable Settlement Date funds sufficient to pay the Redemption Value
or the Early Redemption Value, as applicable, payable with respect to the CPIS
on such date and will give DTC irrevocable instructions and authority to pay
such amount to the holders of the CPIS 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 Redemption Value or the Early
Redemption Value, 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,
except that, if such Business Day falls in the next calendar year such payment
will be made on the immediately preceding Business Day.
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 CPIS by any national securities exchange (or automated inter-dealer
quotation system, including The Nasdaq Stock Market ("Nasdaq")) on which the
CPIS are then listed, Morgan Guaranty may only redeem the Related Note in whole
and, as a result, the Trust may only redeem the CPIS 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 CPIS by tender, in the open
market or by private agreement.
MARKET DISRUPTION EVENTS
A Market Disruption Event with respect to a Reference CPI level will occur on
any day if the Calculation Agent determines, in its sole discretion, that the
Reference CPI level may not be obtained or has not been promulgated by the
Treasury Department (in the event of a delay by the Bureau of Labor Statistics
in publishing the CPI) or the Treasury Department has not cured an existing
Index Contingency for such day. Such Market Disruption Event may continue
indefinitely. However, if such Market Disruption Event remains in effect for
longer than 20 consecutive Business Days and, in the sole discretion of the
Calculation Agent, such Market Disruption Event is likely to remain in effect,
then the applicable Reference CPI may be determined in good faith by the
Calculation Agent (however, it has no obligation to determine such applicable
Reference CPI).
Additionally, a Market Disruption Event with respect to an Early Determination
Date shall occur (a) if the U.S. treasury market is not open on such Early
Determination Date or (b) if an input in the early redemption calculation (i) is
not available or (ii) the input data are potentially subject to extraordinary
influences, in the sole discretion of the Calculation Agent, due to the fact
that the underlying instrument on which such data is based is subject to an
issuer buyback or early call (e.g., the Treasury Department is buying back the
U.S. Government Notes used for determining the Base Yield in the early
redemption calculation). Such market disruption may require the Calculation
Agent to determine certain inputs in good faith and such
S-32
<PAGE> 33
determinations may be delayed or cause a delay in the Early Determination Date
and payment of the Early Redemption Value. See "Description of the
CPIS--Optional Redemption" for further information on the early redemption
calculation.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any dissolution of the Trust (a "Liquidation Event"), whether
voluntary or involuntary, the holders of CPIS 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 C Securities, the Liquidation
Distribution. The "Liquidation Distribution" will be equal to the Early
Redemption Value with respect to such CPIS (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 CPIS,
holders of the CPIS then outstanding will be entitled to a pro rata share of
such assets of the Trust. In addition, in the event that such assets of the
Trust exceed the amount necessary to pay to all holders of CPIS the full amount
of the Liquidation Distribution, such excess will be paid to the holders of the
Series C Common Securities, in an amount sufficient to cover the Liquidation
Distribution in respect of all Series C Common Securities, and thereafter pro
rata to the holders of the CPIS and the Series C 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 CPIS 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 Face Amount at such time of the CPIS 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 Face Amount at such time of the CPIS. See "Description of the
Related Note--Modification of the Related Note".
Notwithstanding that holders of the CPIS are entitled to vote or consent under
any of the circumstances described above, any of the CPIS 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 CPIS were not outstanding.
The procedures by which holders of the CPIS 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 (all of
which will be held by J.P. Morgan); provided that, if any proposed amendment
provides for (i) any action that would adversely affect the powers, preferences
or special rights of the CPIS 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 CPIS), 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 (which, for these
purposes, shall equal Early Redemption Value on the date of such vote) 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 CPIS 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 CPIS.
S-33
<PAGE> 34
LISTING
We have applied for listing of the CPIS on the AMEX under the symbol "JPI".
Trading of the CPIS 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 CPIS.
ACCOUNTING TREATMENT
The financial statements of the Trust will be included in the consolidated
financial statements of J.P. Morgan, with the CPIS included on the balance sheet
as "trading liabilities", 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
CPIS.
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 CPIS. The CPIS will be issued only
as fully-registered securities registered in the name of Cede & Co. (DTC's
nominee). One or more fully-registered global CPIS certificates, representing
the total aggregate number of CPIS, 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 the CPIS within the DTC system must be made by or through Direct
Participants, which will receive a credit for the CPIS on DTC's records. The
ownership interest of each actual purchaser of each Series C 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 Participants or Direct Participants
through which the Beneficial Owners purchased the CPIS. Transfers of ownership
interests in the CPIS 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 CPIS, except
in the event that use of the book-entry system for the CPIS is discontinued.
To facilitate subsequent transfers, all CPIS deposited by Participants with DTC
are registered in the name of DTC's nominee, Cede & Co. The deposit of the CPIS
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 CPIS. DTC's records reflect only the identity of the Direct Participants to
whose accounts such CPIS 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.
S-34
<PAGE> 35
In the case of a Special Event Redemption, redemption notices shall be sent to
Cede & Co. If less than all of the CPIS are being redeemed, DTC will reduce the
amount of the interest of each Direct Participant in such CPIS 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 CPIS 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 CPIS is limited, in those cases where a vote
is required, neither DTC nor Cede & Co. will itself consent or vote with respect
to the CPIS. 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 CPIS 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.
DTC may discontinue providing its services as securities depositary with respect
to the CPIS at any time by giving reasonable notice to the Trust. Under such
circumstances, in the event that a successor securities depositary is not
obtained, CPIS 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 CPIS. In that event, certificates for the CPIS 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 CPIS do not remain in book-entry only form, the following
provisions will apply:
Payment of amounts due on the CPIS will be payable and the transfer of the CPIS
will be registrable 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 the CPIS will be made only upon surrender of such CPIS to the
Property Trustee.
U.S. Bank Trust National Association or one of its affiliates will act as
registrar and transfer agent for the CPIS. 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 the CPIS 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 CPIS after such CPIS have been called for redemption.
GOVERNING LAW
The Declaration and the CPIS 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 CPIS and the related
Series C 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.
S-35
<PAGE> 36
GENERAL
The Related Note will be issued as an unsecured, unsubordinated obligation of
Morgan Guaranty, limited in initial amount to approximately $[49,025,490], such
amount being the sum of the aggregate Public Offering Price shown on the cover
page hereof for the CPIS and the related Series C Common Securities issued in
connection therewith.
The Related Note is not subject to a sinking fund provision. The Related Note
will mature and become due and payable at 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 upon the occurrence of an Optional
Redemption by one or more holders of the CPIS or 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 the CPIS and related Series C Common
Securities having an aggregate value equal to the value of the Related Note so
redeemed at the Early Redemption Value. See "Description of the CPIS--Optional
Redemption" and "Description of the CPIS--Special Event Redemption".
RELATED NOTE REDEMPTION VALUE
The amount payable under the Related Note by Morgan Guaranty to the Property
Trustee, on behalf of holders of Series C Securities, at any time shall equal
(a) at any time prior to the Stated Maturity, the Early Redemption Value of the
CPIS or (b) at the Stated Maturity (or any time thereafter if delayed by a
Market Disruption Event), the Redemption Value of the CPIS (the "Related Note
Redemption Value"). The timing and amount of payments on the Related Note mirror
the aggregate financial terms of the CPIS.
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 an amount of the Related Note sufficient to allow it to pay the
Early Redemption Value to any holders of the CPIS who exercise their right to
redeem any or all of such holders' CPIS and in respect of a pro rata portion of
the related Series C Common Securities. See "Description of the CPIS--Optional
Redemption".
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, Morgan Guaranty (a) in the case of an
Investment Company Event, redeem the Related Note at the Related Note Redemption
Value or (b) in the case of a Tax Event, either apply clause (a) or 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 CPIS--Special Event
Redemption".
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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 Face
Amount of the outstanding CPIS, 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 CPIS, 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 delivered
by J.P. Morgan for the benefit of the holders of the CPIS as well as holders of
other Preferred Securities. The terms of the Guarantee are set forth therein.
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 Guarantee Agreement, a copy of which is filed as an
exhibit to the Registration Statement relating to this Prospectus Supplement and
the Prospectus. The Guarantee is qualified under the Trust Indenture Act and
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 CPIS 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 the CPIS 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 Redemption Value
or the Early Redemption Value, as applicable, but if and only to the extent
that, in each case, Morgan Guaranty has made payments on the Related Note and
(ii) upon a Liquidation Event (other than in connection with the redemption of
all of the CPIS at Stated Maturity or redemption in whole of the Related Note)
the
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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 CPIS 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 the CPIS or by causing the Trust to pay
such amounts to such holders. The Guarantee will be effective with respect to
the CPIS from the time of issuance of the CPIS 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 make payments on the CPIS and may not
have funds available therefor. See "Description of the Related Note".
So long as any CPIS 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 or 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. For the purposes of the proceeding
sentence, the principal amount of each CPIS shall equal the Early Redemption
Value as of the date of such vote, and the principal amount of any other
Preferred Securities shall equal the "Principal Amount" of such series as
defined in the Declaration. 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 CPIS.
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 CPIS and other
Preferred Securities. U.S. Bank Trust National Association shall enforce such
Guarantee on behalf of holders of the CPIS and other Preferred Securities. The
holders of not less than a majority in aggregate principal amount of the CPIS
and 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 the CPIS or other Preferred
Securities 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 CPIS upon full payment of the
aggregate Early Redemption Value or Redemption Value, 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 the CPIS must
restore payment of any sums paid under such CPIS or the Guarantee (e.g., upon a
subsequent bankruptcy of Morgan Guaranty or J.P. Morgan).
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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 CPIS provide that each holder of
the CPIS 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 delivered by J.P. Morgan for the benefit of the Property Trustee for
the benefit of the holders of Securities of various series. The terms of the
Related Note Guarantee are set forth therein. 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 Related
Note Guarantee, a copy of which is filed as an exhibit to the Registration
Statement relating to this Prospectus Supplement and the Prospectus. The Related
Note Guarantee is held by the Property Trustee (for the benefit of holders of
Series C 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 C Securities, any amount payable by
Morgan Guaranty under the Related Note, as and when payable by Morgan Guaranty
(the "Related Note Guarantee Payments") 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. 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 C Securities or by causing Morgan Guaranty to pay
such amounts to the Property Trustee for the benefit of holders of Series C
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 CPIS or other 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. For the purposes
of the preceding sentence, the principal amount of each CPIS shall equal the
Early Redemption Value as of the date of such vote, and the principal amount of
any other Preferred Securities shall equal the "Principal Amount" of such series
as defined in the Declaration. 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 C Securities) as the
holder of the Related Note.
REMEDIES OF THE TRUST AND HOLDERS OF THE CPIS
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 Face Amount
of the CPIS 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 make payments on the Related Note on the date such payments
are otherwise due, J.P. Morgan
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acknowledges that a holder of the outstanding CPIS may institute a direct action
against J.P. Morgan on or after the date of the occurrence of such Note Event of
Default. Notwithstanding any payments made to such holder of the CPIS by J.P.
Morgan in connection with any such direct action, J.P. Morgan shall remain
obligated to make payments on the CPIS, and the rights of J.P. Morgan, as
Guarantor, shall be subrogated to the rights of such holder of the CPIS with
respect to payments on the CPIS to the extent of any payment made by J.P. Morgan
to such holder of CPIS 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 Value. 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 C 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 CPIS provide that each
holder of the CPIS 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 C 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 CPIS because of the following factors:
(i) the value of the Related Note will be equal to the sum of the aggregate
value of the CPIS and the related Series C Common Securities outstanding at any
time; (ii) the payment dates on the Related Note will match the payment dates
for the CPIS and the related Series C 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 the Redemption Value or Early
Redemption Value of the CPIS; 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 CPIS (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 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 CPIS, using the
procedures described in the Declaration, may direct the Property Trustee, on
behalf of holders of the Series C 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 CPIS under the
Guarantee, any holder of the CPIS 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 amounts due 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,
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upon the occurrence and during the continuance of a Note Event of Default that
is attributable to the failure of Morgan Guaranty to make payments on the
Related Note on the date such amounts are otherwise payable, J.P. Morgan
acknowledges that a holder of the outstanding CPIS may directly institute a
proceeding under the Related Note Guarantee with respect to the CPIS against
J.P. Morgan for enforcement of payments to such holder of the related Redemption
Value or Early Redemption owed such holder on or after the date of the
occurrence of such Note Event of Default. Notwithstanding any payments made to
such holder of the CPIS by J.P. Morgan in connection with such direct action,
J.P. Morgan shall remain obligated to pay the principal of the CPIS, and the
rights of J.P. Morgan, as Guarantor, shall be subrogated to the rights of such
holder of the CPIS with respect to payments on the CPIS to the extent of any
payment made by J.P. Morgan to such holder of the CPIS 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 CPIS 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 CPIS.
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 C Securities will be entitled to receive, after satisfaction of
liabilities to creditors of the Trust with respect to Series C Securities, the
Liquidation Distribution. Holders of the CPIS will be entitled to the benefits
of the Guarantee with respect to the Liquidation Distribution. See "Description
of the CPIS--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 the CPIS by U.S.
Holders (as defined below). This summary deals only with the CPIS held as
capital assets by holders who purchase them upon original issuance.
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 CPIS as a position in a "straddle"
(within the meaning of Section 1092 of 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 the CPIS 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 the CPIS.
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 a holder of the CPIS.
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.
For purposes of this summary, a "U.S. Holder" means a holder who is (i) a
citizen or 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 or
(iii) an estate or trust, the income of which is subject to U.S. Federal income
tax regardless of its source. If a partnership holds the CPIS, the tax treatment
of a partner will generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner of a partnership holding the
CPIS, you should consult your own tax advisor.
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CLASSIFICATION OF THE TRUST
In the opinion of Cravath, Swaine & Moore, special tax counsel to J.P. Morgan
and the Trust ("Tax Counsel"), the Trust will be classified as a "grantor trust"
for U.S. Federal income tax purposes. As a result, a holder of the CPIS 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. To the extent income accrues or is paid with respect to the
Related Note (see the discussion under "--U.S. Holders of CPIS" below), no
portion of such income 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 an instrument such as the
Related Note for U.S. 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, unless otherwise required by the IRS, Morgan Guaranty will take the
position for U.S. Federal income tax purposes that the Related Note is a
contract claim that is not an option. Each holder of a CPIS, by acquiring a
CPIS, will agree to treat the Related Note in this manner.
U.S. HOLDERS OF CPIS
TAX REPORTING POSITION
Morgan Guaranty intends to take the position that U.S. Holders will not
generally be required to accrue any amounts in income with respect to the CPIS
before receiving payments with respect thereto.
Even under this position, a different rule may apply if (i) Morgan Guaranty
makes an early determination of the Ending Index as described in "Description of
the CPIS--Early Determination of the Ending Index" or (ii) when the Ending Index
can be determined in the month preceding the Stated Maturity, based on the
announcement of the monthly CPI that determines the Reference CPI on the
Maturity Date. At such times, the amount payable at the maturity of the CPIS
becomes fixed. In such cases, if you are an accrual method taxpayer, you
probably will be required at such time to include in income the full amount, if
any, payable at maturity in excess of your tax basis in the CPIS. If you are a
cash method taxpayer, you may be required at that time to include all or part of
such amount in income. In addition, if you are an accrual method taxpayer, you
might be entitled at that time to a loss to the extent the fixed amount payable
at maturity is less than your tax basis. Income or loss recognized under this
paragraph is probably ordinary income or loss.
Under Morgan Guaranty's tax reporting position, unless the preceding paragraph
applies, when you receive a payment with respect to the CPIS, either at maturity
or upon early redemption or sale of a CPIS, you generally will recognize income,
gain or loss equal to the difference between the amount you receive with respect
to the CPIS and your tax basis in the CPIS. Any such income, gain or loss you
realize on the payment of a CPIS at maturity or upon early redemption will
probably be ordinary income or loss rather than capital gain or loss. If you
sell or otherwise dispose of a CPIS before maturity, it is possible that any
gain or loss will be capital gain or loss. However, this is not clear, and any
such gain may be ordinary.
POSSIBLE ALTERNATIVE TAX CONSEQUENCES
It is possible that the Related Note may not be properly treated as a contract
claim that is not an option. It is also possible that Morgan Guaranty may be
incorrect in its position that you do not have to accrue any income with respect
to the CPIS before the time described in "-- Tax Reporting Position" above. In
either such case, under a variety of theories, you could be required to report
income with respect to the CPIS in advance of your receipt of any cash with
respect thereto.
For example, the CPIS might be considered cash settled options on the Reference
CPI. In that case, the CPIS would probably constitute "nonequity options" within
the meaning of Section 1256 of the Code, with the result that U.S. Holders would
be required to mark-to-market their CPIS. Gain or loss would be recognized each
year that you hold the CPIS based on the increase or decrease in market value of
the CPIS during that year. Of such gain or loss, 40% would be treated as
short-term capital gain or loss, and 60% would be treated as long-term capital
gain or loss. The same treatment would apply to any gain or loss upon the sale
or redemption or other disposition of the CPIS.
Alternatively, the Related Note might be treated as a contingent payment debt
instrument issued by Morgan Guaranty. In such event, regardless of whether you
are an accrual method or cash method taxpayer, you would be required to accrue
original issue discount ("OID") into income as ordinary income each year that
you hold the CPIS. OID would accrue at a rate equal to the "comparable yield" on
the issue date of the CPIS. This is a rate equal to the greater of (i) the
"Applicable Federal Rate"
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(a rate for Treasury obligations of maturities comparable to the CPIS) and (ii)
the fixed rate on a hypothetical, non-contingent debt instrument issued by
Morgan Guaranty with comparable maturity and other terms. The amount of OID
accrued would increase the U.S. Holder's tax basis in the CPIS. Upon the sale or
redemption of a CPIS, any gain would be ordinary income, while any loss would be
ordinary loss, but only to the extent of OID previously accrued.
Even if the Related Note is treated as a contract claim that is not an option,
you could be required to report income with respect to the CPIS in advance of
your receipt of cash with respect thereto. For example, if you are an accrual
method taxpayer, the "all events test" might require you to include amounts in
income to the extent that the Face Amount plus the current value of the CPI
minus the Forward Index is greater than the amount you paid for the CPIS. The
reason is that any such amount will necessarily be taxable profit to you in the
absence of a future net decrease in the CPI due to deflation. Other theories,
such as the requirement that a method of accounting "clearly reflect income",
might apply to require either cash or accrual method taxpayers to include
amounts in income prior to their receipt of cash on the CPIS.
NON-U.S. HOLDERS
If you are a holder of the CPIS that is not a U.S. Holder and if the
characterization of the Related Note as a contract claim that is not an option
is respected, payments made to you with respect to the CPIS may be subject to
U.S. withholding tax at a 30% rate. To protect the Trust from separate liability
for the withholding tax, the Trust will withhold 30% from amounts paid on the
CPIS to non-U.S. Holders in excess of the Issue Price.
If the Related Note were an option subject to the mark-to-market rules of
Section 1256 of the Code, any payment made to a non-U.S. Holder with respect to
the CPIS would not be subject to U.S. withholding tax. Similarly, if the Related
Note were a contingent payment debt obligation, any payment made to a non-U.S.
Holder with respect to the CPIS should not be subject to U.S. withholding tax;
provided that the non-U.S. Holder were to comply with applicable certification
requirements.
Although the Trust will withhold 30% of a portion of the amounts paid on the
CPIS to non-U.S. Holders, such holders can apply to the IRS for a refund of the
tax withheld on the theory that no withholding tax was due. Neither Tax Counsel
nor Morgan Guaranty can give any assurance to non-U.S. Holders that such a
refund claim will be successful.
Under any characterization of the Related Note, gain realized upon the sale of
the CPIS by a non-U.S. Holder generally would be subject to U.S. Federal income
tax under general U.S. tax principles if (i) such gain is effectively connected
with a U.S. trade or business of such holder, or (ii) in the case of an
individual, such individual is present in the United States for 183 days or more
in the taxable year of the sale and certain other conditions are satisfied. In
addition, depending on the proper characterization of the Related Note, it is
possible that all gain on the sale or disposition of the CPIS by any non-U.S.
Holder would be subject to U.S. Federal income tax, regardless of whether the
conditions of the preceding sentence are satisfied.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments made on, and proceeds from the sale of, the CPIS may be subject to a
"backup" withholding tax at a rate of 31% unless the holder complies with
certain identification requirements. Non-U.S. holders are generally exempt from
backup withholding but may be required to certify their status in order to prove
their exemption. Any amounts withheld will be allowed as a credit against the
holder's U.S. Federal income tax, provided that the required information is
furnished to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE
APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. THE TAX CONSEQUENCES
TO HOLDERS OF OWNING THE CPIS ARE UNCLEAR AND COMPLEX. MORGAN GUARANTY, THE
TRUST AND TAX COUNSEL STRONGLY RECOMMEND THAT YOU CONSULT YOUR OWN TAX ADVISOR
ABOUT THE TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE CPIS,
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 MATTERS FOR PENSION PLANS AND INSURANCE COMPANIES
Each fiduciary of a pension, profit-sharing or other employee benefit plan (a
"Plan") subject to ERISA should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the CPIS. 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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<PAGE> 44
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, from engaging in certain transactions involving plan assets with persons
who are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to such Plan.
J.P. Morgan, Morgan Guaranty and JPMSI and their affiliates may each be
considered a "party in interest" within the meaning of ERISA, or a "disqualified
person" within the meaning of the Code, with respect to certain employee benefit
plans. Prohibited transactions within the meaning of ERISA or the Code may
arise, for example and without limitation, if the CPIS are acquired by or with
the assets of a pension or other employee benefit plan with respect to which
Morgan, Morgan Guaranty and JPMSI or their affiliates are service providers,
unless the CPIS are acquired pursuant to an exemption from the prohibited
transaction rules.
The U.S. Department of Labor ("DOL") has issued certain prohibited transaction
class exemptions ("PTCEs") that may provide exemptive relief for direct or
indirect prohibited transactions. The acquisition of the CPIS may be eligible
for one of the exemptions noted below if such acquisition: (a) is made solely
with the assets of a bank collective investment fund and satisfies the
requirements and conditions of PTCE 91-38; (b) is made solely with assets of an
insurance company pooled separate account and satisfies the requirements and
conditions of PTCE 90-1; (c) is made solely with assets managed by a qualified
professional asset manager and satisfies the requirements and conditions of PTCE
84-14; (d) is made solely with assets of a governmental plan (as defined in
Section 3(32) of ERISA) which is not subject to the provisions of Section 401 of
the Code; (e) is made solely with assets of an insurance company general account
and satisfies the requirements and conditions of PTCE 95-60; or (f) is made
solely with assets managed by an in-house asset manager and satisfies the
requirements and condition of PTCE 96-23.
Under ERISA, the assets of a pension or other employee benefit plan may include
assets held in the general account of an insurance company which has issued an
insurance policy to such plan or assets of an entity in which the plan has
invested. Thus, any insurance company, pension or other employee benefit plan or
entity holding assets of a Plan proposing to invest in the CPIS should consult
with its legal counsel prior to such investment.
Pension or other employee benefit plans (including individual retirement
accounts) should also consult their counsel concerning whether income, gain or
loss with respect to the CPIS will be "unrelated business taxable income" under
Section 512 of the Code. Exemptions from such income apply to certain kinds of
investment income, and to all gains or losses on the sale or other disposition
of property. However, no assurance can be given that these exemptions would
apply to any or all income, gains or losses realized with respect to the CPIS.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement dated
as of the date hereof (the "Underwriting Agreement"), the Trust has agreed to
sell to the underwriters named below (the "Underwriters") and such Underwriters,
for whom JPMSI is acting as representative (the "Representative"), have
severally agreed to purchase, the respective number of CPIS 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 CPIS
offered hereby if any of the CPIS are purchased. Under certain circumstances,
the commitments of nondefaulting Underwriters may be increased as set forth in
the Underwriting Agreement.
<TABLE>
<CAPTION>
-------
NUMBER
UNDERWRITER OF CPIS
----------- -------
<S> <C>
J.P. Morgan Securities Inc. [ ]
[ ] [ ]
[ ] [ ]
[ ] [ ]
Total [ ]
</TABLE>
The Underwriters initially propose to offer the CPIS, 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 CPIS. After the initial offering, the public
offering price and such concession may be changed.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the CPIS.
Specifically, the Underwriters may over allot 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 CPIS.
Finally, the underwriting syndicate may reclaim selling concessions allowed for
distributing the CPIS in the offering, if the
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<PAGE> 45
syndicate repurchases previously distributed CPIS in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the CPIS 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 CPIS and Series C
Common Securities 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 CPIS (or $[ ] in the aggregate) for the account of the
Underwriters.
We have applied to list the CPIS on the AMEX under the symbol "JPI". Trading of
the CPIS 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 CPIS.
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 the related 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 CPIS. Such subsidiaries
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of a sale.
The Underwriters, certain agents and their associates may be customers of,
engage in transactions with, and perform services for, J.P. Morgan in the
ordinary course of business.
The Representative is an indirect, wholly-owned subsidiary of J.P. Morgan. The
participation of the Representative in the offer and sale of the CPIS 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 CPIS 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 the CPIS will be made
only to (i) "qualified institutional buyers", as defined in Rule 144A under the
Securities Act of 1933 (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
inflation-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.
SUPPLEMENTAL INFORMATION CONCERNING THE PLAN OF DISTRIBUTION
The Representative proposes to offer the CPIS at the public offering price set
forth on the cover page hereof; provided that the price will be $[25.97] per
CPIS and the underwriting discounts and commissions will be $[ ] per CPIS
for purchasers of greater than or equal to [30,000] CPIS at the initial public
offering, subject to the holding period requirements described below.
Delivery of approximately [98]% of the CPIS to a purchaser of [30,000] or more
CPIS at the reduced price (the "Discounted CPIS") will be made on the date of
delivery of the CPIS referred to on the cover of this pricing supplement. The
balance of approximately [2]% of the CPIS (the "Escrowed CPIS") purchased by
each such investor will be held in escrow by JPMSI for the benefit of the
investor and delivered to the broker-dealer on behalf of such investor if, in
the judgment of the Broker-dealer, the investor and any accounts in which the
investor may have deposited any of its Discounted CPIS have held all of the
Discounted CPIS for [ ] calendar days following the date of the Prospectus
Supplement or any shorter period deemed appropriate by the Representative. If an
investor or any account in which the investor has deposited any of its
Discounted CPIS fails to satisfy the holding period requirement, as determined
by the broker-dealer, all of the investor's Escrowed CPIS will be forfeited by
the investor and not delivered to it. The Escrowed CPIS will instead be
delivered to the Representative for sale to investors. This forfeiture will have
the effect of increasing the purchase price per Discounted CPIS for such
investors to 100% of the amount of the CPIS. Should investors who are subject to
the holding period requirement sell their CPIS once the holding period is no
longer applicable, the market price of the CPIS may be adversely affected.
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<PAGE> 46
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Series C
Securities will be passed upon by Morris, Nichols, Arsht & Tunnell, Wilmington,
Delaware, special Delaware counsel to the Trust. The validity of the Series C
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, 1999 (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.
STABILIZATION
JPMSI as lead underwriter, may engage in transactions that stabilize, maintain
or otherwise affect the price of the CPIS. Such transactions may include
stabilizing and the purchase of the CPIS to cover short positions. For a
description of these activities see "Underwriting".
CONTENT OF PROSPECTUS
You should rely on the information contained in this document or in documents
referenced herein that we have filed with the SEC. We have not authorized anyone
to provide you with different information. You should not assume that the
information in the Prospectus or Prospectus Supplement is accurate as of any
date other than the date on the front of this document.
LIMITATION ON OFFERS AND SOLICITATIONS
We do not intend this document to be an offer or solicitation:
(a) if used in a jurisdiction in which such offer or solicitation is not
authorized
(b) if the person making such offer or solicitation is not qualified to do so;
or
(c) if such offer or solicitation is made to anyone to whom it is unlawful to
make such offer or solicitation.
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<PAGE> 47
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.
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.
CPI Consumer Price Index. Specifically, for our
purposes, is the non-seasonally adjusted
U.S. City Average All Items Consumer
published monthly by the Bureau of Labor
Statistics of the U.S. Department of Labor.
The CPI is a measure of the average change
in consumer prices over time in a fixed
market basket of goods and services,
including food, clothing, shelter, fuels,
transportation, charges for doctors' and
dentists' services, and drugs. In
calculating the index, price changes for the
various items are averaged together with
weights that represent their importance in
the spending of urban households in the
United States. The contents of the market
basket of goods and services and the weights
assigned to the various items are updated
periodically to take into account changes in
consumer expenditure patterns. The CPI is
expressed in relative terms in relation to a
time base reference period for which the
level is set at 100.0. For example, if the
CPI for the 1982-84 reference period is
100.0, an increase of 16.5 percent from that
period would be shown as 116.5. The base
reference period for the Notes will be the
1982-1984 average equal to 100.0. The CPI is
published by the U.S. Bureau of Labor
Statistics (the "Bureau of Labor
Statistics").
CODE The Internal Revenue Code of 1986, as
amended.
COMMISSION The Securities and Exchange Commission.
COMMON SECURITIES The Series C Common Securities and any other
common securities issued by the Trust (or
its predecessor).
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.
DETERMINATION DATE The Stated Maturity, subject to delay for a
Market Disruption Event.
DTC The Depository Trust Company.
EARLY DETERMINATION DATE Five Business Days prior to the Early
Redemption Date, subject to delay for a
Market Disruption Event.
EARLY ENDING INDEX In the event of an Optional or Special Event
Redemption, the projected Ending Index on an
Early Redemption Date using a conservative
methodology and the then current market
conditions.
EARLY REDEMPTION DATE Either an Optional Redemption Date or, in
the case of a Special Event Redemption, the
date, within 30 scheduled Business Days of
the Special Event, selected by Morgan
Guaranty for redemption of the CPIS.
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EARLY REDEMPTION VALUE The discounted present value of the
estimated Redemption Value on the applicable
Early Redemption Date (such amount may be
more or less than the Face Amount, but not
less than zero).
ENDING INDEX The Reference CPI at Stated Maturity.
ERISA The Employee Retirement Income Security Act
of 1974, as amended.
EXCHANGE ACT The Securities Exchange Act of 1934, as
amended.
FACE AMOUNT Face Amount at maturity or [$40.00].
FIXED ENDING INDEX Upon the occurrence of a Reference Treasury
Event, the projected Ending Index on the
date Morgan Guaranty elects to permanently
fix the Ending Index based on the then
current market conditions.
FORWARD INDEX Set on day of pricing, equal to [213.0].
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.
INDEX AMOUNT The Ending Index minus the Forward Index.
INDEX CONTINGENCIES Various events which affect the calculation
of Reference CPI. We use the same Index
Contingencies as TIPS. Index contingencies
include how Reference CPI is affected by
revisions to previously reported CPI, delays
in reported CPI by the Bureau of Labor
Statistics, rebasing of the CPI,
discontinuance or material and fundamental
changes to the character of the CPI.
INITIAL HOLDERS Holders who purchase any Preferred
Securities 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 As set forth in the applicable Prospectus
Supplement.
LIQUIDATION DISTRIBUTION In respect of any Liquidation Event, the sum
of (a) the Early Redemption Value or stated
liquidation preference, as applicable, plus
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<PAGE> 49
(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.
MARKET DISRUPTION EVENTS A Market Disruption Event with respect to a
Reference CPI level will occur on any day if
the Calculation Agent determines that
Reference CPI level may not be obtained or
has not been promulgated by Treasury (in the
event of a delay by the Bureau of Labor
Statistics in publishing the CPI) or the
Treasury has not cured an existing Index
Contingency for such day. Additionally, a
Market Disruption Event with respect to an
early determination date shall occur a) if
the US treasury market is not open on such
early determination date or b) if an input
in the early redemption calculation is i)
not available or ii) the input data are
potentially subject to extraordinary
influences, in the sole discretion of the
Calculation Agent, due to the fact that the
underlying instrument on which such data is
based is subject to an issuer buyback or
early call (e.g., the Treasury Department is
repurchasing the US Government Notes used
for determining the Base Yield in the early
redemption calculation). Such market
disruption may require the Calculation Agent
to determine certain inputs in good faith
and such determinations may be delayed or
cause a delay in the early determination and
early redemption payment.
1940 ACT The Investment Company Act of 1940, as
amended.
NOTE EVENT OF DEFAULT Either: (i) a default for 30 days in the
payment of interest on the applicable
Related Note; (ii) a default in payment of
principal amount at the Stated Maturity or
any amount payable upon any redemption of
the applicable Related Note; (iii) the
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.
OPTIONAL REDEMPTION The redemption of the CPIS, at the holders'
option, on January 15, 2002 and each January
15 thereafter prior to Stated Maturity, at
the Early Redemption Value.
OPTIONAL REDEMPTION DATE Each January 15, beginning in 2002, prior to
Stated Maturity.
PREFERRED SECURITIES Preferred Securities of any series of the
Trust, representing an undivided beneficial
interest in the corresponding series Related
Note.
REDEMPTION DATE Either the Stated Maturity or an Early
Redemption Date, as applicable.
REDEMPTION VALUE At Stated Maturity, the Face Amount plus
Index Amount; but not less than zero.
REFERENCE CPI We use the same three month lagged version
of CPI used by the Treasury Department for
TIPS. "Reference CPI" for the first day of
any calendar month is the CPI for the third
preceding calendar month, as reported by
Bureau of Labor Statistics in the second
preceding calendar month. For example, the
Reference CPI applicable to April 1 in any
year is the CPI for January, which is
reported in February. The Reference CPI for
any other date is the linear interpolation
between the Reference CPI for the first day
of the month and the first day of the
immediately following month. Thus the
Reference CPI for the stated maturity is
lagged 3 months and should be determinable
prior to stated maturity.
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REFERENCE GOVERNMENT NOTES The 6.50% U.S. Treasury Securities due
February 15, 2010.
REFERENCE TIPS The 4.25% U.S. Treasury Inflation Protected
Securities due January 15, 2010.
REFERENCE TREASURY The Reference Government Notes or Reference
TIPS, together the "Reference Treasuries".
REFERENCE TREASURY EVENT The buyback or call by the Treasury
Department or the reduction in outstanding
amount of either of the Reference Treasuries
by 10% or more from the greatest outstanding
amount since issuance of the CPIS.
RELATED NOTE The debt obligation of Morgan Guaranty
related to, and having the same economic
terms as, the CPIS.
RELATED NOTE GUARANTEE The related Note Guarantee Agreement
executed by J.P. Morgan for the benefit of
the property trustee for the benefit of the
holders of each series of securities.
SECRETARY OF THE TREASURY The Secretary of the Treasury is a cabinet
level position appointed by the President of
the United States and confirmed by the
Senate.
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.
SERIES C 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.
SERIES C SECURITIES The CPIS and the Series C Common Securities.
SPECIAL EVENT Either a Tax Event or an Investment Company
Event.
SPECIAL EVENT REDEMPTION 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.
STATED MATURITY January 15, 2010.
SWAP A contract between two counterparties to
exchange two sets of payments over a certain
period of time.
SWAP RATE The interest rate that market-makers will
pay/receive versus LIBOR in the current
market; same as the quoted rate for a plain
vanilla swap.
SWAP SPREAD The difference between the swap rate for a
given maturity and the yield of the
benchmark government bond in that maturity
sector.
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
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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) any amount payable on the Related
Note in excess of the amount received by
Morgan Guaranty for 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 or other governmental
charges.
THE INDEX The CPI.
TIPS Treasury Inflation Protected Securities. The
inflation indexed securities issued by the
US Treasury Department.
TREASURY DEPARTMENT The United States Department of the Treasury
includes the Office of the Secretary of
Treasury and the Departmental Offices
(including the Internal Revenue Service,
Bureau of Engraving and Printing, Bureau of
the Public Debt, U.S. Customs Service and
Bureau of Alcohol, Tobacco and Firearms, and
US Secret Service. The Bureau of the Public
Debt responsible for processing the sale and
redemption of Treasury bonds, notes and
bills (including inflation linked securities
or TIPS).
TRUST INDENTURE ACT The Trust Indenture Act of 1939, as amended.
U.S. GOVERNMENT NOTES The non-inflation indexed securities issued
by the Treasury Department.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE 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-9
J.P. Morgan & Co. Incorporated................. S-16
J.P. Morgan Index Funding Company.............. S-16
Use of Proceeds................................ S-20
Description of the CPIS........................ S-21
Description of the Related Note................ S-35
Description of the Guarantee................... S-37
Description of the Related Note Guarantee...... S-39
Effect of Obligations Under the Guarantee, the
Related Note Guarantee and the Related
Note......................................... S-40
United States Federal Income Taxation.......... S-41
Underwriting................................... S-44
Legal Matters.................................. S-46
Experts........................................ S-46
Stabilization.................................. S-46
Content of Prospectus.......................... S-46
Limitation on Offers and Solicitations......... S-46
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. SA-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
J.P. Morgan & Co. Incorporated................. 3
J.P. Morgan Index Funding Company LLC.......... 5
Use of Proceeds................................ 10
Consolidated Ratios of J.P. Morgan............. 10
Description of All Preferred Securities........ 10
Description of the ComPS....................... 11
Risk Factors with Respect to All Preferred
Securities................................... 20
Risk Factors with Respect to ComPS............. 22
The Underlying Markets......................... 27
The JPM Indices................................ 30
Description of the Related Notes............... 42
Description of the Guarantee................... 43
Description of the Related Note Guarantee...... 45
Plan of Distribution........................... 46
Legal Matters.................................. 47
Experts........................................ 47
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. A-1
</TABLE>
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------------------------------------------------------
------------------------------------------------------
CONSUMER PRICE
INDEXED SECURITIES (CPIS),
SERIES C PREFERRED
SECURITIES
J.P. MORGAN INDEX
FUNDING COMPANY I
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
J.P. MORGAN & CO.
INCORPORATED
PROSPECTUS SUPPLEMENT
$[49,025,000]
NOVEMBER [ ], 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 53
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.
July 14, 1998.
<PAGE> 54
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 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.
2
<PAGE> 55
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.
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.
3
<PAGE> 56
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.
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
4
<PAGE> 57
(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.
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
5
<PAGE> 58
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 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 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
6
<PAGE> 59
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.
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.
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<PAGE> 60
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.
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.
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<PAGE> 61
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).
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> 62
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 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".
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<PAGE> 63
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 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".
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<PAGE> 64
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
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.
12
<PAGE> 65
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.
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
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<PAGE> 66
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.
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
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<PAGE> 67
Period, and (ii) in the case of all other Price Reference Index ComPS, by
multiplying (a) the Face Amount of such ComPS by (b) the quotient of (I)
the arithmetic average of the closing prices of the underlying commodity as
reported in the pricing source identified in the applicable Prospectus
Supplement for each day of the Determination Period (i.e., the Applicable
Index Settlement Value), divided by (II) the Applicable Index Commencement
Value (as defined above). The Redemption Value calculations for Price
Reference Index ComPS will also be subject to Market Disruption Events
similar to those described above, as specified in the applicable Prospectus
Supplements.
The Calculation Agent in its sole discretion will be responsible for determining
if a Market Disruption Event has occurred. In no event shall the Redemption
Value payable in respect of any series of ComPS be less than zero, although the
Redemption Value of any series of ComPS may be more or less than the Face Amount
of such series.
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).
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
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<PAGE> 68
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 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
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<PAGE> 69
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 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
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<PAGE> 70
three dealers of such instruments in New York, New York for the bid
side yield to maturity of the most recently issued on-the-run direct
non-callable fixed rate obligations of the United States Treasury
("U.S. Government Securities") with a maturity equal to the Remaining
Maturity or, if no such maturity exists, by calendar month weighted
linear interpolation among rates so obtained with a maturity up to or
equal to the Remaining Maturity and a maturity greater than the
Remaining Maturity.
The "Applicable Spread" will equal (i) for all ComPS other than
Bullion ComPS, (a) in the case of a Liquidation Distribution, the
offer side U.S. dollar swap spread for the maturity closest to the
Remaining Maturity as published by International Financing Review
("IFR") Corporate Eye on Telerate Page 42276 (or such successor as the
Calculation Agent may reasonably determine) for each day of the Early
Determination Period (except that, in the case of a determination for
which the Remaining Maturity is one year or less, "Applicable Spread"
will equal the difference between then-current yields on U.S. dollar
LIBOR-based deposits and yields on Treasury Bills with maturities
approximately equal to the Remaining Maturity as determined by the
Calculation Agent) (the "Swap Spread") or (b) in the case of all other
redemptions, the greater of the Swap Spread and the yield spread
between (I) the average of quotations from three dealers in such
instruments chosen in the discretion of the Calculation Agent for
notional issuances of debt securities of Morgan Guaranty in a notional
amount equal to the Face Amount of the ComPS being redeemed at such
time (or, if such notional amount is smaller than commercially
practicable, the smallest commercially practicable amount) and having
a similar maturity and similar subordination provisions as those
contained in the applicable Related Note and (II) U.S. Government
Securities of 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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<PAGE> 71
"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 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
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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.
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
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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 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.
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RISK FACTORS WITH RESPECT TO COMPS
INDEXATION OF PRINCIPAL AMOUNT
The Principal Amount of each series of ComPS, which is initially equal to the
Face Amount of such series, will vary until Stated Maturity of such ComPS in
relation to an Applicable Index, reduced by the Factor. The Principal Amount
repayable on any Optional Redemption Date, upon the occurrence of any Special
Event Redemption or in connection with any Liquidation Distribution or at Stated
Maturity of such ComPS will be determined, pursuant to the terms described in
the applicable Prospectus Supplement, by comparing the level of the Applicable
Index at the date of issuance of such ComPS with the level determined pursuant
to the terms thereof for any such date of redemption, reduced by the Factor.
Accordingly, the Principal Amount of a series of ComPS to be received upon any
date of redemption will fluctuate based on the Applicable Index for such series
(reduced by the Factor) and may be lower than the Face Amount for such series.
Thus, if the Applicable Index for a series of ComPS decreases over the life of
such ComPS, or if the percentage increase in the Applicable Index for such
series is less than the amount of the Factor for such series, the Redemption
Value for such series will be less than the Face Amount for such series. If the
percentage increase in the Applicable Index for such series is greater than the
amount of the Factor for such series, the Redemption Value for such series will
be greater than the Face Amount for such series.
EFFECT OF TRADING IN THE FUTURES CONTRACTS AND RELATED COMMODITIES AND
INSTRUMENTS
Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively
involved in the trading of the futures contracts or the commodities underlying
the Applicable Index and other instruments and derivative products based
thereon. Morgan Guaranty, in particular, is an active participant in various
commodity markets including the physical petroleum, precious and base metals and
related derivatives markets. JPMSI and other affiliates may also issue or
underwrite, or authorize unaffiliated entities to issue or underwrite, other
securities or financial instruments with returns indexed to the Applicable Index
or one or more of the JPM Indices. Morgan Guaranty has licensed, and may in the
future license, the Applicable Index, the JPM Indices, and related indices and
sub-indices for use by affiliated and unaffiliated parties, for publication in
newspapers and periodicals, for distribution by information and data
dissemination services and for other purposes. Morgan Guaranty currently intends
to publish individual commodity sub-indices for each of the commodities included
in the 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
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contracts"). The Applicable Index will continue to be calculated based on the
change in value of such shorter-dated contracts until they approach maturity, at
which time the Applicable Index will, as described below, cease to be calculated
based on the change in value of such shorter-dated contracts and begin to be
calculated based on the change in value of the subsequent futures contract (the
"longer-dated contracts") on a regular periodic basis so as to be continuously
indexed to the change in value of the futures contracts on the relevant
commodity. The period during which each such replacement of shorter-dated
contracts with longer-dated contracts as the basis for the calculation of the
change in value of the Applicable Index occurs is referred to herein as the
"Rollover Period", as further defined below. If the market for the commodity
futures contract underlying the Applicable Index is in "contango" (i.e., the
prices of longer-dated contracts are above the prices of shorter-dated
contracts), the return on the Applicable Index may be adversely affected. The
Applicable Index would decline if (i) the price of the longer-dated contracts
underlying the Applicable Index during the Rollover Period were more than the
price of the shorter-dated contracts which they will replace and (ii) the price
of the longer-dated contracts were to decline as such contracts approach
maturity (i.e., the price of the longer-dated contracts were to converge toward
the price of the replaced shorter-dated contracts) (only, in the case of a Total
Return Index, if each declines by more than the amount of the Collateral Return
Component). While many of the commodities included in the JPM Indices have
historically exhibited periods of both "backwardation" (i.e., the prices of
longer-dated contracts are below the prices of shorter-dated contracts) and
contango, there can be no assurance that backwardation will exist at any or all
times. If the Applicable Index is an Excess Return Index or a Total Return
Index, the absence of backwardation in the market for the commodity underlying
the Applicable Index could adversely affect the Applicable Index and,
correspondingly, could adversely affect the value of the ComPS. Additionally,
the issuance and/or the trading of the ComPS could adversely affect the market
for the benchmark contracts underlying such Applicable Index and, accordingly,
could adversely affect the value of such ComPS and could result in a substantial
loss to the holders thereof. See "Description of the ComPS--Calculation of
Redemption Value".
VOLATILITY OF COMMODITY AND COMMODITY FUTURES PRICES
Prices of commodities and commodity futures contracts are extremely volatile and
can be affected by a variety of factors, including weather, governmental
programs and policies, national and international political and economic events,
changes in interest and exchange rates and trading activity in such commodities
and commodity futures contracts. Volatility in the benchmark contracts
underlying any Applicable Index will correlate directly to volatility in such
Applicable Index. Such volatility could lead some investors in the futures
market to withdraw from the applicable futures markets, which could adversely
affect the liquidity of such markets and could adversely affect the value of
such Applicable Index and, correspondingly, the value of the ComPS.
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.
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.
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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.
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.
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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.
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.
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<PAGE> 79
CERTAIN CONSIDERATIONS REGARDING HEDGING
Prospective purchasers of ComPS who intend to hedge against the risks associated
with the market for commodity futures or commodities should recognize the
complexities of utilizing ComPS in this manner. The formula under which the
Principal Amount is calculated is not guaranteed to produce distributions to
holders having readily definable relationships with other commodity futures and
commodity instruments and products. As described above, in the case of ComPS for
which the Applicable Index is an Excess Return Index or a Total Return Index,
the value of such ComPS will reflect not only the price of the benchmark
contracts or the relevant commodity but also, in the case of an Applicable Index
based on futures contracts, the state of the market in which such futures
contracts are traded (i.e., whether such market is in "backwardation" or
"contango" over time), all reduced by the Factor. Also, under certain
circumstances, amounts payable on the ComPS may be based on the good faith
determination of Morgan Guaranty and not on the Applicable Index. For these
reasons, investors should be cautious in using ComPS in a hedging program. The
risks associated with utilizing the ComPS in a hedging program may be magnified
in periods of substantial futures or commodities price volatility, since
properly correlating such ComPS either as a hedge of other assets or correlating
such ComPS to the hedge thereof may become more difficult.
THE UNDERLYING MARKETS
FUTURES MARKETS
An exchange-traded futures contract is a bilateral agreement providing for the
purchase and sale of a specified type and quantity of a commodity or financial
instrument during a stated delivery month for a fixed price or, in the case of a
futures contract on an index, providing for the payment and receipt of a cash
settlement. By its terms, a futures contract provides for a specified settlement
month in which the commodity or financial instrument is to be delivered by the
seller (whose position is therefore described as "short") and acquired by the
purchaser (whose position is therefore described as "long") or in which the cash
settlement amount is required to be paid. Prior to the date on which delivery is
to be made under a 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
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<PAGE> 80
exchanges. In addition to such open outcry trading, trading takes place during
the rest of the day directly between members by means of a telephone trading
system. Settlement prices for contracts with specified settlement dates are
determined by a committee selected by the directors of the LME (the "Quotations
Committee") promptly following the morning trading session, based on the last
bid and offer prices for the relevant commodity at such trading session or, if
the Quotations Committee determines there were no such prices, at such other
level as the Quotations Committee may in its discretion determine at the end of
each LME trading day. The Quotations Committee is similarly responsible for
determining LME closing prices. If the Quotations Committee fails to determine
such closing prices on any LME trading day, such closing prices shall be
determined by the London Clearing House, which is the clearinghouse for the LME.
United States commodity futures exchanges typically have similar procedures for
determining end-of-day settlement prices, although each exchange or type of
commodity may have slightly different procedures. All exchanges have quotations
or settlement price committees which determine the settlement prices using
prescribed formulaic methodologies. However, such committees may, if they
believe the application of the formulaic methodology would yield a settlement
price which is inappropriate, in their own discretion determine a settlement
price which is appropriate.
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 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
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<PAGE> 81
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).
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.
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<PAGE> 82
The price of the longer-dated position may be higher or lower than the price of
the shorter-dated position based on a variety of factors, including the cost of
borrowing, transportation, storage and insurance of commodities, the
expectations of market participants with respect to future price trends and
general inventory, supply and demand trends.
Investors may also calculate the "total return" from an unlevered, continuous
investment in nearby commodity futures contracts by adding to the futures return
a component of return calculated based on the notional amount of their
investment in commodity futures, as it changes from time to time, would earn if
invested as cash. Such return (the "Collateral Return Component") can be added
to (and thus reinvested in) the futures return component to calculate the "total
return" from such an unlevered, continuous investment.
The following table illustrates a simplified calculation of the total return of
a continuous investment in nearby commodity futures contracts over a 2 period
holding period. The example uses the futures return from the table above and
assumed Collateral Return Components:
Total Return Example
<TABLE>
<CAPTION>
PERIOD 1 PERIOD 2 TOTAL
-------- -------- -----
<S> <C> <C> <C>
Return attributable to change in value of futures
contracts................................................. 0.00% 3.45%
Return attributable to Collateral Yield Component........... 0.50% 0.55%
Total Return................................................ 0.50% 4.00% 4.52%*
</TABLE>
---------------
* 4.52% equals the total return from compounding: (1 + 0.005) X (1 + 0.04) - 1
In the above example, if the futures return had been as calculated in the Excess
Return Example and the Collateral Yield Component was as specified, the total
return over the two period holding period would be 4.52%.
THE JPM INDICES
The JPM Indices have been developed and are calculated by Morgan Guaranty as
indices proprietary to J.P. Morgan. The JPMCI 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)
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<PAGE> 83
Where "I(t)" is the value of the relevant Excess Return Index on the
date of determination (such date being referred to as "(t)"); "I(t-1)"
is the value of the relevant Excess Return Index on the Trading Day not
subject to a Market Disruption Event immediately preceding the date of
determination (such date being referred to as "(t-1)"); and "Change(t)"
is equal to the product of (i) I(t-1) and (ii) the sum of the weighted
percentage changes on the date of determination of the U.S. dollar
prices of the futures contracts underlying the Applicable Index. Each
such weighted percentage change shall be equal to the product of (a) the
U.S. dollar percentage gain or loss on such underlying contracts to the
date of determination from the immediately preceding Trading Day that is
not subject to a Market Disruption Event multiplied by (b) the
applicable futures contract's weight in the Applicable Index for such
date of determination. The methodology behind the weighting of the
futures contracts is set forth under the caption "Rebalance of JPM
Indices".
For example, to calculate the value of an Excess Return Index (I(t)) on a
Trading Day not subject to a Market Disruption Event for which I(t-1) equals 100
and on which the only Benchmark Contract moves in value from $14.50 to $15.00
(resulting in an Index change of 3.4482759%),
I(t) = 100 + (100 X 0.034482759)
I(t) = 100 + 3.4482759
I(t) = 103.4482759
TOTAL RETURN METHODOLOGY
The methodology applied by Morgan Guaranty in calculating Total Return JPM
Individual Indices is set forth below. If the Applicable Index of any series of
ComPS is a Total Return Index, the following methodology will be applied by the
Calculation Agent in calculating the Applicable Index:
The value of the relevant Total Return Index for any Trading Day not subject to
a Market Disruption Event will be determined with reference to the following
formula:
I(t) = I(t-1) + Change(t) + R(t)
Where "I(t)" is the value of the relevant Total Return Index on the date
of determination (such date being referred to as "(t)"); "I(t-1)" is the
value of the relevant Total Return Index on the Trading Day not subject
to a Market Disruption Event immediately preceding the date of
determination (such date being referred to as "(t-1)"); and "Change(t)"
is equal to the product of (i) I(t-1) and (ii) the sum of the weighted
percentage changes on the date of determination of the U.S. dollar
prices of the futures contracts underlying the Applicable Index. Each
such weighted percentage change shall be equal to the product of (a) the
U.S. dollar percentage gain or loss on such underlying contracts to the
date of determination from the immediately preceding Trading Day that is
not subject to a Market Disruption Event multiplied by (b) the
applicable futures contract's weight in the Applicable Index for such
date of determination. Also, "R(t)" is the return arising for the period
from (t-1) to (t) from interest payable on the nominal value of the
Applicable Index, which shall be based on the rate determined with
reference to the following formula:
R(t) = I(t-1) X Y(t)
Where "I(t-1)" has the meaning set forth in the preceding paragraph and
Y(t) = [1/(1-Q)](Days/91) - 1
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> 84
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> 85
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
---------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
1 Aluminum $/MT (Metric Tonne) LME Warehouses LME 25 tonnes
(High Grade Primary Aluminum) Worldwide
2 Copper $/MT LME Warehouses LME 25 tonnes
(Copper Grade A) Worldwide
3 Nickel $/MT LME Warehouses LME 6 tonnes
(Primary Nickel) Worldwide
4 Zinc $/MT LME Warehouses LME 25 tonnes
(Special High Grade Zinc) Worldwide
5 Heating Oil #2, cent/gal New York NYMEX 42,000 gallons
Harbor
6 Natural Gas $/MM BTU Henry Hub, NYMEX 10,000 MM BTU
Louisiana
7 Unleaded Gasoline cent/gal New York NYMEX 42,000 gallons
Harbor
8 Light "Sweet" Crude Oil $/BBL Cushing, NYMEX 1,000 bbl
Oklahoma
9 Gold $/troy oz COMEX- COMEX 100 troy oz
(.995 fineness) approved
vaults
10 Silver cent/troy oz COMEX- COMEX 5,000 troy oz
(.999 fineness) approved
vaults
11 Platinum $/troy oz NYMEX- NYMEX 50 troy oz
approved
vaults
12 No. 2 Yellow Corn cent/bushel CBOT Delivery CBOT 5,000 bushels
Sites
13 No. 2 Yellow Soybeans CBOT Delivery CBOT 5,000 bushels
cent/bushel Sites
14 Hard Winter Wheat cent/bushel CBOT Delivery CBOT 5,000 bushels
Sites
<CAPTION>
No. Designated Contract
--- ----------------------------------------------------
<C> <C>
1 Third Wednesday of every March, June, September,
December(1)
2 Third Wednesday of every March, June, September,
December
3 Third Wednesday of every March, June, September,
December
4 Third Wednesday of every March, June, September,
December
5 Every month
6 Every month
7 Every month
8 Every month
9 February, April, June, August, December
10 March, May, July, September, December
11 January, April, July, October
12 March, May, July, December
13 January, March, May, July, November
14 March, July, December
</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.
33
<PAGE> 86
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:
34
<PAGE> 87
--------------------------------------------------------------------------------
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.
35
<PAGE> 88
--------------------------------------------------------------------------------
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 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
36
<PAGE> 89
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
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.
37
<PAGE> 90
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 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
38
<PAGE> 91
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 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.
39
<PAGE> 92
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 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
40
<PAGE> 93
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. Morgan Global Commodities, London
Victor S. Filatov.................... President, Smith Barney Global Chief Investment Officer
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 Group Economic Consultant and former
Visiting Fellow, Institute of
International Economics
Jeanne Feldhusen..................... Managing Director, J.P. Morgan Head of Fixed Income Research
</TABLE>
Each of the futures contracts included in the JPM Indices must satisfy each of
the following JPMCI Inclusion Criteria: the futures contracts must (i) be priced
in U.S. dollars, or if priced in a foreign currency, the exchange on which the
contract is traded must publish an official exchange rate for conversion of the
futures price into U.S. dollars and such currency must be freely convertible
into U.S. dollars; (ii) be traded on a regulated futures exchange located in the
United States, Canada, the United Kingdom, Japan, Singapore or an O.E.C.D.
country and (iii) have a minimum annual trading volume of 300,000 contracts or
$500,000,000 for all contract months. If a contract included in the JPM Indices
ceases to satisfy the JPMCI Inclusion Criteria, the JPMCI Policy Committee shall
meet to consider the substitution of a replacement futures contract for such
contract. If no appropriate replacement contract can be found, the JPMCI Policy
Committee may recommend the removal of such contract from the JPM Indices.
Morgan Guaranty reserves the right to act at its discretion to make any
modifications to the JPM Indices based on the recommendations of the JPMCI
Policy Committee.
CHANGES IN JPM INDICES DESIGNATED CONTRACTS
Before implementing a change in definition or price sources for a designated
contract in the JPM Indices, the JPMCI Policy Committee shall consider the
following: (i) the effectiveness of the JPMCI and JPM Indices as appropriate
commodity investment benchmarks, (ii) the effectiveness of the JPMCI and JPM
Indices as a measure of commodity market performance and (iii) the respective
contract volumes, U.S. dollar volumes, open interest, liquidity and transaction
costs of the proposed replacement and existing benchmark contracts.
The JPMCI Policy Committee may recommend a change in one or more of the
benchmark contracts underlying the JPM Indices if, in the majority opinion of
the committee members, the proposed replacement benchmark contract better meets
the objectives set forth in clauses (i) and (ii) above and has higher annual
contract volumes or U.S. dollar volumes. However, as noted above, Morgan
Guaranty may cause a change in one or more of such contracts if any increased
cost or tax is imposed on holding or trading such contracts if such contract
meets the applicable inclusion rules even though such contract does not have
higher annual contract volumes or U.S. dollar volumes.
After consideration of the above (and other) issues the JPMCI Policy Committee
may recommend to Morgan Guaranty a change in the composition of the JPM Indices.
Morgan Guaranty reserves the right to act at its discretion to make any
modifications to the JPMCI based on recommendations of the policy committee.
Such changes, including the implementation date and details, shall be published
and disseminated by Morgan Guaranty through its usual research distribution
network.
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.
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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.
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
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add covenants of Morgan Guaranty, or 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 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
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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.
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).
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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
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.
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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).
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.
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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 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.
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.
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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 (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.
A-2
<PAGE> 102
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.
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
A-3
<PAGE> 103
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> 104
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE 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-9
J.P. Morgan & Co. Incorporated................. S-16
J.P. Morgan Index Funding Company.............. S-16
Use of Proceeds................................ S-20
Description of the CPIS........................ S-21
Description of the Related Note................ S-35
Description of the Guarantee................... S-37
Description of the Related Note Guarantee...... S-39
Effect of Obligations Under the Guarantee, the
Related Note Guarantee and the Related
Note......................................... S-40
United States Federal Income Taxation.......... S-41
Underwriting................................... S-44
Legal Matters.................................. S-46
Experts........................................ S-46
Stabilization.................................. S-46
Content of Prospectus.......................... S-46
Limitation on Offers and Solicitations......... S-46
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. SA-1
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
J.P. Morgan & Co. Incorporated................. 3
J.P. Morgan Index Funding Company LLC.......... 5
Use of Proceeds................................ 10
Consolidated Ratios of J.P. Morgan............. 10
Description of All Preferred Securities........ 10
Description of the ComPS....................... 11
Risk Factors with Respect to All Preferred
Securities................................... 20
Risk Factors with Respect to ComPS............. 22
The Underlying Markets......................... 27
The JPM Indices................................ 30
Description of the Related Notes............... 42
Description of the Guarantee................... 43
Description of the Related Note Guarantee...... 45
Plan of Distribution........................... 46
Legal Matters.................................. 47
Experts........................................ 47
</TABLE>
ANNEX I
<TABLE>
<S> <C>
Glossary of Terms.............................. A-1
</TABLE>
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CONSUMER PRICE
INDEXED SECURITIES (CPIS),
SERIES C PREFERRED
SECURITIES
J.P. MORGAN INDEX
FUNDING COMPANY I
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
J.P. MORGAN & CO.
INCORPORATED
PROSPECTUS SUPPLEMENT
$[49,025,000]
NOVEMBER [ ], 2000
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