-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sk+MIfLyvjckpMlA5hCfa/U+OJyty8YIImmKhWb1ShrIJZ/m2hhZfr0lqXl6Yuvz iRzGsnF4W4aG6GLOr5BORg== 0000950123-96-002697.txt : 19960525 0000950123-96-002697.hdr.sgml : 19960525 ACCESSION NUMBER: 0000950123-96-002697 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960524 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN J P & CO INC CENTRAL INDEX KEY: 0000068100 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132625764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01121 FILM NUMBER: 96572361 BUSINESS ADDRESS: STREET 1: 60 WALL ST CITY: NEW YORK STATE: NY ZIP: 10260 BUSINESS PHONE: 2124832323 MAIL ADDRESS: STREET 1: P O BOX 271 STREET 2: C/O WILLIAM D HALL CITY: WILMINGTON STATE: DE ZIP: 19899 424B2 1 PROSPECTUS SUPPLEMENT 1 Filed pursuant to Rule 424(b)(2) Registration Statement No. 333-01121 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 MAY 21, 1996 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED MAY 16, 1996) [ ] COMMODITY-INDEXED PREFERRED SECURITIES (ComPS(SM)), SERIES [AL1] J.P. MORGAN INDEX FUNDING COMPANY, LLC [ ]% SERIES [AL1] PREFERRED SECURITIES INDEXED TO THE JPMCI ALUMINUM EXCESS RETURN INDEX GUARANTEED TO THE EXTENT SET FORTH HEREIN BY J.P. MORGAN & CO. INCORPORATED ------------------------ The [ ]% Series AL1 Preferred Securities (each, a "Preferred Security", and collectively, the "ComPS") offered hereby are being issued by J.P. Morgan Index Funding Company, LLC, a limited liability company formed under the laws of the State of Delaware (the "Company"). The ComPS represent preferred limited liability company interests in the Company. Each Preferred Security will have an initial principal amount of [$40] (the "Face Amount"), and thereafter, the change in value of the principal amount per Preferred Security will be indexed to the change in value of the JPMCI Aluminum Excess Return Index (the "Applicable Index"), which is calculated based on the change in value of certain aluminum futures contracts included from time to time in the JPM Indices (such contracts, from time to time, the "Benchmark Aluminum Contracts"). J.P. Morgan & Co. Incorporated, a Delaware corporation ("J.P. Morgan"), will directly or indirectly own all the common securities (the "Common Securities") representing voting limited liability company interests in the Company (the ComPS and the Common Securities, collectively, the "Securities"). The Company exists for the sole purpose of issuing the ComPS and investing the proceeds thereof in a [ ]% Related Note Due [ ], 20[ ] (the "Related Note") of Morgan Guaranty Trust Company of New York, a trust company with full banking powers organized under the laws of the State of New York and a wholly-owned subsidiary of J.P. Morgan ("Morgan Guaranty"), and issuing similar securities and investing the proceeds thereof in similar notes in the future. SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES. THE ComPS ARE NOT FUTURES CONTRACTS AND DO NOT REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS DEFINED BELOW) OF THE ComPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI ALUMINUM EXCESS RETURN INDEX. AS A RESULT, THE REDEMPTION VALUE PER PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT AND MAY BE MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE BENCHMARK ALUMINUM CONTRACTS. SEE "DESCRIPTION OF THE ComPS". "ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are service marks of J.P. Morgan & Co. Incorporated. The ComPS have been authorized for listing on the [ (the " ")] under the symbol " ", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement. See "Underwriting". THE SECURITIES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price $[40] per Preferred Security plus accrued dividends, if any.
- ---------------------------------------------------------------------------------------------------------------- INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE(1) COMMISSIONS(2) THE COMPANY(3)(4) - ---------------------------------------------------------------------------------------------------------------- Per Preferred Security..................... $ (3) $ - ---------------------------------------------------------------------------------------------------------------- Total...................................... $ (3) $ - ----------------------------------------------------------------------------------------------------------------
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein). (2) The Company and J.P. Morgan have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting". (3) Because the proceeds of the sale of the ComPS will be invested in the Related Note, Morgan Guaranty has agreed to pay to the Underwriters a commission of $ per Preferred Security (or $ in the aggregate). See "Underwriting". (4) Expenses of the offering which are payable by the Company and J.P. Morgan are estimated to be $ . ------------------------ The ComPS offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the ComPS will be made on or about , 1996, through the book-entry facilities of The Depository Trust Company, against payment therefor in same-day funds. J.P. MORGAN & CO. The date of this Prospectus Supplement is , 1996. 2 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE [APPLICABLE STOCK EXCHANGE(S)], IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. S-2 3 STRUCTURAL OVERVIEW [GRAPHIC OMITTED] 1. THE COMPANY. The issuer of the ComPS is a Delaware limited liability company formed by J.P. Morgan for the sole purpose of issuing the ComPS and other Preferred Securities and lending the proceeds thereof to Morgan Guaranty. J.P. Morgan will own, directly or indirectly, 100% of the common limited liability company interests in the Company. It is intended that the Company not be taxed as a corporation (and instead be treated as a partnership) for federal income tax purposes. 2. THE COMPS. The ComPS issued by the Company are preferred limited liability company interests. For tax purposes, holders of ComPS are deemed to receive interest income to the extent of interest accrued and paid on the Related Note, and dividends on ComPS are not eligible for the dividends received deduction for United States Federal income tax purposes. The ComPS Redemption Price and the ComPS Early Redemption Price are indexed to the JPMCI Aluminum Excess Return Index. The ComPS Early Redemption Price or the ComPS Redemption Price may be more or less than the Face Amount of the ComPS. The Company intends to issue more than one series of Preferred Securities. 3. COMPS PROCEEDS LOANED TO MORGAN GUARANTY. Proceeds of ComPS and related Common Securities will be used by the Company to purchase from Morgan Guaranty the Related Note with a maturity of [ ] and having the same economic terms as the ComPS. 4. REPAYMENT OF RELATED NOTE. Morgan Guaranty will repay the Related Note in whole or part to the extent required upon any Early Redemption Date and in whole at the Stated Maturity (subject to extension in case of a Market Disruption Event). 5. RELATED NOTE GUARANTEE. J.P. Morgan will guarantee to the Company, on a subordinated basis, the payment of any distributions on and principal of the Related Note as provided pursuant to the terms of the Related Note, at such times and in such amounts as provided therein. 6. GUARANTEE. J.P. Morgan will guarantee to the holders of ComPS, on a subordinated basis, the payment of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only if and to the extent that, in each case, Morgan Guaranty has made payment of interest or principal on the Related Note, as the case may be, and (ii) upon liquidation, the lesser of (a) the sum of the Early Redemption Value and the amount of accrued and unpaid dividends on the ComPS and (b) the amount of assets of the Company available for distribution to holders of ComPS. 7. MORGAN GUARANTY. Morgan Guaranty, a trust company with full banking powers organized under the laws of the State of New York, is a wholly-owned subsidiary of J.P. Morgan. S-3 4 SUMMARY OF THE OFFERING SECURITIES OFFERED......[2,500,000] [ ]% Series AL1 Preferred Securities ("ComPS") Indexed to the JPMCI Aluminum Excess Return Index. ISSUER..................J.P. Morgan Index Funding Company, LLC (the "Company"), a Delaware limited liability company and a subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"). GUARANTOR...............J.P. Morgan, on a subordinated basis, (i) of payments to holders of ComPS of amounts received on the Related Note by the Company and (ii) of payments to the Company on the Related Note by Morgan Guaranty, a wholly-owned subsidiary of J.P. Morgan. INITIAL OFFERING PRICE PER PREFERRED SECURITY ("FACE AMOUNT").........[$40]. AGGREGATE FACE AMOUNT..................[$100,000,000]. COMPS REDEMPTION PRICE...................Redemption Value at Stated Maturity plus accrued and unpaid dividends. STATED MATURITY.........[ ], 20[ ], subject to extension in the case of a Market Disruption Event. REDEMPTION VALUE PER PREFERRED SECURITY......Face Amount X Applicable Index Settlement Value ----------------------------------- Applicable Index Commencement Value APPLICABLE INDEX........JPMCI Aluminum Excess Return Index. APPLICABLE INDEX COMMENCEMENT VALUE......[Set on date of pricing]. APPLICABLE INDEX SETTLEMENT VALUE........The average of the Applicable Index over the 10 consecutive Trading Days meeting certain conditions immediately following the 20th scheduled Business Day prior to redemption (as described herein), unless such value has been permanently fixed prior to such time as described under "Description of ComPS -- Early Determination of Applicable Index Settlement Value and Redemption Value." CALCULATION AGENT.......Morgan Guaranty. DIVIDENDS...............Cumulative cash dividends of % per annum on the Face Amount (calculated on the basis of a 360 day year of twelve 30-day months) accruing from the Issue Date and payable monthly in arrears on the last calendar day of each month. CASH REDEMPTION PRIOR TO STATED MATURITY OPTIONAL REDEMPTION............At the holders' option, on each [ ] prior to the Stated Maturity, for the ComPS Early Redemption Price. SPECIAL EVENT REDEMPTION............Under certain circumstances, upon the occurrence of a Tax Event or an Investment Company Event, for the ComPS Early Redemption Price. EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE........Upon the occurrence of certain events affecting the liquidity or increasing the cost of holding or trading the Benchmark Aluminum Contracts and the inability to find a suitable replacement Benchmark Aluminum Contract, the Applicable Index Settlement Value may be fixed, and such fixed value will be used upon any subsequent Early Redemption and at Stated Maturity. COMPS EARLY REDEMPTION PRICE...................The Early Redemption Value (as defined in the Prospectus), which represents the payment of the discounted present value of dividends and Principal Amount on the applicable Early Redemption Date. See "Description of the ComPS -- Optional Redemption" and "-- Special Event Redemption". VOTING RIGHTS...........Holders of ComPS will have limited voting rights and will not be entitled to vote to appoint, remove or replace the Managing Members of the Company (as defined in the LLC Agreement). See "Description of the ComPS--Voting Rights". USE OF PROCEEDS.........The proceeds to the Company from the sale of ComPS and related Common Securities will be used to purchase a note of Morgan Guaranty (the "Related Note"), and Morgan Guaranty will use such proceeds for general corporate purposes and for hedging its obligations under the Related Note. See "Use of Proceeds". S-4 5 THE OFFERING The information in this Prospectus Supplement concerning J.P. Morgan, Morgan Guaranty, the Company, the ComPS, the Guarantee, the Related Note Guarantee and the Related Note supplements, and should be read in conjunction with, the information contained in the accompanying Prospectus. The following summary of provisions relating to the ComPS is qualified in its entirety by the more detailed information contained elsewhere or incorporated by reference in this Prospectus Supplement and the Prospectus of which this Prospectus Supplement constitutes a part. Prospective purchasers of ComPS should carefully review such information. Certain capitalized terms used in this Prospectus Supplement have the meanings ascribed to them under the "Glossary of Terms" in Annex I hereto. GENERAL Subject to the more specific discussion of each item elsewhere in this Prospectus Supplement or in the accompanying Prospectus (including the effect of a Market Disruption Event, as defined herein), following is a general summary of the ComPS: ComPS are principal-at-risk securities linked directly to the performance of the JPMCI Aluminum Excess Return Index (the "Applicable Index"). As described below, the Applicable Index will change based on the daily percentage change in value of the Benchmark Aluminum Contracts. 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. 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. The ComPS pay a fixed dividend rate on the Face Amount (which equals the initial price) and the Redemption Value of the ComPS is linked to the performance of the JPMCI Aluminum Excess Return Index. 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. Thus, the Redemption Value is linked directly to the performance of the JPMCI Aluminum Excess Return Index (e.g., if the average ending value of the JPMCI Aluminum Excess Return Index is twice the beginning value, the Redemption Value will be twice the initial price). The Applicable Index for the ComPS is the JPMCI Aluminum Excess Return Index, which is an Excess Return Index. An Excess Return Index, which is described more fully in the attached Prospectus under "The JPM Indices -- Excess Return Methodology", represents the cumulative return of holding an unlevered position in the designated nearby commodity futures contracts underlying such Applicable Index. Generally, since the 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 for each of the next four days of the Rollover Period such that, by the day after the Rollover Period ends and for all subsequent days until the next Rollover Period, 100% of the daily index change is attributable to the percentage change of the newly-designated contract. S-5 6 Therefore, the ComPS pay dividends at a fixed rate and amount and pay a principal amount upon redemption or at maturity which varies directly with the performance of the JPMCI Aluminum Excess Return Index. The change in the JPMCI Aluminum Excess Return Index is linked directly to the percentage change in the designated contracts underlying such index. Thus, any events which affect the designated contracts underlying the JPMCI Aluminum Excess Return Index may affect the Redemption Value of such ComPS. The Principal Amount of each of the ComPS, which is initially equal to the Face Amount, will vary over the life of the ComPS in relation to the JPMCI Aluminum Excess Return Index (the "Applicable Index"). The Principal Amount repayable on any Early Redemption Date, upon the occurrence of any Special Event Redemption or at Stated Maturity will be determined, pursuant to the terms described herein (including, without limitation, the averaging of the Applicable Index over the Early Determination Period or Determination Period, as applicable, and the present-valuing of the dividends and Principal Amount in connection with early redemptions), by comparing the level of the JPMCI Aluminum Excess Return Index set on the date of issuance of the ComPS with the level determined pursuant to the terms hereof for any such date of redemption. The ComPS represent preferred limited liability company interests in the Company, the assets of which will consist of the Related Note and other notes issued by Morgan Guaranty in connection with other issuances of Preferred Securities. The Related Note, in which the proceeds of the ComPS and the related Common Securities will be invested, matures on [ ], 20[ ] (which is the "Stated Maturity"), subject to extension in the case of a Market Disruption Event, and is redeemable at certain times, from time to time, at the option of the Company upon an optional redemption by one or more holders of ComPS in an amount sufficient to fund such redemption and the redemption of the related Common Securities and at any time by Morgan Guaranty in whole or in part upon the occurrence of a Special Event. The ComPS will be redeemed at Stated Maturity at the ComPS Redemption Price, which is equal to the sum of (a) the Redemption Value (as defined below) per Preferred Security plus (b) accrued and unpaid dividends thereon to but excluding the date of redemption. In addition, if, as a result of a Special Event, Morgan Guaranty redeems the Related Note in whole or in part prior to Stated Maturity, the Company must redeem ComPS and related Common Securities having an aggregate Principal Amount equal to the Principal Amount of the Related Note so redeemed at the ComPS Redemption Price. See "Description of the ComPS -- Redemption at Stated Maturity"; -- Special Event Redemption". For purposes of this Prospectus Supplement, "Principal Amount" means (i) in the case of any Preferred Security, the Early Redemption Value thereof or the Redemption Value thereof (as if determined as of such time), as applicable, and (ii) in the case of the Related Note, the principal amount thereof at such time determined pursuant to the terms thereof. DIVIDENDS The holders of ComPS are entitled to receive cumulative cash dividends at the rate of [ ]% per annum on the Face Amount per Preferred Security, accruing from the Issue Date, and payable monthly in arrears on the last calendar day of each month, commencing [ ], 1996, or, if any such date is not a Business Day (as defined herein), the next succeeding Business Day when, as and if available for payment by the Company (as described herein), except as otherwise described herein. The first dividend payment will be for the period from and including the Issue Date to but excluding [ ], 1996. Dividends (or amounts equal to accrued and unpaid dividends) payable on the ComPS for any period shorter than a monthly dividend period will be computed on the basis of a 360-day year of twelve 30-day months and on the basis of the actual number of days elapsed in any such 30-day month. See "Description of the ComPS -- Dividends". REDEMPTION AT STATED MATURITY Unless previously redeemed pursuant to the optional or special redemption provisions described below, each of the outstanding ComPS will be redeemed by the Company, in cash, on [ ], 20[ ], which is the Stated Maturity of the Related Note, subject to extension in the case of a Market Disruption Event (as defined herein), at the ComPS Redemption Price, which is equal to (a) the Redemption Value per S-6 7 Preferred Security plus (b) accrued and unpaid dividends thereon to but excluding the date of redemption. See "Description of the ComPS -- Redemption at Stated Maturity"; "Risk Factors -- Extension of Settlement Date or Stated Maturity". CALCULATION OF REDEMPTION VALUE The Principal Amount of each Preferred Security is indexed to the JPMCI Aluminum Excess Return Index (the "Applicable Index"), which is calculated based on the change in value of certain aluminum futures contracts included from time to time in the JPM Indices (such contracts, from time to time, the "Benchmark Aluminum Contracts"). On the date of this Prospectus Supplement, the Benchmark Aluminum Contract is the High Grade Primary Aluminum contract traded on the London Metals Exchange (the "LME"). Any contracts for forward delivery on the LME shall be referred to herein as "futures contracts" or "contracts." In summary, and subject to the complete definitions and formulae contained herein and in the Prospectus, the Principal Amount of each Preferred Security at Stated Maturity, subject to extension in the case of a Market Disruption Event (the "Redemption Value"), shall be determined by multiplying the Face Amount of each Preferred Security by a fraction, the numerator of which is the Applicable Index Settlement Value and the denominator of which is the Applicable Index Commencement Value. Subject to the more complete definitions contained herein and in the accompanying Prospectus, "Applicable Index Settlement Value" means the arithmetic average of the values of the Applicable Index during the Determination Period (as defined below), and "Applicable Index Commencement Value" means [value set on date of issuance]. See "Description of ComPS--Calculation of Redemption Value" herein and "Description of ComPS--Determination Period and Settlement Date" in the accompanying Prospectus. EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE Upon the occurrence of certain events affecting the liquidity or increasing the cost of holding or trading the Benchmark Aluminum Contracts and the inability to find a suitable replacement Benchmark Aluminum Contract, Morgan Guaranty has the right to cause the Applicable Index Settlement Value (as defined in the preceding paragraph) to be fixed. Following such an event, the Applicable Index Settlement Value will remain fixed and will be used as the Applicable Index Early Settlement Value for the computation of any Early Redemption Value and as the Applicable Index Settlement Value at Stated Maturity. See "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value". OPTIONAL REDEMPTION Each holder of ComPS may, by giving notice as specified herein before the [ ] of each year prior to Stated Maturity (each, an "Optional Redemption Date"), cause the Company to redeem some or all of such holder's ComPS at the ComPS Early Redemption Price, which is equal to (a) the Early Redemption Value (as defined in the Prospectus) per Preferred Security as determined at such time plus (b) accrued and unpaid dividends thereon to but excluding the date of redemption. See "Description of the ComPS-- Optional Redemption". SPECIAL EVENT REDEMPTION Upon the occurrence and during the continuation of a Tax Event or an Investment Company Event (each as defined herein), Morgan Guaranty will have the right to redeem the Related Note in whole or, if redemption of less than all the ComPS will result in the discontinuance of such Special Event, in part in an amount sufficient to cause such discontinuance, in each case for cash, with the result that the Company will redeem a Principal Amount of ComPS and related Common Securities equal to the Principal Amount of the Related Note so redeemed for cash at the ComPS Early Redemption Price. However, in the case of a Tax Event, Morgan Guaranty may allow the Related Note and the Company may allow the ComPS and related Common Securities to remain outstanding upon the receipt of indemnification by J.P. Morgan of S-7 8 the Company for all taxes payable by it as a result of such Tax Event. See "Description of the ComPS-- Special Event Redemption". UNCONDITIONAL GUARANTEE BY J.P. MORGAN J.P. Morgan, through its obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement and the Expense Agreement, taken together, will provide a full and unconditional guarantee, on a subordinated basis, of payments due on the ComPS. See "Risk Factors--Limitations on Rights Under the Guarantee, the Related Note Guarantee and the Related Note", "Description of the Related Note Guarantee" and "Effect of Obligations Under the Guarantee, the Related Note Guarantee and the Related Note". THE GUARANTEE The Guarantee by J.P. Morgan guarantees to the holders of the ComPS the payment of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only if and to the extent that, in each case, Morgan Guaranty has made payment of interest or principal on the Related Note, as the case may be, and (ii) upon a Liquidation Event (as defined herein) (other than in connection with the redemption of all the ComPS upon maturity or redemption of Related Note), the lesser of (A) the sum of (I) the Early Redemption Value of such ComPS and (II) the amount of accrued and unpaid dividends on such ComPS to but excluding the date of payment (the "Liquidation Distribution"), to the extent the Company has funds available therefor and (B) the amount of assets of the Company remaining available for distribution to holders of the ComPS upon such Liquidation Event. J.P. Morgan's obligations under the Guarantee will be subordinated and junior in right of payment to all liabilities of J.P. Morgan, pari passu with the most senior preferred stock outstanding as of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan. THE RELATED NOTE GUARANTEE The Related Note Guarantee by J.P. Morgan guarantees to the Company the payment of any dividends on and principal of the Related Note as provided pursuant to the terms of the Related Note, at such times and in such amounts as provided therein. J.P. Morgan's obligations under the Related Note Guarantee will be subordinated and junior in right of payment to all liabilities of J.P. Morgan, pari passu with the most senior preferred stock outstanding as of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan. RELATED NOTE The Related Note will be issued as an unsecured obligation of Morgan Guaranty, limited in initial principal amount to approximately $[ ], such amount being the aggregate Face Amount of the ComPS and the related Common Securities. The Related Note will mature on the Stated Maturity (subject to extension in the case of a Market Disruption Event), and will bear interest at an annual rate of [ ]% on the Face Amount (which is equivalent to the annual dividend rate with respect to the ComPS), payable monthly in arrears on the last day of each calendar month, commencing on [ ], 1996. The Principal Amount of the Related Note at any time will be the aggregate Principal Amount of the outstanding ComPS and related Common Securities at such time. The amount payable upon maturity for the Related Note will be the Related Note Redemption Price. The timing and amount of payments on the Related Note mirror the aggregate financial terms of the ComPS. The obligations of Morgan Guaranty under the Related Note will be pari passu with all present and future Senior Indebtedness of Morgan Guaranty. Morgan Guaranty's obligations under the Related Note are effectively subordinated to all liabilities (including indebtedness) of its consolidated and unconsolidated subsidiaries. S-8 9 VOTING RIGHTS Holders of ComPS will have limited voting rights and will not be entitled to vote to appoint, remove or replace the Managing Members of the Company (as defined below). See "Description of the ComPS-- Voting Rights". USE OF PROCEEDS The Company will invest the proceeds from the sale of the ComPS offered hereby and the related Common Securities in the Related Note, the proceeds of which will be used by Morgan Guaranty for general corporate purposes and for hedging its obligations under the Related Note. See "Use of Proceeds". LISTING [The ComPS have been authorized for listing on the [ ] under the symbol " , subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement.] [Prior to this offering, there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the Underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] S-9 10 RISK FACTORS INDEXATION OF PRINCIPAL AMOUNT The Principal Amount of each of the ComPS, which is initially equal to the Face Amount, will vary until Stated Maturity of the ComPS in relation to the JPMCI Aluminum Excess Return Index (the "Applicable Index"). The Principal Amount repayable on any Optional Redemption Date, upon the occurrence of any Special Event Redemption or in connection with any Liquidation Distribution (each such redemption date, an "Early Redemption Date") or at Stated Maturity will be determined, pursuant to the terms described herein (including, without limitation, the averaging of the Applicable Index over the Early Determination Period or Determination Period, as applicable, and the present-valuing of the dividends and Principal Amount in connection with early redemptions), by comparing the level of the JPMCI Aluminum Excess Return Index at the date of issuance of the ComPS with the level determined pursuant to the terms hereof for any such date of redemption. Accordingly, the Principal Amount to be received upon any date of redemption will fluctuate based on the Applicable Index and may be lower than the Face Amount. LIMITATION ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE RELATED NOTE The Guarantee will be effective with respect to the ComPS from the time of issuance of such ComPS but will not apply to any payment of dividends or other amounts due in respect of the ComPS to the extent Morgan Guaranty has failed to make a payment of principal or interest on the Related Note. To the extent Morgan Guaranty were to default on its obligation to pay amounts payable on the Related Note, the Company would lack available funds for the payment of distributions on or amounts payable on redemption of the ComPS and, in such event, holders of the ComPS would not be able to rely on the Guarantee for payment of such amounts. Instead, holders of the ComPS would rely on the enforcement by the Company of its rights as holder of the Related Note against Morgan Guaranty and as holder of the Related Note Guarantee against J.P. Morgan. J.P. Morgan, through its obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement and the Expense Agreement, taken together, will provide a full and unconditional guarantee, on a subordinated basis, of payments due on the ComPS. See "Description of the Guarantee" and "Description of the Related Note Guarantee". SPECIAL EVENT REDEMPTION Upon the occurrence of a Special Event, unless waived by Morgan Guaranty or subject to cure as specified herein, Morgan Guaranty shall have the right to redeem the Related Note, in whole or in part, in which event the Company will redeem the ComPS and related Common Securities on a pro rata basis to the same extent as the Principal Amount of the Related Note is redeemed by Morgan Guaranty. As described in more detail below, a Special Event is either (i) a Tax Event or (ii) an Investment Company Event. A Special Event may occur at any time. See "Description of the ComPS--Special Event Redemption". It is possible that the occurrence of a Special Event will cause the market price of the ComPS in any existing secondary market to decline. LIMITED VOTING RIGHTS Holders of ComPS will have limited voting rights relating to a payment default on or an adverse change to the ComPS, and will not be entitled to vote to appoint, remove or replace the Managing Members of the Company (J.P. Morgan and JPM Ventures), which voting rights are vested exclusively in the holders of the Common Securities. See "Description of the ComPS--Voting Rights". TRADING PRICE MAY NOT REFLECT ACTUAL ECONOMIC VALUE [The ComPS have been authorized for listing on the [ ] under the symbol "[ ]", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence S-10 11 within a 30-day period after the date of this Prospectus Supplement. [Prior to this offering there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the Underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] However, it is not possible to predict whether the necessary number of holders will purchase and, for the remaining term of the ComPS, continue to hold ComPS in order that any secondary market which does develop continues to exist. The Underwriters are not obligated to make a market for the ComPS, and although JPMSI, as lead Underwriter, intends to use its reasonable efforts to do so, it is possible that no active secondary market for the ComPS will develop and remain in existence. There can be no assurance as to the market prices for the ComPS in any secondary market which does develop. Accordingly, the ComPS that an investor may purchase, whether pursuant to the offer made hereby or in the secondary market, may trade at a discount to the price that the investor paid to purchase the ComPS offered hereby. VALUE OF THE COMPS The value of the ComPS at any time will depend upon the interaction of at least three key factors: (i) the level of the Applicable Index, (ii) the credit quality of Morgan Guaranty and J.P. Morgan and (iii) the interest rate environment. As discussed under "Description of the ComPS", adverse changes in the Applicable Index will directly correlate to adverse changes in the value of the ComPS. 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 the ComPS in any secondary market then existing to decline. NO RIGHT TO INTEREST ON RELATED NOTE Because holders of ComPS are essentially investing in a pro rata share of the Related Note, prospective purchasers of ComPS are also making an investment decision with regard to the Related Note and should carefully review all the information regarding the Related Note contained herein and in the accompanying Prospectus. However, investors in ComPS have no right to direct interest distributions on the Related Note. See "Description of the Related Note". IMPOSITION OF BANK REGULATORY RESTRICTIONS The Company's ability to make distributions and other payments on the ComPS is dependent upon Morgan Guaranty's making interest and other payments on the Related Note as and when required or collection by the Company under the Related Note Guarantee. As noted in the accompanying Prospectus under "J.P. Morgan & Co. Incorporated--Regulation", Morgan Guaranty is subject to examination and regulation by U.S. federal and state banking authorities, and although there is no current restriction on Morgan Guaranty's ability to make payments under the Related Note, certain transactions with affiliates, including the Company, are or may become subject to restrictions imposed in the future by bank regulatory authorities. EFFECT OF TRADING IN THE BENCHMARK ALUMINUM CONTRACTS AND RELATED COMMODITIES AND INSTRUMENTS Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively involved in the trading of the Benchmark Aluminum Contracts 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, one or more of the JPM Indices or to another commodity. Morgan Guaranty has licensed, and may in the future license, the Applicable Index, the JPM Indices, and related indices and sub-indices for use by affiliated and unaffiliated parties, for publication in newspapers and periodicals, for distribution by information and data dissemination services and for other S-11 12 purposes. Morgan Guaranty currently intends to publish individual commodity sub-indices for each of the commodities included in the JPMCI using the same calculation methodology as that described below. The Applicable Index on the date hereof is identical to the sub-index having the same underlying commodity. Trading in the foregoing contracts and commodities by Morgan Guaranty, its affiliates (including JPMSI) and unaffiliated third parties could adversely affect the value of the Applicable Index, which would in turn adversely affect the return on and the value of the ComPS. See "Description of the ComPS". Furthermore, additional issuances of securities linked or referenced to the Benchmark Aluminum Contracts, similar aluminum futures contracts or aluminum could adversely affect the value of the ComPS. POTENTIAL FOR ADVERSE INTERESTS As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in trading activities related to the Benchmark Aluminum Contracts and 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 Note issued to the Company, all such activities could create interests of Morgan Guaranty adverse to those of the holders of ComPS. For example, the issuance of other securities indexed to the Applicable Index, i.e., the introduction of competing products into the marketplace, could adversely affect the value of the ComPS. To the extent that J.P. Morgan or one of its affiliates serves as issuer, or JPMSI or one of its affiliates serves as agent or underwriter, for such securities or other instruments, their interests with respect to such products may be adverse to those of the holders of the ComPS. Morgan Guaranty will serve as Calculation Agent with respect to the ComPS and, accordingly, will in good faith calculate the Applicable Index, which could also raise certain adverse interests (for example, in instances where Morgan Guaranty as the Calculation Agent is required to exercise discretion). RISK OF CARRYING AND ROLLING BENCHMARK ALUMINUM CONTRACTS As discussed below, the Early Redemption Value and the Redemption Value of the ComPS will be calculated with reference to the Applicable Index, the value of which is designed to replicate to the extent provided herein the cumulative return of holding a continuous investment in the Benchmark Aluminum Contracts. At any given time, the Applicable Index will be calculated based on the change in value of certain Benchmark Aluminum Contracts for delivery in the near term (the "shorter-dated contracts"). The Applicable Index will continue to be calculated based on the change in value of such shorter-dated contracts until they approach maturity, at which time the Applicable Index will, as described below, cease to be calculated based on the change in value of such shorter-dated contracts and begin to be calculated based on the change in value of the subsequent Benchmark Aluminum Contracts (the "longer-dated contracts") on a regular periodic basis so as to be continuously indexed to the change in value of Benchmark Aluminum Contracts. The period during which each such replacement of shorter-dated contracts with longer-dated contracts as the basis for the calculation of the change in value of the Applicable Index occurs is referred to herein as the "Rollover Period", as further defined below. If the market for Benchmark Aluminum Contracts is in "contango" (i.e., the prices of longer-dated contracts are above the prices of shorter-dated contracts), the return on the Applicable Index may be adversely affected. The Applicable Index would decline if (i) the price of the longer-dated Benchmark Aluminum Contracts during the Rollover Period were more than the price of the shorter-dated contracts which they will replace and (ii) the price of the longer-dated contracts were to decline as such contracts approach maturity (i.e., the price of the longer-dated contracts were to converge toward the price of the replaced shorter-dated contracts). While many of the commodities included in the JPM Indices have historically exhibited periods of both "backwardation" (i.e., the prices of longer-dated contracts are below the prices of shorter-dated contracts) and contango, there can be no assurance that backwardation will exist at any or all times. The absence of backwardation in the market for Benchmark Aluminum Contracts could adversely affect the Applicable Index and, correspondingly, could adversely affect the value of the ComPS. Additionally, the issuance and/or the trading of the ComPS could adversely affect the market for Benchmark Aluminum S-12 13 Contracts and the extent to which such markets are in backwardation or contango and, correspondingly, could adversely affect the value of the Applicable Index and the value of the ComPS. See "Description of ComPS--Calculation of Redemption Value". The following table sets forth the simulated month-end level of the JPMCI Aluminum Excess Return Index (the Applicable Index) for the months from January, 1986 through January, 1996, and the actual level of the JPMCI Aluminum Excess Return Index thereafter. Because Morgan Guaranty did not commence actual calculation and publication of the JPMCI Aluminum Excess Return Index using the rules described herein until February 1, 1996, the levels prior to such date are simulated levels only, derived by applying the rules of the JPMCI Aluminum Excess Return Index as described herein to historical aluminum contract settlement values and using as a given the level of the previous JPMCI Aluminum Excess Return Index on January 31, 1996, as the basis for calculation: LEVEL OF THE APPLICABLE INDEX AS OF THE END OF:
YEAR JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ 1986 120.66 119.38 122.98 118.54 119.11 120.95 117.12 117.40 122.36 119.78 117.16 119.54 1987 123.04 133.46 135.89 141.28 144.69 149.28 167.84 180.74 200.23 190.48 176.48 210.78 1988 203.14 249.21 306.25 273.71 398.50 396.49 401.27 419.79 333.89 367.03 364.73 391.40 1989 355.43 350.61 314.72 357.74 325.51 311.85 296.95 311.45 301.97 306.98 303.60 289.62 1990 248.03 265.21 282.13 267.15 277.24 275.49 302.02 327.22 329.25 328.03 265.25 266.28 1991 253.26 265.25 242.98 227.44 209.21 219.36 209.32 205.44 187.47 186.67 176.32 177.88 1992 193.04 204.36 203.01 204.19 202.49 199.09 201.52 198.90 190.65 173.72 181.45 186.21 1993 180.35 176.98 166.16 163.13 163.42 177.05 171.18 163.15 155.61 147.24 146.08 153.48 1994 166.37 175.51 174.32 172.38 179.06 194.36 192.43 199.00 207.86 232.30 247.50 251.30 1995 269.87 224.12 233.24 223.80 227.34 223.38 231.06 220.12 215.78 203.80 200.88 186.76 1996 188.76 188.24 194.58 187.80
Additionally, the level of the Applicable Index as of the close of business on [the date of pricing] was [ ]. S-13 14 The following is a graph of such simulated and actual month-end values: LEVELS OF JPMCI ALUMINUM EXCESS RETURN INDEX, 1986-1996 [GRAPHIC OMITTED] Source: Morgan Guaranty Using the month-end levels noted above as hypothetical Applicable Index Settlement Values, the hypothetical Redemption Value of a ComPS as if maturing at the end of each of the past ten years for a ComPS priced on December 31, 1986, with a hypothetical Face Amount of $40.00 and an Applicable Index Commencement Value of 119.54 would be as follows:
HYPOTHETICAL APPLICABLE INDEX YEAR SETTLEMENT VALUE HYPOTHETICAL REDEMPTION VALUE ---------------- ----------------------------- ----------------------------- 1986............ 119.54 $ 40.00 1987............ 210.78 $ 70.53 1988............ 391.40 $130.97 1989............ 289.62 $ 96.91 1990............ 266.28 $ 89.10 1991............ 177.88 $ 59.52 1992............ 186.21 $ 62.31 1993............ 153.48 $ 51.36 1994............ 251.30 $ 84.09 1995............ 186.76 $ 62.49
VOLATILITY OF ALUMINUM AND ALUMINUM FUTURES PRICES Market prices for aluminum can fluctuate widely and are affected by numerous factors, with the two principal factors being the level of economic activity in the main consuming markets and the rate of supply of new metal from producers. Other factors influencing market prices for aluminum include disruptions in S-14 15 aluminum output, the level of metal exports from the former Soviet Union, producer cut-backs and speculative activity. Production of aluminum is a three-stage process beginning with the mining of bauxite. The mining of bauxite occurs mainly in the tropics, with the major producing regions being the Caribbean, South America, Africa, Southeast Asia and Australia. Fluctuation in the supplies of bauxite or social or political disruptions in the major producing regions could affect the level of the Applicable Index. The production of aluminum from alumina is a power-intensive process and a continuous supply of electrical power is essential. A significant proportion of aluminum production capacity is located close to resources of hydroelectric power. Other economical energy sources for producing aluminum include lowgrade coal and waste gases from oil production. However, disruptions in the supply of energy to aluminum producers or an increase in the cost thereof could affect the level of the Applicable Index. Furthermore, a significant proportion of western world aluminum production capacity is controlled by a small number of companies, and such producers have in the recent past implemented temporary curtailments of output. Such efforts at supply curtailment (and the cessation thereof) could affect the value of the Applicable Index. Aluminum's major end-uses include applications in the transportation, construction, packaging and electrical industries. Potential for substitution exists in all areas, although considerations including relative weight and cost often limit substitution levels. However, the development of a substitute product could adversely affect the value of the Applicable Index. The supply of and demand for aluminum influence the aluminum price in the medium to longer term. However, in the short term price may experience rapid changes due to the influence of speculative activity in markets. All such volatility in the Benchmark Aluminum Contracts will correlate directly to volatility in the Applicable Index. Such volatility could lead some investors in the Benchmark Aluminum Contracts to withdraw from the applicable futures markets, which could adversely affect the liquidity of such markets and could adversely affect the value of the Applicable Index and, correspondingly, the value of the ComPS. EFFECT OF ADVERSE CHANGES IN COMMODITY PRICES The Applicable Index is designed to replicate to the extent provided herein the cumulative return of holding a continuous investment in the Benchmark Aluminum Contracts over time. In the event of sudden disruptions in the supplies of aluminum, such as those caused by war, accidents, weather, or acts of terrorism, prices of Benchmark Aluminum Contracts, and, consequently, the value of the Applicable Index, could become extremely volatile and unpredictable. Also, sudden and dramatic declines in Benchmark Aluminum Contract prices as may occur, for example, upon a cessation of hostilities that may exist in countries producing aluminum or upon the discovery of significant additional sources or reserves of the raw materials necessary to produce aluminum (e.g., bauxite or electricity), the introduction of new or previously withheld supplies into the market (e.g., aluminum from the former Soviet Union) or the introduction of substitute products or commodities, could have a significant adverse effect on the value of the Applicable Index and on the value of the ComPS. In addition, the price of aluminum has on occasion been subject to very rapid short-term changes due to speculative activities which, if such activities result in a price decrease, may cause the value of the ComPS to decrease. See "Description of the ComPS--Calculation of Redemption Value". SUSPENSION OR MATERIAL DISRUPTION OF FUTURES OR COMMODITIES TRADING; TEMPORARY DISTORTIONS The futures markets and the markets for aluminum are subject to temporary distortions or other disruptions due to conditions of illiquidity in the markets, the participation of speculators, government regulation and intervention and the other factors referred to in the preceding paragraph. In addition,the London Metals Exchange (the "LME") has the authority to limit trading when required in its discretion, and has in the past exercised such authority to limit the spread at which a futures contract can trade based on the cash contract (or the difference between adjacent contracts) for the same commodity. Although the LME has not imposed absolute price limits to date, many U.S. futures exchanges set and enforce a maximum or minimum price at which a contract may trade on any given day (such price, a "limit price"). In a particular futures contract, once the limit price has been reached in such a contract, no trades may be S-15 16 made on that day at a price above or below the limit price, as the case may be. Limit prices may have the effect of precluding trading in a particular contract for all or a portion of a trading day or forcing the liquidation of contracts at disadvantageous times or prices. Any such circumstances, particularly if they occur during the Rollover Period for the Applicable Index or during an Early Determination Period or the Determination Period (each as defined herein) for the Applicable Index, could adversely affect the value of the Applicable Index and/or could constitute a Market Disruption Event (as defined below) and, therefore, could adversely affect the value of the ComPS. Depending on the period of time over which a Market Disruption Event continues, the correlation between changes in the value of the Applicable Index and changes in the general level of prices of aluminum may be adversely affected. Under such circumstances, the value of the Applicable Index, and the value of the ComPS, may be adversely affected. Additionally, because application has been made to list the ComPS on the NYSE and, if listed, the ComPS will trade as equity securities on the NYSE, trading in the ComPS may be subject to interruption or delay due to extreme volatility in the trading prices of equity securities generally on the NYSE (the so-called "circuit breaker" rules), notwithstanding the specific price movements of the ComPS. MARKET DISRUPTION EVENTS In the event of a Market Disruption Event during the Determination Period, the Early Redemption Value or Redemption Value, as applicable, payable in respect of the ComPS will be calculated using the Applicable Index on the day or days on which open-outcry trading on either the New York Mercantile Exchange (the "NYMEX") or the LME is scheduled to occur or occurs (each, a "Trading Day") immediately following the termination of such Market Disruption Event. However, if such Market Disruption Event remains in effect for longer than 20 consecutive Trading Days and, in the reasonable judgment of Morgan Guaranty, such Market Disruption Event is likely to remain in effect, then the Applicable Index Settlement Value for each Trading Day subject to a Market Disruption Event may be determined in good faith by Morgan Guaranty based on alternative pricing sources reasonably believed by it to be indicative of then-prevailing prices for notional transactions in futures contracts or commodities equal in size to the Applicable Index Settlement Value, although Morgan Guaranty has no obligation to do so, and such value will be utilized in the calculation of the Redemption Value for such days. Because Morgan Guaranty's obligations under the 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 Aluminum Excess Return Index and the spot prices of aluminum have shown some positive correlation with inflation and some negative correlation with stock and bond returns (in each case in the United States), there can be no assurance that such correlations will prevail in the future. As a result, investors who invest in ComPS in reliance on these correlations should individually assess the likelihood of such correlations continuing. CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS THEREOF Prices of commodities and commodity futures contracts may be adversely affected by the promulgation of new laws or regulations or by the reinterpretation of existing laws or regulations (including, without limitation, those relating to taxes and duties on commodities or commodity components) by one or more governments, governmental agencies or instrumentalities, courts or other official bodies. Any such event could adversely affect the value of the Applicable Index and, correspondingly, could adversely affect the value of the ComPS. Additionally, the occurrence of certain events increasing the cost of holding or trading the Benchmark Aluminum Contracts and the inability to find a suitable replacement Benchmark Aluminum Contract could lead Morgan Guaranty to cause the Applicable Index Settlement Value to be fixed, in which event the Redemption Value of the ComPS would not vary through Stated Maturity. S-16 17 EXTENSION OF SETTLEMENT DATE OR STATED MATURITY If any Benchmark Aluminum Contract were to be affected by a Market Disruption Event during any Early Determination Period or the Determination Period, the applicable Settlement Date would be postponed until the later of (i) the applicable Early Redemption Date or the Stated Maturity and (ii) the fifth Business Day after the last day of the applicable Early Determination Period or the Determination Period. Such delay could be of indefinite duration, during which time a holder of ComPS will not receive the Early Redemption Value or Redemption Value thereof, as applicable. In the event that payment of the Redemption Value is postponed beyond the Stated Maturity, interest will accrue on the Face Amount in the manner described under the caption "Description of the ComPS--Calculation of Redemption Value", but no dividends will be payable after Stated Maturity. In the event payment of the Early Redemption Value is postponed beyond the applicable Early Redemption Date, no dividends will be payable, and no interest will accrue and be payable, with respect to ComPS redeemed on such Early Redemption Date. DISCONTINUANCE OF PUBLISHING OF THE JPMCI ALUMINUM EXCESS RETURN 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 during the remaining term of the ComPS, based on the methodology described in the accompanying Prospectus under "Description of the ComPS". However, such good-faith calculation may result in a ComPS Redemption Price or ComPS Early Redemption Price for the ComPS which is less than the ComPS Redemption Price or ComPS Early Redemption Price, as applicable, for such ComPS had it been calculated on the basis of the 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 under "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value", if any Benchmark Aluminum Contract becomes less liquid or representative, the JPMCI Policy Committee could recommend a replacement Benchmark Aluminum Contract. Such a change from a less liquid to a more liquid contract may result in a lower Early Redemption Value or Redemption Value for the ComPS than would have been the case if the less liquid contract had remained the benchmark. If at any time no replacement contracts can be found to serve as a Benchmark Aluminum Contract, the Applicable Index Settlement Value of the ComPS will be determined at such time as described under the caption "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value". Such an early determination of the Applicable Index Settlement Value may result in the holders of the ComPS receiving an amount that is less than what indicative commodity and futures prices prevailing on any Early Redemption Date or at the Stated Maturity would otherwise imply. Because Morgan Guaranty will be the Calculation Agent, such early determination may raise adverse interests. Additionally, if at any time any Benchmark Aluminum Contract, or the trading thereof, becomes subject to any increased cost or additional tax, Morgan Guaranty reserves the right to designate a replacement Benchmark Aluminum Contract or, if no such contract is designated, to cause, at its option, the Applicable Index Settlement Value of the ComPS to be determined at such time as described under "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value". Because Morgan Guaranty will, at the time any Benchmark Aluminum Contract becomes subject to such increased cost or additional tax, in its discretion decide whether or not to cause an early determination of the Applicable Index Settlement Value of the ComPS, exercise of such option may raise an adverse interest. Such a change in contracts due to the imposition of any increased cost or additional tax may result in a lower Redemption Value for such ComPS than would have been the case if the contract on which such increased cost or additional tax were imposed had remained a Benchmark Aluminum Contract. Any early determination of the Applicable Index Settlement Value may cause the market price of ComPS in any existing secondary market to decline. S-17 18 EARLY REDEMPTION The ComPS may be redeemed prior to their Stated Maturity upon the occurrence of a Special Event or redeemed at the option of the holders thereof on each Optional Redemption Date. In the case of a redemption upon the occurrence of a Special Event, the Early Redemption Value paid by the Company at such time may be significantly less than the Redemption Value that would otherwise have been payable had the ComPS not been redeemed prior to their Stated Maturity and the occurrence of such Special Event may cause the market price of ComPS in any existing secondary market to decline. In the case of an optional redemption by holders, it is likely, under usually-prevailing market conditions, that the Early Redemption Value paid by the Company will be less than the amount such holder could have realized by selling such ComPS in an existing secondary market, if any, ratably during the Early Determination Period. Delay in payment of the ComPS Early Redemption Price (as a result of a Market Disruption Event or a delay in the provision by DTC to the Company of the Applicable Notice (as defined below)) will not entitle holders of ComPS to additional dividends on the ComPS or the accrual of any interest on such ComPS Early Redemption Price. CERTAIN CONSIDERATIONS REGARDING HEDGING Prospective purchasers of the ComPS who intend to hedge against the risks associated with the market for aluminum should recognize the complexities of utilizing the ComPS in this manner. The formula under which the Principal Amount is calculated is not guaranteed to produce distributions to holders having readily definable relationships with other aluminum market instruments and products. As described below, because the Applicable Index is an Excess Return Index, the value of the ComPS will reflect not only the price of the Benchmark Aluminum Contracts but also the state of the futures market for Benchmark Aluminum Contracts (i.e., whether such market is in "backwardation" or "contango" over time, as discussed above). Also, under certain circumstances, amounts payable on the ComPS may be based on the good faith determination of Morgan Guaranty and not on the Applicable Index. For these reasons, investors should be cautious in using the ComPS in a hedging program. The risks associated with utilizing the ComPS in a hedging program may be magnified in periods of substantial aluminum price volatility, since properly correlating the ComPS either as a hedge of other assets or correlating the ComPS to a hedge thereof may become more difficult. Also, investing in ComPS should not be considered a complete investment program. UNCERTAIN UNITED STATES FEDERAL INCOME TAX CHARACTERIZATION OF COMPS As discussed below, assuming that the Company will be classified for U.S. Federal income tax purposes as a partnership, each holder of ComPS will be required to include in its gross income its distributive share of any item of income or gain realized by the Company. Morgan Guaranty and the Company initially intend to treat the Related Note as a contingent debt instrument, but in light of the absence of direct authority on the proper characterization of the Related Note and the proper consequences of a contingent debt instrument, the Internal Revenue Service may apply, and may require Morgan Guaranty, the Company and/or the holders of ComPS to apply, a different characterization or consequences. Such alternate characterization or consequences may be materially less favorable for holders of ComPS for United States federal income tax purposes than the characterization and consequences to be applied initially by Morgan Guaranty and the Company. See "United States Federal Income Taxation" below. J.P. MORGAN & CO. INCORPORATED J.P. Morgan, whose origins date to a merchant banking firm founded in London in 1838, is the holding company for a group of global subsidiaries that provide a wide range of financial services to corporations, governments, financial institutions, institutional investors, professional firms, privately held companies, nonprofit organizations, and financially sophisticated individuals. J.P. Morgan's activities are summarized in the accompanying Prospectus. S-18 19 J.P. MORGAN INDEX FUNDING COMPANY, LLC J.P. Morgan Index Funding Company, LLC, is a Delaware limited liability company formed pursuant to (i) the filing of a certificate of formation with the Secretary of State of the State of Delaware on November 21, 1995 and (ii) the amended and restated limited liability company agreement, dated May 15, 1996, and effective as of November 21, 1995 (the "LLC Agreement"), filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. J.P. Morgan will directly or indirectly acquire all Common Securities of the Company. The Company exists for the exclusive purposes of (i) issuing the ComPS and Common Securities, and from time to time issuing additional series of preferred and common securities, (ii) investing the gross proceeds of the ComPS and Common Securities in the Related Note, and investing the proceeds of such additional issuances of preferred and common securities in other debt obligations of Morgan Guaranty, and (iii) engaging in only those other activities necessary or incidental thereto. Pursuant to the LLC Agreement, the Common Securities will initially be owned by J.P. Morgan and by J.P. Morgan Ventures Corporation, a Delaware corporation and a wholly-owned subsidiary of J.P. Morgan ("JPM Ventures"). J.P. Morgan and JPM Ventures will be the Managing Members of the Company (as defined in the LLC Agreement). The LLC Agreement and the Agreement as to Expenses and Liabilities, dated as of [ ], 1996, between J.P. Morgan and the Company (the Expense Agreement"), provide that J.P. Morgan will pay for all debts and obligations (other than with respect to the ComPS to the extent set forth herein) and all costs and expenses of the Company, including any taxes and all costs and expenses with respect thereto, to which the Company may become subject. The Company and J.P. Morgan have agreed that any person to whom such debts, obligations, costs and expenses are owed will have the right to enforce J.P. Morgan's obligations in respect of such debts, obligations, costs and expenses directly against J.P. Morgan without first proceeding against the Company. The rights of the holders of the ComPS, including economic rights, rights to information and voting rights, are set forth in the LLC Agreement. See "Description of the ComPS". USE OF PROCEEDS The Company will invest the proceeds from the sale of the ComPS offered hereby and the related Common Securities in a Related Note of Morgan Guaranty, the proceeds of which will be used by Morgan Guaranty for general corporate purposes and for hedging its obligations under the Related Note. At the time of the pricing of the ComPS, Morgan Guaranty hedged its anticipated exposure under the Related Note and, subject to market conditions, Morgan Guaranty expects that it will continue to hedge its exposure under the Related Note from time to time following this offering of ComPS by taking long or short positions in the Benchmark Aluminum Contracts or in listed or over-the-counter options contracts in, or other derivative or synthetic instruments related to, several or all of the Benchmark Aluminum Contracts. There can be no assurance that Morgan Guaranty's initial hedging did not, and that its continued hedging will not, affect the price of the Benchmark Aluminum Contracts (and, as a result, the Initial Price and the subsequent value of the ComPS). In addition, J.P. Morgan and its affiliates may from time to time purchase or otherwise acquire a long or short position in the ComPS and may, in their sole discretion, hold or resell such ComPS. Morgan Guaranty may also take positions in other types of appropriate financial instruments that may become available in the future. To the extent Morgan Guaranty has a long hedge position in several or all of the Benchmark Aluminum Contracts or options contracts in, or other derivative or synthetic instruments related to, several or all of the Benchmark Aluminum Contracts, Morgan Guaranty may liquidate a portion or all of its holdings, as applicable, at or about the time of any Early Redemption Date or the Stated Maturity of the Related Note (which correspond to the Early Redemption Dates and the Stated Maturity of the ComPS). Depending on, among other things, future market conditions, the aggregate amount and the composition of those positions are likely to vary S-19 20 over time. Profits or losses from any such position cannot be ascertained until that position is closed out and any offsetting position or positions are taken into account. However, none of the contracts or securities acquired in connection with any hedging activity will be held for the benefit of holders of ComPS. DESCRIPTION OF THE ComPS The ComPS will be issued pursuant to the LLC Agreement. The following summary of the principal terms and provisions of the ComPS does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement constitutes a part and the LLC Agreement, a copy of which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. GENERAL The Principal Amount of each of the ComPS, which is initially equal to the Face Amount, will vary over the life of the ComPS in relation to the JPMCI Aluminum Excess Return Index (the "Applicable Index"). As described herein, the Applicable Index will change based on the daily percentage change in value of the Benchmark Aluminum Contracts. The Principal Amount repayable on any Early Redemption Date, upon the occurrence of any Special Event Redemption or at Stated Maturity will be determined, pursuant to the terms described herein (including, without limitation, the averaging of the Applicable Index over the Early Determination Period or the Determination Period, as applicable, and the present-valuing of the dividends and Principal Amount in connection with redemptions prior to Stated Maturity), by comparing the level of the JPMCI Aluminum Excess Return Index set on the date of issuance of the ComPS with the level determined pursuant to the terms hereof for any such date of redemption. The LLC Agreement authorizes the Company to issue Preferred and Common Securities. All of the Common Securities will be owned, directly or indirectly, by J.P. Morgan. Payments of interest on and redemptions of principal of the ComPS and the related Common Securities will be made on a pro rata basis among the ComPS and the related Common Securities, except that upon the occurrence of a liquidation, termination or winding up of the Company, the rights of the holders of the Common Securities to receive payment of periodic dividends and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of all Preferred Securities of the Company. The Guarantee does not permit the incurrence of any indebtedness by the Company (other than any preferred securities thereof) while any Preferred Securities are outstanding. The payment of distributions out of money held by the Company, and payments upon liquidation, termination or winding-up of the Company, are guaranteed by J.P. Morgan to the extent described under "Description of the Guarantee". The Guarantee does not cover payment of distributions when Morgan Guaranty has not made payment of principal or interest, as applicable, on the Related Note. In such event, the remedy of a holder of ComPS is to direct the Company to enforce its rights under the Related Note and the Related Note Guarantee with respect to such Related Note. See "-- Voting Rights" and "Effect of Obligations Under the Guarantee, the Related Note Guarantee and the Related Note". DIVIDENDS Dividends on the ComPS will be fixed at a rate per annum of [ ]% of the Face Amount of $[40] per Preferred Security. The amount of dividends payable for any period will be computed on the basis of a 360-day year of twelve 30-day months (and actual days elapsed, in the case of periods of less than a month) and will include the first day but exclude the last day of such period. Dividends on the ComPS will be cumulative, will accrue from and including the Issue Date and will be payable monthly in arrears on the last calendar day of each month, commencing [ ], 1996, when, as and if available for payment. Dividends on the ComPS will be payable to the holders thereof as they appear on the books and records of the Company on the relevant record dates, which, as long as the ComPS remain in book-entry only form, S-20 21 will be one Business Day prior to the relevant payment dates. Subject to any applicable laws and regulations and the provisions of the LLC Agreement, each such payment will be made as described under "-- Book-Entry Only Issuance -- The Depository Trust Company". In the event that the ComPS do not continue to remain in book-entry only form, the Company shall have the right to select relevant record dates, which shall be at least one Business Day prior to the relevant payment dates. In the event that any date on which dividends are to be made on the ComPS is not a Business Day, then payment of the dividends payable on such date will be made on the next succeeding Business Day with the same force and effect as if made on such date and no interest on such distributions will accrue from and after such date, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. A "Business Day" shall mean any day other than Saturday, Sunday or any other day on which banking institutions in The City of New York, New York are permitted or required by any applicable law to close. The payment of dividends on the ComPS out of moneys held by the Company is guaranteed by J.P. Morgan on a subordinated basis as and to the extent set forth under "Description of the Guarantee". The Guarantee is effective from the time of issuance of the ComPS, but the Guarantee covers dividends and other payments on the ComPS only if and to the extent that Morgan Guaranty has made a payment to the Company of interest or principal on the Related Note, as the case may be. REDEMPTION AT STATED MATURITY Unless previously redeemed pursuant to the optional or special redemption provisions and subject to extension in the case of a Market Disruption Event (as defined below), each of the outstanding ComPS will be redeemed by the Company, in cash, on the Stated Maturity, at the ComPS Redemption Price. The ComPS Redemption Price is the sum of (a) the Redemption Value per Preferred Security plus (b) accrued but unpaid dividends on such ComPS to but excluding the date of redemption. CALCULATION OF REDEMPTION VALUE The Principal Amount of each Preferred Security is indexed to the JPMCI Aluminum Excess Return Index (the "Applicable Index"), which is calculated based on the change in value of certain aluminum futures contracts included from time to time in the JPM Indices (such contracts, from time to time, the "Benchmark Aluminum Contracts"). On the date of this Prospectus Supplement, the Benchmark Aluminum Contract is the LME High Grade Primary Aluminum contract. Subject to the more complete definitions and formulae contained in the accompanying Prospectus, the Principal Amount of each Preferred Security payable at Stated Maturity, subject to extension in the case of a Market Disruption Event (the "Redemption Value"), shall be determined by multiplying the Face Amount of each Preferred Security by a fraction, the numerator of which is the Applicable Index Settlement Value and the denominator of which is the Applicable Index Commencement Value. For purposes of this Prospectus Supplement, the "Applicable Index Settlement Value" means the arithmetic average of the daily values of the Applicable Index for each day of the Determination Period (the period of ten consecutive Trading Days on which no Market Disruption Event occurs commencing immediately following the twentieth scheduled Business Day prior to Stated Maturity), and the "Applicable Index Commencement Value" means [ ]. The ComPS Redemption Price will first be payable on the later of the Stated Maturity and the fifth Business Day after the completion of the Determination Period. For a complete description and definition of an Excess Return Index, see "Description of ComPS -- Calculation of Redemption Value" and "The JPM Indices -- Excess Return Methodology" in the accompanying Prospectus. As defined in the accompanying Prospectus under "Description of ComPS -- Market Disruption Events", a Market Disruption Event, as determined by Morgan Guaranty, is the occurrence of one or more of the following on any Trading Day with respect to any Benchmark Aluminum Contract underlying the Applicable Index, or an exchange on which any Benchmark Aluminum Contract is traded (a "Relevant Exchange"): (a) a day on which the fluctuation of the price of any Benchmark S-21 22 Aluminum Contract underlying the Applicable Index is materially limited by the rules of a Relevant Exchange setting the maximum or minimum price for such day (a "Limit Price"); (b) a day on which the official settlement price on the relevant exchange (the "Settlement Price") is the Limit Price; (c) the failure of a Relevant Exchange to determine, announce or publish the Settlement Price with respect to a Benchmark Aluminum Contract underlying the Applicable Index; (d) the material suspension of trading in any Benchmark Aluminum Contract underlying the Applicable Index on a Relevant Exchange; (e) the failure of trading to commence, or the permanent discontinuation of trading, in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange and (f) the imposition of any material limitation on trading in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange. EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE Morgan Guaranty reserves the right at its discretion to make any modifications to the JPM Indices based on the recommendations of the JPMCI Policy Committee. As discussed in the accompanying Prospectus, the JPMCI Policy Committee advises Morgan Guaranty with respect to, among other things, the composition of the JPM Indices, the price sources upon which the JPM Indices are based (i.e., the underlying futures contracts, including the Benchmark Aluminum Contracts), and the weightings and calculation methodology of the JPM Indices, with a view toward maintaining the JPM Indices as appropriate commodity investment benchmarks that serve as a measure of performance of the commodity markets. The inclusion requirements for the futures contracts underlying the JPM Indices require that such futures contracts be sufficiently liquid and representative price sources. It is possible, however, that any such underlying contract could become less liquid or representative and, as a result, the JPMCI Policy Committee may recommend a modification in the calculation methodology or the contracts underlying the JPM Indices and, therefore, the Applicable Index. Any such replacement contract (i) will be required to satisfy the JPMCI Inclusion Criteria, as described in the accompanying Prospectus under the caption "The JPMCI Policy Committee", (ii) must be traded in a market or with a self-regulator which has established either (a) a comprehensive information sharing agreement with the exchange, if any, on which the ComPS are then traded or (b) suitable alternative arrangements with the Commission and (iii) will be with respect to the same general commodity type as the contract being replaced (e.g., assuming the JPMCI Policy Committee recommends a modification and assuming the requirements of clauses (i) and (ii) are satisfied, a NYMEX crude oil futures contract 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., an aluminum futures contract may not be replaced by a gold futures contract). If at any time no contract satisfying both clauses (i) and (ii) of the previous paragraph can be found to serve as a Benchmark Aluminum Contract, the Applicable Index Settlement Value of the ComPS will be determined at such time (in accordance with the methodology set forth above under the caption "Description of the ComPS--Calculation of Redemption Value") as if the last date of the inclusion of the final Benchmark Aluminum Contract in the JPM Indices were the Stated Maturity. However, the ComPS will not be redeemed on such date; rather, the ComPS will remain outstanding to Stated Maturity, will continue to be entitled to dividends and will be redeemed at Stated Maturity for a Redemption Value calculated using the Applicable Index Settlement Value determined at such time as no contract satisfying clauses (i) and (ii) of the previous paragraph was able to be found. Such ComPS will also be subject to redemption upon the occurrence of a Special Event and optional redemption on each Optional Redemption Date (treating the Applicable Index Settlement Value determined pursuant to the terms of this paragraph as the Applicable Index Early Settlement Value for any Early Redemption Date). Additionally, if at any time any Benchmark Aluminum Contract, or the trading thereof, becomes subject to any increased cost or additional tax, whether imposed by any exchange or otherwise, Morgan Guaranty reserves the right to (x) designate a replacement Benchmark Aluminum Contract, satisfying both clauses (i) and (ii) of the second preceding paragraph, which contract is subject to an amount of cost or tax less than or equal to such increased amount or (y) if no contract satisfying clause (x) of this paragraph is designated by Morgan Guaranty, to cause, at its option, the Applicable Index Settlement Value of the S-22 23 ComPS to be determined at such time (in accordance with the methodology set forth above) as if the date of such increase in cost or tax (or, in Morgan Guaranty's discretion, the last calendar day of the month in which the determination of the Applicable Index Settlement Value is completed) were the Stated Maturity. However, the ComPS will not be redeemed at such time; rather, the ComPS will remain outstanding to Stated Maturity, will continue to be entitled to dividends and will be redeemed at Stated Maturity for a Redemption Value calculated using the Applicable Index Settlement Value determined pursuant to the terms of this paragraph. Such ComPS will also be subject to redemption upon the occurrence of a Special Event and optional redemption on each Optional Redemption Date (treating the Applicable Index Settlement Value determined pursuant to the terms of this paragraph as the Applicable Index Early Settlement Value for any Early Redemption Date) 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. See "Risk Factors -- Potential Modification to the JPM Indices and/or the Applicable Index". OPTIONAL REDEMPTION The ComPS will be subject to redemption prior to their Stated Maturity at the election of the holders thereof on each [ ] prior to the Stated Maturity, beginning [ ], 1997 (each, an "Optional Redemption Date"). In order to effect an Optional Redemption, any such redeeming holder will be required to provide notice of the number of ComPS shares to be redeemed on such Early Redemption Date to a Participant or Direct Participant in DTC, and such Participant or Direct Participant must communicate such notice to DTC no earlier than 32 scheduled Business Days prior to but no later than 22 scheduled Business Days prior to the applicable Early Redemption Date. The DTC will then provide notice to the Company or its Transfer Agent of the total number of ComPS shares to be redeemed on the Optional Redemption Date (the "Applicable Notice"). Each Applicable Notice will be provided by DTC to the Company by 12:30 p.m. New York time on the Business Day next succeeding the last day of the applicable notice period. Each Applicable Notice will be irrevocable upon receipt by the Company or its Transfer Agent, and may not be withdrawn or modified after such receipt. Additionally, the Early Determination Period will not commence until the Company has received the Applicable Notice and the applicable Optional Redemption Date will be subject to extension in the case of a Market Disruption Event. The redeeming holders will be entitled to the ComPS Early Redemption Price for each Preferred Security redeemed, which is equal to (a) the Early Redemption Value for such ComPS plus (b) accrued and unpaid dividends thereon to but excluding the scheduled Optional Redemption Date. The Early Redemption Value of such ComPS shall be determined in accordance with the formula specified in the Prospectus; provided that, for the purposes of this Prospectus Supplement, "unused costs" shall equal [ ]. See "-- Book Entry Issuance -- The Depository Trust Company" herein and "Description of ComPS -- Early Redemption Upon the Occurrence of a Special Event or at the Election of the Holders of the ComPS" in the Prospectus of which this Prospectus Supplement constitutes a part. SPECIAL EVENT REDEMPTION The ComPS will be subject to redemption by the Company prior to Stated Maturity, at its option, upon the occurrence of a Tax Event or an Investment Company Event (each, a "Special Event"), as discussed herein. "Tax Event" means that the Company shall have obtained an opinion of nationally recognized independent tax counsel experienced in such matters (a "Tax Opinion") to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any S-23 24 governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the date of this Prospectus Supplement, there is more than an insubstantial risk that at such time or within 90 days of the date thereof (i) the Company is or would be subject to United States Federal income tax with respect to income accrued or received on the Related Note, (ii) the interest payable on the Related Note is not, or would not be, deductible by Morgan Guaranty for United States Federal income tax purposes, (iii) the contingent principal in excess of the Face Amount, if any, payable on the Related Note is not, or would not be, deductible by Morgan Guaranty for United States Federal income tax purposes or (iv) the Company is or would be subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges. "Investment Company Event" means that the Company shall have received an opinion of a nationally recognized independent counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation, a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority or the expiration or revocation of any exemption from any provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), obtained by the Company (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Company is or will be considered an "investment company" that is required to be registered as such under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the date of this Prospectus Supplement. If at any time a Tax Event or an Investment Company Event shall occur and be continuing, J.P. Morgan shall elect to either: (a) direct Morgan Guaranty to redeem the Related Note in whole or in part, upon not less than 22 scheduled Business Days' notice to DTC, within 90 days following the occurrence of such Special Event, in which case the Company shall redeem in cash on a pro rata basis ComPS and related Common Securities having an aggregate Principal Amount equal to the Principal Amount of the Related Note so redeemed, at a price per Preferred Security of the Early Redemption Value, plus an amount equal to all accrued and unpaid dividends on such ComPS to but excluding such Early Redemption Date; provided, that Morgan Guaranty shall only be entitled to redeem the Related Note in part if such partial redemption is sufficient to cause such Special Event to cease; or (b) in the case of a Tax Event, allow the Related Note and the ComPS to remain outstanding and indemnify the Company for all taxes payable by it as a result of such Tax Event (if any); provided that, if at the time there is available to the Company the opportunity to eliminate, within such 90-day period, the Special Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure, that has no adverse effect on the Company, J.P. Morgan, Morgan Guaranty or the holders of ComPS, the Company will pursue such measure in lieu of redemption; provided further that Morgan Guaranty shall have no right to redeem the Related Note and J.P. Morgan shall have no right to direct the Company to redeem the ComPS while the Company is pursuing any such ministerial action or reasonable measure unless the Special Event shall not have been so eliminated by the 85th day following the occurrence thereof, in which case J.P. Morgan shall be permitted to direct Morgan Guaranty to provide notice to the Company of the redemption of the Related Note. Under current United States Federal income tax law, upon the occurrence of a Special Event, a redemption of ComPS, whether or not upon dissolution of the Company, would be a taxable event to such holders. See "United States Federal Income Taxation". REDEMPTION PROCEDURES In the case of a redemption by a holder of ComPS on an Optional Redemption Date, any such redeeming holder will be required to provide notice of the number of ComPS shares to be redeemed on such Optional Redemption Date to a Participant or Direct Participant in DTC, and such Participant or Direct Participant must communicate such notice to DTC no earlier than 32 scheduled Business Days prior to but S-24 25 no later than 22 scheduled Business Days prior to the applicable Optional Redemption Date. Following receipt by DTC of such notice, DTC will assign a new CUSIP number to ComPS with respect to which such notice has been given, and such ComPS will no longer be usable for settling trades with other DTC book-entry securities. In the case of a redemption of ComPS upon the occurrence of a Special Event, the Company will provide notice of such redemption to the Transfer Agent and to DTC on a date not less than 22 scheduled Business Days prior to such Early Redemption Date stating, among other things, the date of such redemption. The related Common Securities will be redeemed on a pro rata basis with the ComPS except that, in the case of any dissolution or liquidation in which the assets of the Company are insufficient to repay in full the Principal Amount of all Preferred Securities then outstanding, all Preferred Securities will be redeemed prior to the redemption of any Common Securities. ComPS registered in the name of and held by DTC (as defined herein) or its nominee will be redeemed in accordance with DTC's standard procedures. See "--Book-Entry Only Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, of the ComPS is conditioned upon delivery or book-entry transfer of such ComPS (together with necessary endorsements) to the Company at any time (whether prior to, on or after the relevant Redemption Date) after the required notice is given (to the extent such notice is required). See "--Book-Entry Only Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, for such ComPS will be made by the delivery of cash no later than the applicable Settlement Date with respect to such ComPS (subject to delay in the case of a Market Disruption Event) or, if later, the time of delivery or book-entry transfer of such ComPS. If the Company holds money sufficient to pay the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, of the ComPS on the applicable Settlement Date, then immediately at the close of business on such Settlement Date, such ComPS will cease to be outstanding and dividends with respect to such ComPS will cease to accrue, whether or not such ComPS are delivered to the Company, and all rights of the holder of such ComPS shall terminate and lapse, other than the right to receive the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, upon delivery of the ComPS. Provided that Morgan Guaranty has paid to the Company the required amount of cash due upon any redemption or at the maturity of the Related Note, the Company will irrevocably deposit with DTC no later than the close of business on the applicable Settlement Date funds sufficient to pay the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, payable with respect to ComPS on such date and will give the Depositary irrevocable instructions and authority to pay such amount to the holders of ComPS entitled thereto. See "--Book-Entry Only Issuance--The Depository Trust Company". In the event that any Settlement Date is not a Business Day, then payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, payable on such date will be made on the next succeeding Business Day with the same force and effect as if made on such date and no interest on such distributions will accrue from and after such date, except that, if such Business Day falls in the next calendar year such payment will be made on the immediately preceding Business Day. In the event that payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, is improperly withheld or refused and not paid by the Company or by J.P. Morgan pursuant to the Guarantee, dividends on such ComPS will continue to accrue from the original Redemption Date to the actual date of payment by the Company to DTC. The Company may not redeem fewer than all of the outstanding ComPS on any Redemption Date unless all accrued and unpaid dividends have been or are concurrently being paid on all ComPS for all monthly dividend periods terminating on or prior to the applicable Redemption Date. If a partial redemption as a result of a Special Event Redemption by Morgan Guaranty of a part or all of the Related Note would result in the delisting of the ComPS by any national securities exchange (or automated inter-dealer quotation system, including The Nasdaq Stock Market ("Nasdaq")) on which the ComPS are then listed, Morgan Guaranty may only redeem the Related Note in whole and, as a result, the Company may only redeem the ComPS in whole. S-25 26 Subject to the foregoing and to applicable law (including, without limitation, United States Federal securities laws), J.P. Morgan or its affiliates may, at any time and from time to time, purchase outstanding ComPS by tender, in the open market or by private agreement. LIQUIDATION DISTRIBUTION UPON DISSOLUTION In the event of any liquidation, dissolution, winding-up or termination of the Company (each, a "Liquidation Event"), whether voluntary or involuntary, the holders of ComPS on the date of such Liquidation Event will be entitled to be paid out of the assets of the Company the Liquidation Distribution. The "Liquidation Distribution" will be equal to (a) the Early Redemption Value with respect to such ComPS (treating the date of such distribution as the Early Redemption Date) plus (b) the amount of accrued and unpaid dividends on such ComPS to but excluding the date of payment. To the extent the assets of the Company are insufficient to repay all amounts due to holders of all Preferred Securities of the Company, holders of all Preferred Securities then outstanding (including the ComPS) will be entitled to a pro rata share of the assets of the Company, based upon the relative Principal Amounts of all Preferred Securities outstanding. In addition, in the event that the assets of the Company exceed the amount necessary to pay to all holders of ComPS the full amount of the Liquidation Distribution, such excess will be paid to the holders of Common Securities. Pursuant to the LLC Agreement, the legal existence of the Company shall terminate on November 21, 2105. VOTING RIGHTS Except as described herein and under "--Modification of the LLC Agreement", and as otherwise required by law and the LLC Agreement, the holders of the ComPS will have no voting rights. Pursuant to the provisions of the Guarantee, certain amendments to or modifications of the Guarantee may only be effected with the approval of a majority in aggregate Principal Amount at such time of the ComPS and all other affected Preferred Securities. See "Description of the Guarantee--Modification of the Guarantee". Pursuant to the provisions of the Related Note and the LLC Agreement, certain amendments to or modifications of the Related Note may only be effected with the approval of a majority in aggregate Principal Amount at such time of the ComPS. See "Description of the Related Note--Modification of the Related Note". Notwithstanding that holders of ComPS are entitled to vote or consent under any of the circumstances described above, any of the ComPS that are owned at such time by J.P. Morgan or any entity directly or indirectly controlling or controlled by, or under direct or indirect common control with, J.P. Morgan, shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if such ComPS were not outstanding. The procedures by which holders of ComPS may exercise their voting rights are described below under "--Book-Entry Only Issuance--The Depository Trust Company" and in the LLC Agreement. MODIFICATION OF THE LLC AGREEMENT The LLC Agreement may be amended or modified if approved by a written instrument executed by a majority in interest of the holders of Common Securities; provided that, if any proposed amendment provides for (i) any action that would adversely affect the powers, preferences or special rights of the ComPS or (ii) the dissolution, winding up or termination of the Company other than pursuant to the terms of the LLC Agreement, then the holders of all affected outstanding Preferred Securities (or, in the case of an event described in clause (ii), all Preferred Securities) of the Company voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of holders of not less than a majority in aggregate Principal Amount of S-26 27 all affected outstanding Preferred Securities (or, in the case of an event described in clause (ii), all Preferred Securities) of the Company affected thereby. The LLC Agreement further provides that it may be amended without the consent of the holders of the ComPS to (i) cure any ambiguity, (ii) correct or supplement any provision in the LLC Agreement that may be defective or inconsistent with any other provision of the LLC Agreement, (iii) add to the covenants, restrictions or obligations of J.P. Morgan, (iv) conform to changes in, or a change in interpretation or application of, certain requirements of the 1940 Act by the Commission and (v) conform to certain requirements of the Code with respect to the characterization of the Company as a partnership for U.S. Federal income tax purposes (including, without limitation, an alteration of the capitalization of the Company or the events causing dissolution of the Company) upon any such change, which amendment does not adversely affect the rights, preferences or privileges of the holders of the ComPS. LISTING [The ComPS have been authorized for listing on the [ ] under the symbol "[ ]", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement.] [Prior to this offering, there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] ACCOUNTING TREATMENT The financial statements of the Company will be included in the consolidated financial statements of J.P. Morgan, with the ComPS included on the balance sheet as "Long-term debt not qualifying as risk-based capital", with a footnote disclosing (1) that the Company is a wholly-owned subsidiary of J.P. Morgan, (2) that the sole assets of the Company are the Related Note and other similar notes, specifying the principal amount, interest rate and maturity of each and (3) that considered together, the Guarantee and the Related Note Guarantee and J.P. Morgan's obligations under the LLC Agreement and the Expense Agreement constitute a full and unconditional guarantee by J.P. Morgan with respect to the ComPS. MERGERS, CONSOLIDATIONS OR AMALGAMATIONS The Company may not consolidate, amalgamate, merge with or into or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other entity, except upon satisfaction of the conditions set forth in Section 2.8 of the LLC Agreement, which includes in certain circumstances approval of 2/3 of the outstanding Principal Amount of all Preferred Securities. In addition, so long as any ComPS are outstanding and are not held directly or indirectly entirely by J.P. Morgan, the Company may not voluntarily liquidate, dissolve, wind-up or terminate on or prior to the Stated Maturity. BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY The Depository Trust Company ("DTC") will act as securities depositary for the ComPS. The ComPS will be issued only as fully-registered securities registered in the name of Cede & Co. (DTC's nominee). One or more fully-registered global ComPS certificates, representing the total aggregate number of ComPS, will be issued and will be deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' S-27 28 accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, such as securities brokers and dealers, banks and trust companies that clear transactions through or maintain a direct or indirect custodial relationship with a Direct Participant either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Commission. Purchases of ComPS within the DTC system must be made by or through Direct Participants, which will receive a credit for the ComPS on DTC's records. The ownership interest of each actual purchaser of each Preferred Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchases, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owners purchased ComPS. Transfers of ownership interests in the ComPS are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the ComPS, except in the event that use of the book-entry system for the ComPS is discontinued. To facilitate subsequent transfers, all the ComPS deposited by Participants with DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of ComPS with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the ComPS. DTC's records reflect only the identity of the Direct Participants to whose accounts such ComPS are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements that may be in effect from time to time. In the case of a Special Event Redemption, redemption notices shall be sent to Cede & Co. If less than all of the ComPS are being redeemed, DTC will reduce the amount of the interest of each Direct Participant in such ComPS in accordance with its procedures. In the case of an Optional Redemption, redemption notices shall be provided by Beneficial Owners and Participants to DTC in accordance with its procedures. DTC will then provide the Applicable Notice to the Company or its Transfer Agent of the number of ComPS to be redeemed on the applicable Optional Redemption Date. The Applicable Notice will be irrevocable upon receipt by the Company or its Transfer Agent, and may not be withdrawn or modified after such receipt. Although voting with respect to the ComPS is limited, in those cases where a vote is required, neither DTC nor Cede & Co. will itself consent or vote with respect to ComPS. Under its usual procedures, DTC would mail an Omnibus Proxy to the Company as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. consenting or voting rights to those Direct Participants to whose accounts the ComPS are credited on the record date (identified in a listing attached to the Omnibus Proxy). J.P. Morgan and the Company believe that the arrangements among DTC, Direct and Indirect Participants and Beneficial Owners will enable the Beneficial Owners to exercise rights equivalent in substance to the rights that can be directly exercised by a holder of a limited liability company interest in the Company. Dividend payments on the ComPS will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payment date. Payments by participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name", and such payments will be the responsibility of such Participant and not of DTC, the Company or S-28 29 J.P. Morgan, subject to any statutory or regulatory requirements to the contrary that may be in effect from time to time. Payment of dividends to DTC is the responsibility of the Company, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depositary with respect to the ComPS at any time by giving reasonable notice to the Company. Under such circumstances, in the event that a successor securities depositary is not obtained, ComPS certificates are required to be printed and delivered. Additionally, the Company may decide to discontinue use of the system of book-entry transfers through DTC (or any successor depositary) with respect to the ComPS. In that event, certificates for the ComPS will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that J.P. Morgan believes to be reliable, but neither J.P. Morgan nor the Company takes responsibility for the accuracy thereof. GOVERNING LAW The LLC Agreement and the ComPS will be governed by and interpreted in accordance with the laws of the State of Delaware. DESCRIPTION OF THE RELATED NOTE Set forth below is a summary of the terms of the Related Note in which the Company will invest the proceeds from the issuance and sale of the ComPS and the related Common Securities. The following description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement is a part and the Related Note, the form of which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms are used herein as defined in the Related Note. GENERAL The Related Note will be issued as an unsecured, unsubordinated obligation of Morgan Guaranty, limited in initial principal amount to approximately $[ ] , such amount being the sum of the aggregate Initial Public Offering Price shown on the cover page hereof for the ComPS and the related Common Securities issued in connection therewith. The Related Note is not subject to a sinking fund provision. The entire Principal Amount of the Related Note will mature and become due and payable, together with any accrued and unpaid interest thereon, if any, on the Stated Maturity (subject to extension in the case of a Market Disruption Event), subject to the prior redemption of the Related Note in whole or in part at the option of the holders of ComPS or in certain circumstances upon the occurrence of a Special Event. If Morgan Guaranty redeems the Related Note in whole or in part, the Company must redeem on a pro rata basis ComPS and related Common Securities having an aggregate Principal Amount equal to the Principal Amount of the Related Note so redeemed at the ComPS Early Redemption Price. See "Description of the ComPS--Redemption at Stated Maturity; --Special Event Redemption". RELATED NOTE REDEMPTION PRICE The amount payable under the Related Note by Morgan Guaranty to the Company at any time shall equal (a) the Principal Amount of the Related Note at such time plus (b) any accrued but unpaid distributions due to the Company (the "Related Note Redemption Price"). The Principal Amount of the Related Note at any time shall equal the aggregate Principal Amount of outstanding ComPS and the related Common Securities at such time. The timing and amount of payments on the Related Note mirror the aggregate financial terms of the ComPS. S-29 30 SUBORDINATION Morgan Guaranty's obligations under the Related Note are effectively subordinated to all liabilities (including indebtedness) of its consolidated and unconsolidated subsidiaries. Moreover, Morgan Guaranty's subsidiaries may incur indebtedness and other liabilities and have obligations to third parties. Generally, the claims of such third parties to the assets of Morgan Guaranty's subsidiaries will be superior to those of Morgan Guaranty as a stockholder, and, therefore, the Related Note may be deemed to be effectively subordinated to the claims of such third parties. Upon any payment or distribution of all or substantially all of the assets of Morgan Guaranty or in the event of any insolvency, bankruptcy, receivership, liquidation, dissolution, reorganization or other similar proceeding, whether voluntary or involuntary, relative to Morgan Guaranty or its creditors, the holders of all Senior Indebtedness of Morgan Guaranty will be entitled to receive payment pari passu and pro rata with the Company. However, depositors in Morgan Guaranty will have a preference over holders of Senior Indebtedness of Morgan Guaranty upon any such event. As used in the Related Note, the term "Senior Indebtedness" means the principal of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for money borrowed, whether outstanding as of the date hereof or hereafter created, issued or incurred (other than Morgan Guaranty's obligations to its depositors), except any indebtedness expressly subordinated to such Senior Indebtedness, and (b) any deferrals, renewals or extensions of any such Senior Indebtedness. The Related Note does not limit the amount of Senior Indebtedness which Morgan Guaranty may incur. INTEREST The Related Note shall bear interest at the rate of [ ] % per annum on the Face Amount from the original date of issuance, payable monthly in arrears on the last calendar day of each month (each, an "Interest Payment Date"), commencing [ ], 1996, to the Company, subject to certain exceptions, at the close of business on the Business Day next preceding the relevant Interest Payment Date. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any period shorter than a full monthly period for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on the Related Note is not a Business Day, payment of the interest payable on such date will be made on the next succeeding Business Day with the same force and effect as if made on such date and no interest on such distributions will accrue from and after such date, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. OPTIONAL REDEMPTION The Company shall have the right to call for redemption prior to each Optional Redemption Date a Principal Amount of the Related Note sufficient to allow it to pay the ComPS Early Redemption Price to any holders of ComPS who exercise their right to redeem any or all of such holders' ComPS and a pro rata portion of the related Common Securities. See "Description of the ComPS--Optional Redemption". SPECIAL EVENT REDEMPTION Upon the occurrence of a Special Event, Morgan Guaranty will have the right to elect to, under certain circumstances, (a) redeem the Related Note at the Related Note Redemption Price or (b) in the case of a Tax Event, allow the Related Note to remain outstanding and indemnify the Company for any taxes payable by it as a result of such Tax Event. See "Description of the ComPS--Special Event Redemption". S-30 31 EVENTS OF DEFAULT The Related Note Events of Default are described in "Description of the Related Notes --Related Note Events of Default" in the Prospectus of which this Prospectus Supplement constitutes a part. A default or event of default under any Senior Indebtedness would not constitute a default or event of default under the Related Note. MODIFICATION OF THE RELATED NOTE The Related Note contains provisions permitting Morgan Guaranty and the Company, with the consent of the holders of not less than a majority in Principal Amount of the outstanding ComPS, to modify the Related Note, subject to certain exceptions. See "Description of the Related Notes --Modification of the Related Notes" in the Prospectus of which this Prospectus Supplement constitutes a part. CONSOLIDATION, MERGER AND SALE The Related Note provides that Morgan Guaranty may, without the consent of the Company or the holders of the ComPS, consolidate or merge with or into, or sell or transfer all or substantially all of its property or assets to, any corporation or association; provided that (i) the corporation (if other than Morgan Guaranty) or association formed by or resulting from any such consolidation or merger or which shall have received such property or assets shall have assumed Morgan Guaranty's obligations under the Related Note and (ii) immediately after giving effect to such transaction, Morgan Guaranty or such successor corporation shall not be in default under the terms of the Related Note. GOVERNING LAW The Related Note will be governed by, and construed in accordance with, the laws of the State of New York. MISCELLANEOUS Morgan Guaranty will have the right at all times to assign any of its rights or obligations under the Related Note to J.P. Morgan or to a direct or indirect wholly-owned subsidiary of Morgan Guaranty; provided that, in the event of any such assignment, Morgan Guaranty will remain jointly and severally liable for all such obligations. Subject to the foregoing, the Related Note will be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns. The Related Note is not a deposit or other obligation of a bank and is not insured by the Federal Deposit Insurance Corporation or any other federal agency. The obligations of Morgan Guaranty under the Related Note are pari passu with all present and future Senior Indebtedness of Morgan Guaranty (as defined herein) and are junior to Morgan Guaranty's obligations to its depositors in the event of a receivership. In addition, J.P. Morgan's obligations under the Guarantee and the Related Note Guarantee and Morgan Guaranty's obligations under the Related Note are effectively subordinated to all liabilities (including indebtedness) of the consolidated and unconsolidated subsidiaries of each. DESCRIPTION OF THE GUARANTEE Set forth below is a summary of information concerning the Guarantee that will be delivered by J.P. Morgan for the benefit of the holders of ComPS. The terms of the Guarantee will be those set forth in the Guarantee Agreement. The following summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement is a part and the form of Guarantee, which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. S-31 32 GENERAL Pursuant to the Guarantee, J.P. Morgan irrevocably and unconditionally agrees, on a subordinated basis, to pay in full to the holders of the ComPS the Guarantee Payments (as defined herein) (except to the extent paid by the Company), as and when due, regardless of any defense, right of set-off or counterclaim that the Company may have or assert. The following payments with respect to ComPS issued by the Company (the "Guarantee Payments"), to the extent not paid by the Company, will be subject to the Guarantee (without duplication): (i)(A) any accrued and unpaid dividends that are required to be paid on the ComPS and (B) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only if to the extent that, in each case, Morgan Guaranty has made payment of interest or principal on the Related Note, as the case may be, and (ii) upon a Liquidation Event (other than in connection with the redemption of all of the ComPS at Stated Maturity or redemption of the Related Note) the lesser of (A) the Liquidation Distribution to the extent the Company has funds available therefor and (B) the amount of assets of the Company remaining available for distribution to holders of the ComPS upon such Liquidation Event. J.P. Morgan's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by J.P. Morgan to the holders of ComPS or by causing the Company to pay such amounts to such holders. The Guarantee will be effective with respect to the ComPS from the time of issuance of the ComPS to the extent Morgan Guaranty has made payments under the Related Note. If Morgan Guaranty does not make payments on the Related Note, the Company may not pay distributions on the ComPS issued and may not have funds available therefor. See "Description of the Related Note". MODIFICATION OF THE GUARANTEE; ASSIGNMENT Except with respect to any changes that do not adversely affect the rights of holders of all Preferred Securities (in which case no vote will be required), the Guarantee may be amended only with the prior approval of the holders of not less than a majority in aggregate Principal Amount of the outstanding ComPS and all other Preferred Securities entitled to vote thereon, voting as a single class. All guarantees and agreements contained in the Guarantee shall bind the successors, assignees, receivers, trustees and representatives of J.P. Morgan and shall inure to the benefit of the holders of the ComPS. REMEDIES OF HOLDERS If J.P. Morgan fails to perform any of its payment or other obligations with respect to the ComPS under the Guarantee, any holder of ComPS may institute a legal proceeding directly against J.P. Morgan to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against the Company or any other person or entity. Subject to the award by a court of competent jurisdiction of legal fees in connection with any such legal proceeding, each holder will be required to bear its own costs in connection with instituting a legal proceeding directly against J.P. Morgan, which cost may be significant. TERMINATION OF THE GUARANTEE The Guarantee will terminate with respect to the ComPS upon full payment of the aggregate ComPS Early Redemption Price or ComPS Redemption Price, as applicable, or upon full payment of the amounts payable in accordance with the LLC Agreement upon liquidation of the Company. The Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of ComPS must restore payment of any sums paid under such ComPS or the Guarantee (e.g., upon a subsequent bankruptcy of Morgan Guaranty or J.P. Morgan). STATUS OF THE GUARANTEE The Guarantee will constitute an unsecured obligation of J.P. Morgan and will rank (i) subordinate and junior in right of payment to all other liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock outstanding as of the date hereof of J.P. Morgan and (iii) senior to J.P. S-32 33 Morgan's common stock. The terms of the ComPS provide that each holder of ComPS by acceptance thereof agrees to the subordination provisions and other terms of the Guarantee. The Guarantee will constitute a guarantee of payment and not of collection (that is, the guaranteed party may institute a legal proceeding directly against the guarantor to enforce its rights under the Guarantee without instituting a legal proceeding against any other person or entity). GOVERNING LAW The Guarantee will be governed by and construed and interpreted in accordance with the laws of the State of New York. DESCRIPTION OF THE RELATED NOTE GUARANTEE Set forth below is a summary of information concerning the Related Note Guarantee that will be delivered by J.P. Morgan for the benefit of the Company. The terms of the Related Note Guarantee will be those set forth in the Related Note Guarantee Agreement. The following summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement is a part and the form of Related Note Guarantee, which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. The Related Note Guarantee will be held by the Company, as the holder of the Related Note. GENERAL Pursuant to the Related Note Guarantee, J.P. Morgan irrevocably and unconditionally agrees, on a subordinated basis, to pay in full to the Company the Related Note Guarantee Payments (as defined herein), as and when due, regardless of any defense, right of set-off or counterclaim that Morgan Guaranty may have or assert with respect to its obligation to make such Related Note Guarantee Payments. The following payments with respect to the Related Note issued by Morgan Guaranty (the "Related Note Guarantee Payments") will be subject to the Related Note Guarantee (without duplication): (i) any accrued and unpaid distributions that are required to be paid by Morgan Guaranty on the Related Note and (ii) any principal payable by Morgan Guaranty under the Related Note, as and when payable by Morgan Guaranty. J.P. Morgan's obligation to make a Related Note Guarantee Payment may be satisfied by direct payment of the required amounts by J.P. Morgan to the Company or by causing Morgan Guaranty to pay such amounts to the Company. The Related Note Guarantee will be a full and unconditional guarantee with respect to the Related Note from the time of issuance of the Related Note. MODIFICATION OF THE RELATED NOTE GUARANTEE; ASSIGNMENT The Related Note Guarantee may be amended only with the prior approval of the Company. All guarantees and agreements contained in the Related Note Guarantee shall bind the successors, assignees, receivers, trustees and representatives of J.P. Morgan and shall inure to the benefit of the Company as the holder of the Related Note. REMEDIES OF THE COMPANY The Company has the sole right to direct the time, method and place of conducting any proceeding for any remedy available to it in respect of the Related Note Guarantee. TERMINATION OF THE RELATED NOTE GUARANTEE The Related Note Guarantee will terminate with respect to the Related Note upon full payment of the Related Note Redemption Price (as defined below) of the Related Note. The Related Note Guarantee will continue to be effective or will be reinstated with respect to the Related Note, as the case may be, if at any S-33 34 time the Company must restore payment of any sums paid under the Related Note or the Related Note Guarantee (e.g., upon a subsequent bankruptcy of J.P. Morgan). STATUS OF THE RELATED NOTE GUARANTEE The Related Note Guarantee will constitute an unsecured obligation of J.P. Morgan and will rank (i) subordinate and junior in right of payment to all other liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock outstanding as of the date hereof of J.P. Morgan and (iii) senior to J.P. Morgan's common stock. The terms of the ComPS provide that each holder of ComPS by acceptance thereof agrees to the subordination provisions and other terms of the Related Note Guarantee. The Related Note Guarantee will constitute a guarantee of payment and not of collection (that is, the Company may institute a legal proceeding directly against J.P. Morgan to enforce its rights under the Related Note Guarantee without instituting a legal proceeding against Morgan Guaranty). GOVERNING LAW The Related Note Guarantee will be governed by and construed and interpreted in accordance with the laws of the State of New York. EFFECT OF OBLIGATIONS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE RELATED NOTE As set forth in the LLC Agreement, the sole purpose of the Company is to issue the Securities and other Preferred and Common Securities, and to invest the proceeds from such issuances in the Related Note and other debt obligations of Morgan Guaranty. As long as payments of interest and other payments are made when due on the Related Note, such payments will be sufficient to cover dividends and payments due on the ComPS because of the following factors: (i) the Principal Amount of the Related Note will be equal to the sum of the aggregate Principal Amount of the ComPS and the related Common Securities; (ii) the interest rate and the interest and other payment dates on the Related Note will match the dividend rate and dividend and other payment dates for the ComPS; (iii) J.P. Morgan shall pay all, and the Company shall not be obligated to pay, directly or indirectly, any, costs and expenses of the Company other than principal of and dividends on the ComPS and the related Common Securities; and (iv) the LLC Agreement further provides that the J.P. Morgan shall not cause the Company to, among other things, engage in any activity that is not consistent with the purposes of the Company. Payments of dividends (to the extent Morgan Guaranty has made payments of interest on the Related Note) and other payments due on the ComPS (to the extent Morgan Guaranty has made payment of principal and other amounts on the Related Note) are guaranteed by J.P. Morgan as and to the extent set forth under "Description of the Guarantee" herein and in the accompanying Prospectus. If Morgan Guaranty does not make interest payments on the Related Note, it is expected that the Company will not have sufficient funds to pay dividends on the ComPS. The Guarantee is a full and unconditional guarantee from the time of its issuance but does not apply to any dividends or other payments unless and until Morgan Guaranty has made payment of interest or other payments on the Related Note. If Morgan Guaranty fails to make interest or other payments on the Related Note when due, the LLC Agreement provides a mechanism whereby the holders of the ComPS, using the procedures described in the LLC Agreement, may direct the Company to enforce its rights under the Related Note and the Related Note Guarantee. If J.P. Morgan fails to perform any of its payment or other obligations with respect to the ComPS under the Guarantee, any holder of ComPS may institute a legal proceeding directly against J.P. Morgan to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against the Company or any other person or entity. S-34 35 The Related Note Guarantee by J.P. Morgan guarantees to the Company the payment of any distributions on and principal of the Related Note as provided pursuant to the terms of the Related Note, at such times and in such amounts as provided therein. J.P. Morgan's obligations under the Related Note Guarantee will be subordinated and junior in right of payment to all liabilities of J.P. Morgan, pari passu with the most senior preferred stock outstanding as of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan. The LLC Agreement and the Expense Agreement provide that J.P. Morgan will pay, or cause to be paid, all debts and obligations (other than with respect to the ComPS) and all costs and expenses of the Company, including any taxes and all costs and expenses with respect thereto, to which the Company may become subject. The LLC Agreement and the Expense Agreement provide that any person to whom such debts, obligations, costs and expenses are owed will have the right to enforce J.P. Morgan's obligations in respect of such debts, obligations, costs and expenses directly against J.P. Morgan without first proceeding against the Company. J.P. Morgan, through its obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement and the Expense Agreement, taken together, will provide a full and unconditional guarantee, on a subordinated basis, of payments due on the ComPS. See "Description of the Guarantee -- General" and "Description of the Related Note Guarantee -- General" herein and in the accompanying Prospectus. Upon any voluntary or involuntary liquidation, dissolution, winding-up or termination of the Company, the holders of Securities will be entitled to receive the Liquidation Distribution. Holders of ComPS will be entitled to the benefits of the Guarantee with respect to the Liquidation Distribution. See "Description of the ComPS -- Liquidation Distribution Upon Dissolution". Upon any voluntary or involuntary liquidation or bankruptcy of Morgan Guaranty, the Company as holder of the Related Note would be pari passu with creditors of Morgan Guaranty (other than any depositors therein), equal in right of payment with all Senior Indebtedness and entitled to receive payment in full of principal, premium, if any, and interest, before any stockholders of Morgan Guaranty receive payments of distributions. UNITED STATES FEDERAL INCOME TAXATION GENERAL The following is a summary of the material United States Federal income tax consequences of the purchase, ownership and disposition of ComPS by U.S. Holders (as defined herein). Unless otherwise stated, this summary deals only with ComPS held as capital assets by holders who purchase the ComPS upon original issuance ("Initial Holders"). This summary does not address tax considerations applicable to investors that may be subject to special U.S. Federal income tax treatment, such as dealers in securities or persons that will hold the ComPS as a position in a "straddle" (within the meaning of Section 1092 of the Internal Revenue Code of 1986, as amended (the "Code")), or as part of a "conversion transaction" (within the meaning of Section 1258 of the Code) or "synthetic security" or other integrated investment comprised of ComPS and one or more other investments. This summary also does not address the tax consequences to persons that have a functional currency other than the U.S. Dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of ComPS. Further, it does not include any description of any alternative minimum tax consequences or the tax laws of any state or local government or of any foreign government that may be applicable to the ComPS. This summary is based on the Code, Treasury regulations thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. In the opinion of Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Company ("Tax Counsel"), the statements contained in the following summary, to the extent they constitute matters of law, accurately describe the material U.S. Federal income tax consequences to holders of the acquisition, ownership and disposition of ComPS. For purposes of this summary, a "U.S. Holder" shall mean a holder who is (i) a citizen or a resident of the United States (or any state thereof), (ii) a S-35 36 corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate or trust, the income of which is subject to U.S. Federal income tax regardless of its source, and (iv) any other person subject to U.S. Federal income tax on net income. CLASSIFICATION OF THE RELATED NOTE No statutory, judicial or administrative authority directly addresses the characterization of the Related Note or instruments similar to the Related Note for U.S. Federal income tax purposes. As a result, significant aspects of the U.S. Federal income tax consequences of investment in ComPS are not certain. No ruling is being requested from the Internal Revenue Service (the "IRS") with respect to the Related Note and no assurance can be given that the IRS will agree with the conclusions expressed herein. In the absence of clear authority and based on the advice of Tax Counsel, it is the intention of the Company to treat the Related Note as a contingent debt instrument with interest accruing (and currently taxable to holders) at the stated coupon rate. By purchasing the ComPS, the holders will agree to treat the Related Note in the same manner. CLASSIFICATION OF THE COMPANY In connection with the issuance of the ComPS, it is Tax Counsel's opinion that, under current law and assuming full compliance with the terms of the LLC Agreement and the Related Note, and based on certain facts and assumptions contained in the opinion of Tax Counsel, the Company will be classified for U.S. Federal income tax purposes as a partnership and not as an association taxable as a corporation. Accordingly, for U.S. Federal income tax purposes, each holder of ComPS will be required to include in its gross income its distributive share of any item of income or gain realized by the Company including any interest accrued with respect to the Related Note. No portion of the income accrued by the Company will be eligible for the dividends received deduction. By acquiring one or more ComPS, each holder thereof agrees to treat such ComPS as an interest in a partnership holding the Related Note. The Company will have a calendar year tax year and will use the accrual method of accounting. Accordingly, calendar year holders will be required to include their distributive share of the income accrued by Company in their taxable year that corresponds to the year in which the Company accrued such income. Holders with a different taxable year will include such income in their taxable year that includes the December 31 of the Company's taxable year in which the Company accrued the income. U.S. HOLDERS TAXATION OF INCOME ACCRUED BY THE COMPANY Assuming the Related Notes are treated as contingent debt instruments for U.S. Federal income tax purposes, the following rules are believed to apply, subject to the discussion below: (1) a U.S. Holder would be required to include its distributive share of the stated interest on the Related Note in income as it is accrued by the Company, and would not be entitled to the dividends received deduction with respect thereto; (2) upon the redemption of the ComPS (whether optional or Special Event redemption or at Stated Maturity) or liquidation of the Company, it is expected that a U.S. Holder will have gain or loss equal to the difference between the amount realized by the U.S. Holder and such Holder's tax basis in the ComPS; any loss would be capital loss, but the tax characterization of gain is not clear and may be ordinary income rather than capital gain; (3) for the purpose of computing gain or loss, a U.S. Holder's tax basis in the ComPS would equal the cost of the ComPS increased by such Holder's distributive share of income accrued with respect to the income of the Company and decreased by the amount of dividends received by such Holder; and S-36 37 (4) any capital gain or loss on the redemption of the ComPS will be characterized as a long-term capital gain or loss if at the time of redemption or liquidation the holding period in the ComPS is in excess of one year. However, even assuming the Related Note is properly treated as a contingent debt instrument, in the absence of authority concerning the proper tax treatment of such instruments, no assurance can be given that the above tax consequences would be accepted by the IRS or upheld by a court. Moreover, a variety of different tax characterizations can apply to the Related Note. For example the Related Note can be viewed as a "notional principal contract" (as defined in Treasury Regulations 1.446-3), a non-contingent debt instrument coupled with a cash-settled forward purchase contract or some other contractual arrangement. Accordingly, the tax consequences of investment in ComPS may not be as described above. For example, (i) gain on redemption of the ComPS or on liquidation of the Company may be ordinary income rather than capital gain, (ii) a U.S. Holder might be required to accrue income at a rate greater than the stated rate on the Related Note, and have less income or gain (or a greater loss) upon disposition or redemption of ComPS, or (iii) all or part of the stated interest on the Related Note might be treated as a nontaxable return of capital, increasing the amount of income or gain (or decreasing the loss) upon disposition or redemption of ComPS. In connection with clause (ii) of the preceding paragraph, recently proposed Treasury Regulations with respect to contingent debt instruments would require the accrual of interest income on the Related Note based on the projected yield to maturity of the Related Note. The projected yield would take into account the projected Related Note Redemption Price (based upon forward pricing for the Applicable Index). This method might result in an annual inclusion of income at a rate in excess of the stated rate of interest on the Related Note. An adjustment would be made at maturity to reflect the actual Related Note Redemption Price as compared to the projected amount. Moreover, any gain on redemption of ComPS or upon liquidation of the Company would be ordinary income and any loss would be ordinary loss to the extent of the amount of prior interest accrual. These proposed regulations by their terms only apply to debt issued at least 60 days after publication of final regulations, and therefore would not apply to the Related Note. However, no assurance can be given that the IRS or the courts would not apply the principles of the regulations to the Related Note. MONTHLY ALLOCATIONS OF INCOME In general, the Company's taxable income from the Related Note for each month will be allocated, pursuant to a monthly convention, to holders who hold ComPS on the record date for the payment of dividends for that month. Thus, taxable income is allocated when paid and not on an accrual basis. As a result, the taxable income allocated to a holder who sells (or buys) ComPS between record dates will not accurately reflect the accrued interest on the Related Note for the holder's actual holding period for ComPS during the month of sale (or purchase), which may affect such holder's tax liability and tax basis in the ComPS. However, the IRS may determine that the use of this monthly convention is not permitted. If this monthly convention is not allowed, taxable income of the Company from the Related Note in the month of sale might be reallocated among the sellers and buyers of ComPS. The LLC Agreement permits the Company to revise its method of allocation between sellers and buyers to conform to a method permitted by future regulations. SALE OR OTHER DISPOSITION OF COMPS Upon the sale or other disposition of ComPS (other than redemption of ComPS by the Company), a U.S Holder would have gain or loss equal to the difference between the amount realized by the U.S. Holder and such Holder's tax basis in the ComPS disposed of. Generally, it is believed that such gain or loss will be capital gain or loss, although such gain might be ordinary income. Any such capital gain or loss will be a long-term capital gain or loss if upon disposition the ComPS will have been held for more than one year. S-37 38 SECONDARY MARKET PURCHASERS The Company will not make an election under Section 754 of the Code to adjust the Company's tax basis of the Related Note to reflect the price paid for ComPS by a secondary market purchaser. This could result in adverse tax consequences to such a purchaser which holds such ComPS until Stated Maturity or early redemption, such as taxable ordinary income in excess of the economic profit on the ComPS, offset by a capital loss that might result in no tax benefit. Secondary market purchasers should consult their tax advisors concerning the consequences of acquiring ComPS and holding such ComPS until Stated Maturity or early redemption. NON-UNITED STATES HOLDERS In the case of a holder of ComPS that is not a U.S. Holder, although no assurance can be given it is believed that payments made with respect to ComPS will not be subject to U.S. withholding tax; provided that such holder complies with applicable certification requirements. The Company may withhold on such payments, in which case the holder will be entitled to file a claim with the IRS claiming a refund of such withholding tax. No assurance can be given whether such a claim would be successful. Any capital gain realized upon the redemption, sale or other disposition of ComPS by a holder that is not a U.S. Holder will generally not be subject to U.S. Federal income tax if (i) such gain is not effectively connected with a U.S. trade or business of such holder and (ii) in the case of an individual, such individual is not present in the United States for 183 days or more in the taxable year of the redemption, sale or other disposition or the gain is not attributable to a fixed place of business maintained by such individual in the United States. INFORMATION REPORTING TO HOLDERS The Company will annually report each holder's distributive share of the Company's income, gains, expenses and losses to the holders and the IRS on Schedule K-1. The Company currently intends to report such information by late February following each calendar year even though the Company is not legally required to report to record holders until April 15 following each calendar year. The Company will provide the Schedule K-1 information to nominees (other than certain clearing agencies) that fail to provide the information statements described below and such nominees will be required to forward such information to the beneficial owners of the ComPS. Under section 6031 of the Code, any person (other than certain clearing agencies) that holds ComPS as a nominee at any time during a calendar year is required to furnish the Company with a statement containing certain information on the nominee, the beneficial holders and the ComPS so held. Such information includes (i) the name, address and taxpayer identification number of the nominee and each beneficial owner and (ii) as to each beneficial owner (x) whether such person is a United States person, a tax-exempt entity, a foreign government, an international organization or any whollyowned agency or instrumentality of the either of the foregoing and (y) certain information on ComPS that were held, bought or sold on behalf of such person throughout the year. In addition, brokers and financial institutions that hold ComPS for their own account through a clearing agency are required to furnish the Company additional information as to themselves and their ownership of ComPS. The information referred to above for any calendar year must be furnished to the Company on or before the following January 31. Nominees, brokers and financial institutions that fail to provide the Company with such information may be subject to penalties. BACKUP WITHHOLDING Payments made on, and proceeds from the sale of, the ComPS may be subject to a "backup" withholding tax of 31% unless the holder complies with certain identification requirements. Any withheld amounts will be allowed as a credit against the holder's United States Federal income tax, provided that the required information is provided to the IRS. THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD S-38 39 CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMPS, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. ERISA CONSIDERATIONS Generally, employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 ("ERISA") or Section 4975 of the Code ("Plans"), may purchase ComPS, subject to the investing fiduciary's determination that the investment in ComPS satisfies ERISA's fiduciary standards and other requirements applicable to investments by the Plans. In any case, J.P. Morgan, Morgan Guaranty and/or any affiliates of either may be considered a "party in interest" (within the meaning of ERISA) or a "disqualified person" (within the meaning of Section 4975 of the Code) with respect to certain Plans. The acquisition and ownership of ComPS by a Plan (or by an individual retirement arrangement or other plans described in Section 4975(e)(i) of the Code) with respect to which J.P. Morgan, Morgan Guaranty or any of its affiliates of either is considered a party in interest or a disqualified person may constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code, unless such ComPS are acquired pursuant to and in accordance with an applicable exemption. As a result, Plans with respect to which J.P. Morgan, Morgan Guaranty or any affiliates of either is a party in interest or a disqualified person should not acquire ComPS. Any other Plans or other entities whose assets include plan assets subject to ERISA proposing to acquire ComPS should consult with their own ERISA counsel. UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to the Underwriters, and the Underwriters have agreed, severally and not jointly, to purchase, the ComPS. In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the ComPS offered hereby if any of the ComPS are purchased. In the event of default by any Underwriter and failure by the other Underwriters to purchase such defaulting Underwriter's portion of the ComPS, the Underwriting Agreement provides that, in certain circumstances, the Underwriting Agreement may be terminated. The Underwriters propose to offer the ComPS, in part, directly to the public at the initial public offering price set forth on the cover page of this Prospectus Supplement, and, in part, to certain securities dealers at such price less a concession of $[ ] per Preferred Security. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $[ ] per Preferred Security to certain brokers and dealers. After the ComPS are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives. In view of the fact that the proceeds of the sale of the ComPS will ultimately be used to purchase the Related Note of Morgan Guaranty, the Underwriting Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters' Compensation") to the Underwriters $[ ] per Preferred Security (or $[ ] in the aggregate) for the accounts of the several Underwriters. [The ComPS have been authorized for listing on the [ ] under the symbol "[ ] ", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement.] [Prior to this offering, there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the Underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] The Company and J.P. Morgan have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. S-39 40 This Prospectus Supplement and related the Prospectus may be used by direct or indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and sales related to secondary market transactions in the ComPS. Such subsidiaries may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of a sale. The Underwriters, certain agents and their associates may be customers of, engage in transactions with, and perform services for, J.P. Morgan in the ordinary course of business. The lead Underwriter is an indirect, wholly-owned subsidiary of J.P. Morgan. The participation of the lead Underwriter in the offer and sale of the ComPS complies with the requirements of Schedule E of the By-laws of the National Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of securities of an affiliate and complies with any restrictions imposed on such Underwriters by the Board of Governors of the Federal Reserve System. LEGAL MATTERS The validity of the Securities offered hereby will be passed upon by Margaret M. Foran, Vice President, Assistant General Counsel and Assistant Secretary of J.P. Morgan, and by Cravath, Swaine & Moore, New York, New York, counsel for the Underwriter. Ms. Foran owns or has the right to acquire a number of shares of Common Stock of J.P. Morgan equal to or less than 0.01% of the outstanding Common Stock of J.P. Morgan. EXPERTS The audited financial statements contained in J.P. Morgan's Annual Report on Form 10-K for the year ended December 31, 1995 (included in J.P. Morgan's Annual Report to Stockholders), are incorporated by reference in this Prospectus Supplement in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. S-40 41 ANNEX I GLOSSARY OF TERMS The following are abbreviated definitions of certain capitalized terms used in the Prospectus Supplement. The LLC Agreement, the Guarantee, the Related Note Guarantee and the Related Note may contain more complete definitions of certain of the terms defined herein, as well as definitions of certain other terms not defined herein, and reference should be made to the LLC Agreement, the Guarantee, the Related Note Guarantee and the Related Note, as applicable, for complete definitions of such terms. APPLICABLE INDEX........the JPMCI Aluminum Excess Return Index. APPLICABLE INDEX COMMENCEMENT VALUE...................[ ] APPLICABLE INDEX SETTLEMENT VALUE........the arithmetic average of the values of the Applicable Index during the Determination Period; provided, however, that if the Applicable Index Settlement Value has been permanently determined prior to such time, the Applicable Index Settlement Value shall equal the value so determined. APPLICABLE INDEX EARLY SETTLEMENT VALUE........for each day of the Early Determination Period, the value of the Applicable Index for such day of the Early Determination Period; provided, however, that if the Applicable Index Settlement Value has been permanently determined prior to such time, the Applicable Index Early Settlement Value shall equal the value so determined. BENCHMARK ALUMINUM CONTRACTS...............the aluminum futures contracts included from time to time in the JPM Indices, which shall initially be the LME High Grade Primary Aluminum contract. BUSINESS DAY............any day other than a Saturday, Sunday or any other day on which banking institutions in The City of New York, New York, are permitted or required by any applicable law to close. CODE....................the Internal Revenue Code of 1986, as amended. COMMISSION..............the Securities and Exchange Commission. COMMON SECURITIES.......the common securities of the Company representing voting limited liability company interests in the Company, to be directly or indirectly owned by J.P. Morgan. COMPS EARLY REDEMPTION PRICE...................On any Early Redemption Date, an amount equal to (i) the Early Redemption Value per Preferred Security plus (ii) accrued and unpaid dividends to but excluding the date of redemption. COMPS REDEMPTION PRICE...................at Stated Maturity, an amount equal to (i) the Redemption Value per Preferred Security plus (ii) accrued and unpaid dividends to but excluding Stated Maturity. DETERMINATION PERIOD....the 10 consecutive Trading Days on which no Market Disruption Event occurs immediately following the 20th scheduled Business Day prior to Stated Maturity. A-1 42 DIVIDENDS...............cumulative cash dividends of [ ]% per annum on the Face Amount (calculated on the basis of a 360 day year of twelve 30-day months) accruing from the Issue Date and payable monthly in arrears. DTC.....................the Depository Trust Company. EARLY DETERMINATION PERIOD..................the 10 consecutive Trading Days which are Business Days on which U.S. Treasury Bond markets are open and on which no Market Disruption Event occurs immediately following the 20th scheduled Business Day prior to the applicable Early Redemption Date. EARLY REDEMPTION VALUE...................the average for the 10 days of the Early Determination Period of the discounted present value of the future dividends and the indexed Principal Amount of the ComPS, as set forth in the accompanying Prospectus under "Description of ComPS--Early Redemption Upon the Occurrence of a Special Event or at the Election of the Holders of the ComPS". EARLY REDEMPTION DATE....................each Optional Redemption Date and the date of any Special Event Redemption or Liquidation Distribution. ERISA...................the Employee Retirement Income Security Act of 1974. EXCHANGE ACT............the Securities Exchange Act of 1934, as amended. FACE AMOUNT.............[$40]. GUARANTEE...............the Guarantee Agreement executed by J.P. Morgan on behalf of the holders of each series of Preferred Securities. GUARANTEE PAYMENTS......without duplication, (i)(A) any accrued and unpaid dividends that are required to be paid on the ComPS and (B) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only to the extent that, in each of case, Morgan Guaranty has made a payment of interest or principal, as the case may be, on the Related Note and (ii) upon a Liquidation Event (other than in connection with the redemption of all the ComPS upon the maturity or redemption of the Related Note), the lesser of (A) the Liquidation Distribution to the extent the Company has funds available therefor, and (B) the amount of assets of the Company remaining available for distribution to holders of all Preferred Securities upon such Liquidation Event. INITIAL HOLDERS.........holders who purchase any ComPS upon original issuance. INTEREST PAYMENT DATE...with respect to the Related Note, the last calendar day of each month, beginning [ ], 1996. INVESTMENT COMPANY EVENT...................the receipt by the Company of an opinion of a nationally recognized independent counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation, a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority or the expiration or revocation of any applicable exemption obtained by the Company (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Company is or will be considered an "investment company" that is A-2 43 required to be registered under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the date of this Prospectus. IRS.....................Internal Revenue Service. ISSUE DATE..............[ ], 1996. JPMCI...................The J.P. Morgan Commodity Index. LIQUIDATION DISTRIBUTION............in respect of any Liquidation Event, the sum of (a) the Early Redemption Value (treating the date of such distribution as the Early Redemption Date), plus (b) the amount of accrued and unpaid dividends on such Preferred Security to but excluding the date of payment. LIQUIDATION EVENT.......any liquidation, dissolution, winding-up or termination of the Company, whether voluntary or involuntary. LLC AGREEMENT...........the amended and restated limited liability company agreement among J.P. Morgan, JPM Ventures and holders of Preferred Securities subsequently becoming members thereof dated May 15, 1996, and effective as of November 21, 1995. LME.....................the London Metals Exchange. MARKET DISRUPTION EVENT...................the occurrence of one or more of the following on any Trading Day with respect to any Benchmark Aluminum Contract underlying the Applicable Index, or an exchange on which any Benchmark Aluminum Contract is traded (a "Relevant Exchange"): (a) a day on which the fluctuation of the price of any Benchmark Aluminum Contract underlying the Applicable Index is materially limited by the rules of a Relevant Exchange setting the maximum or minimum price for such day (a "Limit Price"); (b) a day on which the Settlement Price is the Limit Price; (c) the failure of a Relevant Exchange to determine, announce or publish the Settlement Price with respect to a Benchmark Aluminum Contract underlying the Applicable Index; (d) the material suspension of trading in any Benchmark Aluminum Contract underlying the Applicable Index on a Relevant Exchange; (e) the failure of trading to commence, or the permanent discontinuation of trading, in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange; and (f) the imposition of any material limitation on trading in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange. NASDAQ..................The Nasdaq Stock Market. 1940 ACT................the Investment Company Act of 1940, as amended. OPTIONAL REDEMPTION.....the redemption of ComPS by the holders thereof on any Optional Redemption Date for the ComPS Early Redemption Price. OPTIONAL REDEMPTION DATE....................each [ ] prior to Stated Maturity, subject to extension in the case of (i) delay in the provision by DTC of the Applicable Notice or (ii) the occurrence and continuance of a Market Disruption Event. PRINCIPAL AMOUNT........at any time, (i) in the case of ComPS, the Redemption Value or Early Redemption Value, as applicable, as if determined as of such time, and A-3 44 (ii) in the case of the Related Note, the principal amount thereof at such time determined pursuant to the terms thereof. REDEMPTION DATE.........either the Stated Maturity or an Early Redemption Date, as applicable. REDEMPTION VALUE........at Stated Maturity, the Face Amount per Preferred Security multiplied by a fraction, the numerator of which is the Applicable Index Settlement Value and the denominator of which is the Applicable Index Commencement Value. RELATED NOTE............the [ ]% unsecured, unsubordinated debt obligation of Morgan Guaranty due 20[ ]. RELATED NOTE EVENT OF DEFAULT.................(i) default for 30 days in the payment of interest on the Related Note; (ii) default in payment of principal amount at the Stated Maturity or any amount payable upon any redemption of the Related Note; (iii) failure by Morgan Guaranty for 90 days after receipt of notice to it to comply with any of its covenants or agreements contained in the Related Note; and (iv) certain events of bankruptcy, insolvency, receivership or reorganization involving Morgan Guaranty or certain affiliates. ROLLOVER PERIOD.........the period during which each replacement of shorter- dated Benchmark Aluminum Contracts with longer-dated Benchmark Aluminum Contracts as the basis for the change in value of the Applicable Index occurs. SECURITIES..............the ComPS and the Common Securities. SECURITIES ACT..........the Securities Act of 1933. SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, the principal of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for money borrowed, whether outstanding as of the date hereof or hereafter created, issued or incurred (other than Morgan Guaranty's obligations to its depositors), except any indebtedness expressly subordinated to such Senior Indebtedness, and (b) any deferrals, renewals or extensions of any such Senior Indebtedness. SPECIAL EVENT...........either a Tax Event or an Investment Company Event. SPECIAL REDEMPTION......upon the occurrence and during the continuation of a Special Event, Morgan Guaranty will have the right to redeem the Related Note in whole or in part for cash at the Related Note Redemption Price, with the result that the Company will redeem on a pro rata basis ComPS and related Common Securities in an equal Principal Amount for cash at the ComPS Early Redemption Price. SPECIAL REDEMPTION DATE....................any date in respect of which upon the occurrence and continuation of a Tax Event or an Investment Company Event Morgan Guaranty shall have called for redemption in whole or in part the Related Note, and the Company shall have called for redemption on a pro rata basis an equal Principal Amount of the ComPS and related Common Securities. STATED MATURITY.........[ ], 20[ ]. TAX COUNSEL.............Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Company. A-4 45 TAX EVENT...............the receipt by the Company of an opinion of nationally recognized independent tax counsel experienced in such matters (a "Tax Opinion") to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the date of this Prospectus Supplement, that there is more than an insubstantial risk that at such time or within 90 days of the date thereof (i) the Company is or would be subject to United States Federal income tax with respect to income accrued or received on any Related Note, (ii) the interest payable on any Related Note is not or would not be deductible by Morgan Guaranty for United States Federal income tax purposes, (iii) the contingent principal in excess of the Face Amount of any series of Preferred Securities (if any) payable on any Related Note is not or would not be deductible by Morgan Guaranty for United States Federal income tax purposes or (iv) the Company is or would be subject to more than a de minimis amount of other taxes, duties or other governmental charges. TRADING DAY.............any day on which open-outcry trading on either the New York Mercantile Exchange (the "NYMEX") or the LME is scheduled to occur or occurs. A-5 46 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF J.P. MORGAN, OR THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE ------ Summary of the Offering......................... S-4 The Offering.................................... S-5 Risk Factors.................................... S-10 J.P. Morgan & Co. Incorporated.................. S-18 J.P. Morgan Index Funding Company, LLC.......... S-19 Use of Proceeds................................. S-19 Description of the ComPS........................ S-20 Description of the Related Note................. S-29 Description of the Guarantee.................... S-31 Description of the Related Note Guarantee....... S-33 Effect of Obligations Under the Guarantee, the Related Note Guarantee and the Related Note... S-34 United States Federal Income Taxation........... S-35 ERISA Considerations............................ S-39 Underwriting.................................... S-39 Legal Matters................................... S-40 Experts......................................... S-40
ANNEX I Glossary of Terms............................... A-1
PROSPECTUS Available Information........................... 2 Incorporation of Certain Documents by Reference..................................... 2 J.P. Morgan & Co. Incorporated.................. 3 J.P. Morgan Index Funding Company, LLC.......... 5 Use of Proceeds................................. 6 Consolidated Ratios of J.P. Morgan.............. 6 Description of All Preferred Securities......... 7 Description of the ComPS........................ 7 Risk Factors with Respect to All Preferred Securities.................................... 17 Risk Factors with Respect to ComPS.............. 18 The Underlying Markets.......................... 24 The JPM Indices................................. 27 Description of the Related Notes................ 34 Description of the Guarantee.................... 35 Description of the Related Note Guarantee....... 37 Plan of Distribution............................ 38 Legal Matters................................... 39 Experts......................................... 40
ANNEX I Glossary of Terms............................... A-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SERIES AL1 PREFERRED SECURITIES INDEXED TO THE JPMCI ALUMINUM EXCESS RETURN INDEX J.P. MORGAN INDEX FUNDING COMPANY, LLC PREFERRED SECURITIES GUARANTEED TO THE EXTENT SET FORTH HEREIN BY J.P. MORGAN & CO. INCORPORATED PROSPECTUS SUPPLEMENT [ ] , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 47 Filed pursuant to Rule 424(b)(2) Registration Statement No. 333-01121 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 MAY 21, 1996 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED MAY 16, 1996) [ ] COMMODITY-INDEXED PREFERRED SECURITIES (ComPS(SM)), SERIES [AL1] J.P. MORGAN INDEX FUNDING COMPANY, LLC [ ]% SERIES [AL1] PREFERRED SECURITIES INDEXED TO THE JPMCI ALUMINUM EXCESS RETURN INDEX GUARANTEED TO THE EXTENT SET FORTH HEREIN BY J.P. MORGAN & CO. INCORPORATED ------------------------ The [ ]% Series AL1 Preferred Securities (each, a "Preferred Security", and collectively, the "ComPS") offered hereby are being issued by J.P. Morgan Index Funding Company, LLC, a limited liability company formed under the laws of the State of Delaware (the "Company"). The ComPS represent preferred limited liability company interests in the Company. Each Preferred Security will have an initial principal amount of [$40] (the "Face Amount"), and thereafter, the change in value of the principal amount per Preferred Security will be indexed to the change in value of the JPMCI Aluminum Excess Return Index (the "Applicable Index"), which is calculated based on the change in value of certain aluminum futures contracts included from time to time in the JPM Indices (such contracts, from time to time, the "Benchmark Aluminum Contracts"). J.P. Morgan & Co. Incorporated, a Delaware corporation ("J.P. Morgan"), will directly or indirectly own all the common securities (the "Common Securities") representing voting limited liability company interests in the Company (the ComPS and the Common Securities, collectively, the "Securities"). The Company exists for the sole purpose of issuing the ComPS and investing the proceeds thereof in a [ ]% Related Note Due [ ], 20[ ] (the "Related Note") of Morgan Guaranty Trust Company of New York, a trust company with full banking powers organized under the laws of the State of New York and a wholly-owned subsidiary of J.P. Morgan ("Morgan Guaranty"), and issuing similar securities and investing the proceeds thereof in similar notes in the future. SEE "RISK FACTORS" ON PAGE S-10 FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES. THE ComPS ARE NOT FUTURES CONTRACTS AND DO NOT REPRESENT AN ACTUAL INVESTMENT IN FUTURES CONTRACTS. THE REDEMPTION VALUE (AS DEFINED BELOW) OF THE ComPS IS DIRECTLY LINKED TO THE PERFORMANCE OF THE JPMCI ALUMINUM EXCESS RETURN INDEX. AS A RESULT, THE REDEMPTION VALUE PER PREFERRED SECURITY MAY BE MORE OR LESS THAN THE FACE AMOUNT AND MAY BE MORE OR LESS THAN THE RETURN FROM AN ACTUAL INVESTMENT IN THE BENCHMARK ALUMINUM CONTRACTS. SEE "DESCRIPTION OF THE ComPS". "ComPS", "JPMCI" and the "J.P. Morgan Commodity Index" are service marks of J.P. Morgan & Co. Incorporated. The ComPS have been authorized for listing on the [ (the " ")] under the symbol " ", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement. See "Underwriting". THE SECURITIES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price $[40] per Preferred Security plus accrued dividends, if any.
- ---------------------------------------------------------------------------------------------------------------- INITIAL PUBLIC UNDERWRITING PROCEEDS TO OFFERING PRICE(1) COMMISSIONS(2) THE COMPANY(3)(4) - ---------------------------------------------------------------------------------------------------------------- Per Preferred Security..................... $ (3) $ - ---------------------------------------------------------------------------------------------------------------- Total...................................... $ (3) $ - ----------------------------------------------------------------------------------------------------------------
(1) Plus accrued dividends, if any, from the Issue Date (as defined herein). (2) The Company and J.P. Morgan have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting". (3) Because the proceeds of the sale of the ComPS will be invested in the Related Note, Morgan Guaranty has agreed to pay to the Underwriters a commission of $ per Preferred Security (or $ in the aggregate). See "Underwriting". (4) Expenses of the offering which are payable by the Company and J.P. Morgan are estimated to be $ . ------------------------ The ComPS offered hereby are offered severally by the Underwriters, as specified herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the ComPS will be made on or about , 1996, through the book-entry facilities of The Depository Trust Company, against payment therefor in same-day funds. J.P. MORGAN SECURITIES LTD. The date of this Prospectus Supplement is , 1996. 48 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE [APPLICABLE STOCK EXCHANGE(S)], IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. S-2 49 STRUCTURAL OVERVIEW [GRAPHIC OMITTED] 1. THE COMPANY. The issuer of the ComPS is a Delaware limited liability company formed by J.P. Morgan for the sole purpose of issuing the ComPS and other Preferred Securities and lending the proceeds thereof to Morgan Guaranty. J.P. Morgan will own, directly or indirectly, 100% of the common limited liability company interests in the Company. It is intended that the Company not be taxed as a corporation (and instead be treated as a partnership) for federal income tax purposes. 2. THE COMPS. The ComPS issued by the Company are preferred limited liability company interests. For tax purposes, holders of ComPS are deemed to receive interest income to the extent of interest accrued and paid on the Related Note, and dividends on ComPS are not eligible for the dividends received deduction for United States Federal income tax purposes. The ComPS Redemption Price and the ComPS Early Redemption Price are indexed to the JPMCI Aluminum Excess Return Index. The ComPS Early Redemption Price or the ComPS Redemption Price may be more or less than the Face Amount of the ComPS. The Company intends to issue more than one series of Preferred Securities. 3. COMPS PROCEEDS LOANED TO MORGAN GUARANTY. Proceeds of ComPS and related Common Securities will be used by the Company to purchase from Morgan Guaranty the Related Note with a maturity of [ ] and having the same economic terms as the ComPS. 4. REPAYMENT OF RELATED NOTE. Morgan Guaranty will repay the Related Note in whole or part to the extent required upon any Early Redemption Date and in whole at the Stated Maturity (subject to extension in case of a Market Disruption Event). 5. RELATED NOTE GUARANTEE. J.P. Morgan will guarantee to the Company, on a subordinated basis, the payment of any distributions on and principal of the Related Note as provided pursuant to the terms of the Related Note, at such times and in such amounts as provided therein. 6. GUARANTEE. J.P. Morgan will guarantee to the holders of ComPS, on a subordinated basis, the payment of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only if and to the extent that, in each case, Morgan Guaranty has made payment of interest or principal on the Related Note, as the case may be, and (ii) upon liquidation, the lesser of (a) the sum of the Early Redemption Value and the amount of accrued and unpaid dividends on the ComPS and (b) the amount of assets of the Company available for distribution to holders of ComPS. 7. MORGAN GUARANTY. Morgan Guaranty, a trust company with full banking powers organized under the laws of the State of New York, is a wholly-owned subsidiary of J.P. Morgan. S-3 50 SUMMARY OF THE OFFERING SECURITIES OFFERED......[2,500,000] [ ]% Series AL1 Preferred Securities ("ComPS") Indexed to the JPMCI Aluminum Excess Return Index. ISSUER..................J.P. Morgan Index Funding Company, LLC (the "Company"), a Delaware limited liability company and a subsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan"). GUARANTOR...............J.P. Morgan, on a subordinated basis, (i) of payments to holders of ComPS of amounts received on the Related Note by the Company and (ii) of payments to the Company on the Related Note by Morgan Guaranty, a wholly-owned subsidiary of J.P. Morgan. INITIAL OFFERING PRICE PER PREFERRED SECURITY ("FACE AMOUNT").........[$40]. AGGREGATE FACE AMOUNT..................[$100,000,000]. COMPS REDEMPTION PRICE...................Redemption Value at Stated Maturity plus accrued and unpaid dividends. STATED MATURITY.........[ ], 20[ ], subject to extension in the case of a Market Disruption Event. REDEMPTION VALUE PER PREFERRED SECURITY......Face Amount X Applicable Index Settlement Value ----------------------------------- Applicable Index Commencement Value APPLICABLE INDEX........JPMCI Aluminum Excess Return Index. APPLICABLE INDEX COMMENCEMENT VALUE......[Set on date of pricing]. APPLICABLE INDEX SETTLEMENT VALUE........The average of the Applicable Index over the 10 consecutive Trading Days meeting certain conditions immediately following the 20th scheduled Business Day prior to redemption (as described herein), unless such value has been permanently fixed prior to such time as described under "Description of ComPS -- Early Determination of Applicable Index Settlement Value and Redemption Value." CALCULATION AGENT.......Morgan Guaranty. DIVIDENDS...............Cumulative cash dividends of % per annum on the Face Amount (calculated on the basis of a 360 day year of twelve 30-day months) accruing from the Issue Date and payable monthly in arrears on the last calendar day of each month. CASH REDEMPTION PRIOR TO STATED MATURITY OPTIONAL REDEMPTION............At the holders' option, on each [ ] prior to the Stated Maturity, for the ComPS Early Redemption Price. SPECIAL EVENT REDEMPTION............Under certain circumstances, upon the occurrence of a Tax Event or an Investment Company Event, for the ComPS Early Redemption Price. EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE........Upon the occurrence of certain events affecting the liquidity or increasing the cost of holding or trading the Benchmark Aluminum Contracts and the inability to find a suitable replacement Benchmark Aluminum Contract, the Applicable Index Settlement Value may be fixed, and such fixed value will be used upon any subsequent Early Redemption and at Stated Maturity. COMPS EARLY REDEMPTION PRICE...................The Early Redemption Value (as defined in the Prospectus), which represents the payment of the discounted present value of dividends and Principal Amount on the applicable Early Redemption Date. See "Description of the ComPS -- Optional Redemption" and "-- Special Event Redemption". VOTING RIGHTS...........Holders of ComPS will have limited voting rights and will not be entitled to vote to appoint, remove or replace the Managing Members of the Company (as defined in the LLC Agreement). See "Description of the ComPS--Voting Rights". USE OF PROCEEDS.........The proceeds to the Company from the sale of ComPS and related Common Securities will be used to purchase a note of Morgan Guaranty (the "Related Note"), and Morgan Guaranty will use such proceeds for general corporate purposes and for hedging its obligations under the Related Note. See "Use of Proceeds". S-4 51 THE OFFERING The information in this Prospectus Supplement concerning J.P. Morgan, Morgan Guaranty, the Company, the ComPS, the Guarantee, the Related Note Guarantee and the Related Note supplements, and should be read in conjunction with, the information contained in the accompanying Prospectus. The following summary of provisions relating to the ComPS is qualified in its entirety by the more detailed information contained elsewhere or incorporated by reference in this Prospectus Supplement and the Prospectus of which this Prospectus Supplement constitutes a part. Prospective purchasers of ComPS should carefully review such information. Certain capitalized terms used in this Prospectus Supplement have the meanings ascribed to them under the "Glossary of Terms" in Annex I hereto. GENERAL Subject to the more specific discussion of each item elsewhere in this Prospectus Supplement or in the accompanying Prospectus (including the effect of a Market Disruption Event, as defined herein), following is a general summary of the ComPS: ComPS are principal-at-risk securities linked directly to the performance of the JPMCI Aluminum Excess Return Index (the "Applicable Index"). As described below, the Applicable Index will change based on the daily percentage change in value of the Benchmark Aluminum Contracts. 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. 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. The ComPS pay a fixed dividend rate on the Face Amount (which equals the initial price) and the Redemption Value of the ComPS is linked to the performance of the JPMCI Aluminum Excess Return Index. 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. Thus, the Redemption Value is linked directly to the performance of the JPMCI Aluminum Excess Return Index (e.g., if the average ending value of the JPMCI Aluminum Excess Return Index is twice the beginning value, the Redemption Value will be twice the initial price). The Applicable Index for the ComPS is the JPMCI Aluminum Excess Return Index, which is an Excess Return Index. An Excess Return Index, which is described more fully in the attached Prospectus under "The JPM Indices -- Excess Return Methodology", represents the cumulative return of holding an unlevered position in the designated nearby commodity futures contracts underlying such Applicable Index. Generally, since the 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 for each of the next four days of the Rollover Period such that, by the day after the Rollover Period ends and for all subsequent days until the next Rollover Period, 100% of the daily index change is attributable to the percentage change of the newly-designated contract. S-5 52 Therefore, the ComPS pay dividends at a fixed rate and amount and pay a principal amount upon redemption or at maturity which varies directly with the performance of the JPMCI Aluminum Excess Return Index. The change in the JPMCI Aluminum Excess Return Index is linked directly to the percentage change in the designated contracts underlying such index. Thus, any events which affect the designated contracts underlying the JPMCI Aluminum Excess Return Index may affect the Redemption Value of such ComPS. The Principal Amount of each of the ComPS, which is initially equal to the Face Amount, will vary over the life of the ComPS in relation to the JPMCI Aluminum Excess Return Index (the "Applicable Index"). The Principal Amount repayable on any Early Redemption Date, upon the occurrence of any Special Event Redemption or at Stated Maturity will be determined, pursuant to the terms described herein (including, without limitation, the averaging of the Applicable Index over the Early Determination Period or Determination Period, as applicable, and the present-valuing of the dividends and Principal Amount in connection with early redemptions), by comparing the level of the JPMCI Aluminum Excess Return Index set on the date of issuance of the ComPS with the level determined pursuant to the terms hereof for any such date of redemption. The ComPS represent preferred limited liability company interests in the Company, the assets of which will consist of the Related Note and other notes issued by Morgan Guaranty in connection with other issuances of Preferred Securities. The Related Note, in which the proceeds of the ComPS and the related Common Securities will be invested, matures on [ ], 20[ ] (which is the "Stated Maturity"), subject to extension in the case of a Market Disruption Event, and is redeemable at certain times, from time to time, at the option of the Company upon an optional redemption by one or more holders of ComPS in an amount sufficient to fund such redemption and the redemption of the related Common Securities and at any time by Morgan Guaranty in whole or in part upon the occurrence of a Special Event. The ComPS will be redeemed at Stated Maturity at the ComPS Redemption Price, which is equal to the sum of (a) the Redemption Value (as defined below) per Preferred Security plus (b) accrued and unpaid dividends thereon to but excluding the date of redemption. In addition, if, as a result of a Special Event, Morgan Guaranty redeems the Related Note in whole or in part prior to Stated Maturity, the Company must redeem ComPS and related Common Securities having an aggregate Principal Amount equal to the Principal Amount of the Related Note so redeemed at the ComPS Redemption Price. See "Description of the ComPS -- Redemption at Stated Maturity"; -- Special Event Redemption". For purposes of this Prospectus Supplement, "Principal Amount" means (i) in the case of any Preferred Security, the Early Redemption Value thereof or the Redemption Value thereof (as if determined as of such time), as applicable, and (ii) in the case of the Related Note, the principal amount thereof at such time determined pursuant to the terms thereof. DIVIDENDS The holders of ComPS are entitled to receive cumulative cash dividends at the rate of [ ]% per annum on the Face Amount per Preferred Security, accruing from the Issue Date, and payable monthly in arrears on the last calendar day of each month, commencing [ ], 1996, or, if any such date is not a Business Day (as defined herein), the next succeeding Business Day when, as and if available for payment by the Company (as described herein), except as otherwise described herein. The first dividend payment will be for the period from and including the Issue Date to but excluding [ ], 1996. Dividends (or amounts equal to accrued and unpaid dividends) payable on the ComPS for any period shorter than a monthly dividend period will be computed on the basis of a 360-day year of twelve 30-day months and on the basis of the actual number of days elapsed in any such 30-day month. See "Description of the ComPS -- Dividends". REDEMPTION AT STATED MATURITY Unless previously redeemed pursuant to the optional or special redemption provisions described below, each of the outstanding ComPS will be redeemed by the Company, in cash, on [ ], 20[ ], which is the Stated Maturity of the Related Note, subject to extension in the case of a Market Disruption Event (as defined herein), at the ComPS Redemption Price, which is equal to (a) the Redemption Value per S-6 53 Preferred Security plus (b) accrued and unpaid dividends thereon to but excluding the date of redemption. See "Description of the ComPS -- Redemption at Stated Maturity"; "Risk Factors -- Extension of Settlement Date or Stated Maturity". CALCULATION OF REDEMPTION VALUE The Principal Amount of each Preferred Security is indexed to the JPMCI Aluminum Excess Return Index (the "Applicable Index"), which is calculated based on the change in value of certain aluminum futures contracts included from time to time in the JPM Indices (such contracts, from time to time, the "Benchmark Aluminum Contracts"). On the date of this Prospectus Supplement, the Benchmark Aluminum Contract is the High Grade Primary Aluminum contract traded on the London Metals Exchange (the "LME"). Any contracts for forward delivery on the LME shall be referred to herein as "futures contracts" or "contracts." In summary, and subject to the complete definitions and formulae contained herein and in the Prospectus, the Principal Amount of each Preferred Security at Stated Maturity, subject to extension in the case of a Market Disruption Event (the "Redemption Value"), shall be determined by multiplying the Face Amount of each Preferred Security by a fraction, the numerator of which is the Applicable Index Settlement Value and the denominator of which is the Applicable Index Commencement Value. Subject to the more complete definitions contained herein and in the accompanying Prospectus, "Applicable Index Settlement Value" means the arithmetic average of the values of the Applicable Index during the Determination Period (as defined below), and "Applicable Index Commencement Value" means [value set on date of issuance]. See "Description of ComPS--Calculation of Redemption Value" herein and "Description of ComPS--Determination Period and Settlement Date" in the accompanying Prospectus. EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE Upon the occurrence of certain events affecting the liquidity or increasing the cost of holding or trading the Benchmark Aluminum Contracts and the inability to find a suitable replacement Benchmark Aluminum Contract, Morgan Guaranty has the right to cause the Applicable Index Settlement Value (as defined in the preceding paragraph) to be fixed. Following such an event, the Applicable Index Settlement Value will remain fixed and will be used as the Applicable Index Early Settlement Value for the computation of any Early Redemption Value and as the Applicable Index Settlement Value at Stated Maturity. See "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value". OPTIONAL REDEMPTION Each holder of ComPS may, by giving notice as specified herein before the [ ] of each year prior to Stated Maturity (each, an "Optional Redemption Date"), cause the Company to redeem some or all of such holder's ComPS at the ComPS Early Redemption Price, which is equal to (a) the Early Redemption Value (as defined in the Prospectus) per Preferred Security as determined at such time plus (b) accrued and unpaid dividends thereon to but excluding the date of redemption. See "Description of the ComPS-- Optional Redemption". SPECIAL EVENT REDEMPTION Upon the occurrence and during the continuation of a Tax Event or an Investment Company Event (each as defined herein), Morgan Guaranty will have the right to redeem the Related Note in whole or, if redemption of less than all the ComPS will result in the discontinuance of such Special Event, in part in an amount sufficient to cause such discontinuance, in each case for cash, with the result that the Company will redeem a Principal Amount of ComPS and related Common Securities equal to the Principal Amount of the Related Note so redeemed for cash at the ComPS Early Redemption Price. However, in the case of a Tax Event, Morgan Guaranty may allow the Related Note and the Company may allow the ComPS and related Common Securities to remain outstanding upon the receipt of indemnification by J.P. Morgan of S-7 54 the Company for all taxes payable by it as a result of such Tax Event. See "Description of the ComPS-- Special Event Redemption". UNCONDITIONAL GUARANTEE BY J.P. MORGAN J.P. Morgan, through its obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement and the Expense Agreement, taken together, will provide a full and unconditional guarantee, on a subordinated basis, of payments due on the ComPS. See "Risk Factors--Limitations on Rights Under the Guarantee, the Related Note Guarantee and the Related Note", "Description of the Related Note Guarantee" and "Effect of Obligations Under the Guarantee, the Related Note Guarantee and the Related Note". THE GUARANTEE The Guarantee by J.P. Morgan guarantees to the holders of the ComPS the payment of (i) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only if and to the extent that, in each case, Morgan Guaranty has made payment of interest or principal on the Related Note, as the case may be, and (ii) upon a Liquidation Event (as defined herein) (other than in connection with the redemption of all the ComPS upon maturity or redemption of Related Note), the lesser of (A) the sum of (I) the Early Redemption Value of such ComPS and (II) the amount of accrued and unpaid dividends on such ComPS to but excluding the date of payment (the "Liquidation Distribution"), to the extent the Company has funds available therefor and (B) the amount of assets of the Company remaining available for distribution to holders of the ComPS upon such Liquidation Event. J.P. Morgan's obligations under the Guarantee will be subordinated and junior in right of payment to all liabilities of J.P. Morgan, pari passu with the most senior preferred stock outstanding as of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan. THE RELATED NOTE GUARANTEE The Related Note Guarantee by J.P. Morgan guarantees to the Company the payment of any dividends on and principal of the Related Note as provided pursuant to the terms of the Related Note, at such times and in such amounts as provided therein. J.P. Morgan's obligations under the Related Note Guarantee will be subordinated and junior in right of payment to all liabilities of J.P. Morgan, pari passu with the most senior preferred stock outstanding as of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan. RELATED NOTE The Related Note will be issued as an unsecured obligation of Morgan Guaranty, limited in initial principal amount to approximately $[ ], such amount being the aggregate Face Amount of the ComPS and the related Common Securities. The Related Note will mature on the Stated Maturity (subject to extension in the case of a Market Disruption Event), and will bear interest at an annual rate of [ ]% on the Face Amount (which is equivalent to the annual dividend rate with respect to the ComPS), payable monthly in arrears on the last day of each calendar month, commencing on [ ], 1996. The Principal Amount of the Related Note at any time will be the aggregate Principal Amount of the outstanding ComPS and related Common Securities at such time. The amount payable upon maturity for the Related Note will be the Related Note Redemption Price. The timing and amount of payments on the Related Note mirror the aggregate financial terms of the ComPS. The obligations of Morgan Guaranty under the Related Note will be pari passu with all present and future Senior Indebtedness of Morgan Guaranty. Morgan Guaranty's obligations under the Related Note are effectively subordinated to all liabilities (including indebtedness) of its consolidated and unconsolidated subsidiaries. S-8 55 VOTING RIGHTS Holders of ComPS will have limited voting rights and will not be entitled to vote to appoint, remove or replace the Managing Members of the Company (as defined below). See "Description of the ComPS-- Voting Rights". USE OF PROCEEDS The Company will invest the proceeds from the sale of the ComPS offered hereby and the related Common Securities in the Related Note, the proceeds of which will be used by Morgan Guaranty for general corporate purposes and for hedging its obligations under the Related Note. See "Use of Proceeds". LISTING [The ComPS have been authorized for listing on the [ ] under the symbol " , subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement.] [Prior to this offering, there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the Underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] S-9 56 RISK FACTORS INDEXATION OF PRINCIPAL AMOUNT The Principal Amount of each of the ComPS, which is initially equal to the Face Amount, will vary until Stated Maturity of the ComPS in relation to the JPMCI Aluminum Excess Return Index (the "Applicable Index"). The Principal Amount repayable on any Optional Redemption Date, upon the occurrence of any Special Event Redemption or in connection with any Liquidation Distribution (each such redemption date, an "Early Redemption Date") or at Stated Maturity will be determined, pursuant to the terms described herein (including, without limitation, the averaging of the Applicable Index over the Early Determination Period or Determination Period, as applicable, and the present-valuing of the dividends and Principal Amount in connection with early redemptions), by comparing the level of the JPMCI Aluminum Excess Return Index at the date of issuance of the ComPS with the level determined pursuant to the terms hereof for any such date of redemption. Accordingly, the Principal Amount to be received upon any date of redemption will fluctuate based on the Applicable Index and may be lower than the Face Amount. LIMITATION ON RIGHTS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE RELATED NOTE The Guarantee will be effective with respect to the ComPS from the time of issuance of such ComPS but will not apply to any payment of dividends or other amounts due in respect of the ComPS to the extent Morgan Guaranty has failed to make a payment of principal or interest on the Related Note. To the extent Morgan Guaranty were to default on its obligation to pay amounts payable on the Related Note, the Company would lack available funds for the payment of distributions on or amounts payable on redemption of the ComPS and, in such event, holders of the ComPS would not be able to rely on the Guarantee for payment of such amounts. Instead, holders of the ComPS would rely on the enforcement by the Company of its rights as holder of the Related Note against Morgan Guaranty and as holder of the Related Note Guarantee against J.P. Morgan. J.P. Morgan, through its obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement and the Expense Agreement, taken together, will provide a full and unconditional guarantee, on a subordinated basis, of payments due on the ComPS. See "Description of the Guarantee" and "Description of the Related Note Guarantee". SPECIAL EVENT REDEMPTION Upon the occurrence of a Special Event, unless waived by Morgan Guaranty or subject to cure as specified herein, Morgan Guaranty shall have the right to redeem the Related Note, in whole or in part, in which event the Company will redeem the ComPS and related Common Securities on a pro rata basis to the same extent as the Principal Amount of the Related Note is redeemed by Morgan Guaranty. As described in more detail below, a Special Event is either (i) a Tax Event or (ii) an Investment Company Event. A Special Event may occur at any time. See "Description of the ComPS--Special Event Redemption". It is possible that the occurrence of a Special Event will cause the market price of the ComPS in any existing secondary market to decline. LIMITED VOTING RIGHTS Holders of ComPS will have limited voting rights relating to a payment default on or an adverse change to the ComPS, and will not be entitled to vote to appoint, remove or replace the Managing Members of the Company (J.P. Morgan and JPM Ventures), which voting rights are vested exclusively in the holders of the Common Securities. See "Description of the ComPS--Voting Rights". TRADING PRICE MAY NOT REFLECT ACTUAL ECONOMIC VALUE [The ComPS have been authorized for listing on the [ ] under the symbol "[ ]", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence S-10 57 within a 30-day period after the date of this Prospectus Supplement. [Prior to this offering there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the Underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] However, it is not possible to predict whether the necessary number of holders will purchase and, for the remaining term of the ComPS, continue to hold ComPS in order that any secondary market which does develop continues to exist. The Underwriters are not obligated to make a market for the ComPS, and although JPMSI, as lead Underwriter, intends to use its reasonable efforts to do so, it is possible that no active secondary market for the ComPS will develop and remain in existence. There can be no assurance as to the market prices for the ComPS in any secondary market which does develop. Accordingly, the ComPS that an investor may purchase, whether pursuant to the offer made hereby or in the secondary market, may trade at a discount to the price that the investor paid to purchase the ComPS offered hereby. VALUE OF THE COMPS The value of the ComPS at any time will depend upon the interaction of at least three key factors: (i) the level of the Applicable Index, (ii) the credit quality of Morgan Guaranty and J.P. Morgan and (iii) the interest rate environment. As discussed under "Description of the ComPS", adverse changes in the Applicable Index will directly correlate to adverse changes in the value of the ComPS. 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 the ComPS in any secondary market then existing to decline. NO RIGHT TO INTEREST ON RELATED NOTE Because holders of ComPS are essentially investing in a pro rata share of the Related Note, prospective purchasers of ComPS are also making an investment decision with regard to the Related Note and should carefully review all the information regarding the Related Note contained herein and in the accompanying Prospectus. However, investors in ComPS have no right to direct interest distributions on the Related Note. See "Description of the Related Note". IMPOSITION OF BANK REGULATORY RESTRICTIONS The Company's ability to make distributions and other payments on the ComPS is dependent upon Morgan Guaranty's making interest and other payments on the Related Note as and when required or collection by the Company under the Related Note Guarantee. As noted in the accompanying Prospectus under "J.P. Morgan & Co. Incorporated--Regulation", Morgan Guaranty is subject to examination and regulation by U.S. federal and state banking authorities, and although there is no current restriction on Morgan Guaranty's ability to make payments under the Related Note, certain transactions with affiliates, including the Company, are or may become subject to restrictions imposed in the future by bank regulatory authorities. EFFECT OF TRADING IN THE BENCHMARK ALUMINUM CONTRACTS AND RELATED COMMODITIES AND INSTRUMENTS Morgan Guaranty and other affiliates of J.P. Morgan are and will be actively involved in the trading of the Benchmark Aluminum Contracts 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, one or more of the JPM Indices or to another commodity. Morgan Guaranty has licensed, and may in the future license, the Applicable Index, the JPM Indices, and related indices and sub-indices for use by affiliated and unaffiliated parties, for publication in newspapers and periodicals, for distribution by information and data dissemination services and for other S-11 58 purposes. Morgan Guaranty currently intends to publish individual commodity sub-indices for each of the commodities included in the JPMCI using the same calculation methodology as that described below. The Applicable Index on the date hereof is identical to the sub-index having the same underlying commodity. Trading in the foregoing contracts and commodities by Morgan Guaranty, its affiliates (including JPMSI) and unaffiliated third parties could adversely affect the value of the Applicable Index, which would in turn adversely affect the return on and the value of the ComPS. See "Description of the ComPS". Furthermore, additional issuances of securities linked or referenced to the Benchmark Aluminum Contracts, similar aluminum futures contracts or aluminum could adversely affect the value of the ComPS. POTENTIAL FOR ADVERSE INTERESTS As noted above, Morgan Guaranty, JPMSI and their affiliates expect to engage in trading activities related to the Benchmark Aluminum Contracts and 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 Note issued to the Company, all such activities could create interests of Morgan Guaranty adverse to those of the holders of ComPS. For example, the issuance of other securities indexed to the Applicable Index, i.e., the introduction of competing products into the marketplace, could adversely affect the value of the ComPS. To the extent that J.P. Morgan or one of its affiliates serves as issuer, or JPMSI or one of its affiliates serves as agent or underwriter, for such securities or other instruments, their interests with respect to such products may be adverse to those of the holders of the ComPS. Morgan Guaranty will serve as Calculation Agent with respect to the ComPS and, accordingly, will in good faith calculate the Applicable Index, which could also raise certain adverse interests (for example, in instances where Morgan Guaranty as the Calculation Agent is required to exercise discretion). RISK OF CARRYING AND ROLLING BENCHMARK ALUMINUM CONTRACTS As discussed below, the Early Redemption Value and the Redemption Value of the ComPS will be calculated with reference to the Applicable Index, the value of which is designed to replicate to the extent provided herein the cumulative return of holding a continuous investment in the Benchmark Aluminum Contracts. At any given time, the Applicable Index will be calculated based on the change in value of certain Benchmark Aluminum Contracts for delivery in the near term (the "shorter-dated contracts"). The Applicable Index will continue to be calculated based on the change in value of such shorter-dated contracts until they approach maturity, at which time the Applicable Index will, as described below, cease to be calculated based on the change in value of such shorter-dated contracts and begin to be calculated based on the change in value of the subsequent Benchmark Aluminum Contracts (the "longer-dated contracts") on a regular periodic basis so as to be continuously indexed to the change in value of Benchmark Aluminum Contracts. The period during which each such replacement of shorter-dated contracts with longer-dated contracts as the basis for the calculation of the change in value of the Applicable Index occurs is referred to herein as the "Rollover Period", as further defined below. If the market for Benchmark Aluminum Contracts is in "contango" (i.e., the prices of longer-dated contracts are above the prices of shorter-dated contracts), the return on the Applicable Index may be adversely affected. The Applicable Index would decline if (i) the price of the longer-dated Benchmark Aluminum Contracts during the Rollover Period were more than the price of the shorter-dated contracts which they will replace and (ii) the price of the longer-dated contracts were to decline as such contracts approach maturity (i.e., the price of the longer-dated contracts were to converge toward the price of the replaced shorter-dated contracts). While many of the commodities included in the JPM Indices have historically exhibited periods of both "backwardation" (i.e., the prices of longer-dated contracts are below the prices of shorter-dated contracts) and contango, there can be no assurance that backwardation will exist at any or all times. The absence of backwardation in the market for Benchmark Aluminum Contracts could adversely affect the Applicable Index and, correspondingly, could adversely affect the value of the ComPS. Additionally, the issuance and/or the trading of the ComPS could adversely affect the market for Benchmark Aluminum S-12 59 Contracts and the extent to which such markets are in backwardation or contango and, correspondingly, could adversely affect the value of the Applicable Index and the value of the ComPS. See "Description of ComPS--Calculation of Redemption Value". The following table sets forth the simulated month-end level of the JPMCI Aluminum Excess Return Index (the Applicable Index) for the months from January, 1986 through January, 1996, and the actual level of the JPMCI Aluminum Excess Return Index thereafter. Because Morgan Guaranty did not commence actual calculation and publication of the JPMCI Aluminum Excess Return Index using the rules described herein until February 1, 1996, the levels prior to such date are simulated levels only, derived by applying the rules of the JPMCI Aluminum Excess Return Index as described herein to historical aluminum contract settlement values and using as a given the level of the previous JPMCI Aluminum Excess Return Index on January 31, 1996, as the basis for calculation: LEVEL OF THE APPLICABLE INDEX AS OF THE END OF:
YEAR JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. ---- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ 1986 120.66 119.38 122.98 118.54 119.11 120.95 117.12 117.40 122.36 119.78 117.16 119.54 1987 123.04 133.46 135.89 141.28 144.69 149.28 167.84 180.74 200.23 190.48 176.48 210.78 1988 203.14 249.21 306.25 273.71 398.50 396.49 401.27 419.79 333.89 367.03 364.73 391.40 1989 355.43 350.61 314.72 357.74 325.51 311.85 296.95 311.45 301.97 306.98 303.60 289.62 1990 248.03 265.21 282.13 267.15 277.24 275.49 302.02 327.22 329.25 328.03 265.25 266.28 1991 253.26 265.25 242.98 227.44 209.21 219.36 209.32 205.44 187.47 186.67 176.32 177.88 1992 193.04 204.36 203.01 204.19 202.49 199.09 201.52 198.90 190.65 173.72 181.45 186.21 1993 180.35 176.98 166.16 163.13 163.42 177.05 171.18 163.15 155.61 147.24 146.08 153.48 1994 166.37 175.51 174.32 172.38 179.06 194.36 192.43 199.00 207.86 232.30 247.50 251.30 1995 269.87 224.12 233.24 223.80 227.34 223.38 231.06 220.12 215.78 203.80 200.88 186.76 1996 188.76 188.24 194.58 187.80
Additionally, the level of the Applicable Index as of the close of business on [the date of pricing] was [ ]. S-13 60 The following is a graph of such simulated and actual month-end values: LEVELS OF JPMCI ALUMINUM EXCESS RETURN INDEX, 1986-1996 [GRAPHIC OMITTED] Source: Morgan Guaranty Using the month-end levels noted above as hypothetical Applicable Index Settlement Values, the hypothetical Redemption Value of a ComPS as if maturing at the end of each of the past ten years for a ComPS priced on December 31, 1986, with a hypothetical Face Amount of $40.00 and an Applicable Index Commencement Value of 119.54 would be as follows:
HYPOTHETICAL APPLICABLE INDEX YEAR SETTLEMENT VALUE HYPOTHETICAL REDEMPTION VALUE ---------------- ----------------------------- ----------------------------- 1986............ 119.54 $ 40.00 1987............ 210.78 $ 70.53 1988............ 391.40 $130.97 1989............ 289.62 $ 96.91 1990............ 266.28 $ 89.10 1991............ 177.88 $ 59.52 1992............ 186.21 $ 62.31 1993............ 153.48 $ 51.36 1994............ 251.30 $ 84.09 1995............ 186.76 $ 62.49
VOLATILITY OF ALUMINUM AND ALUMINUM FUTURES PRICES Market prices for aluminum can fluctuate widely and are affected by numerous factors, with the two principal factors being the level of economic activity in the main consuming markets and the rate of supply of new metal from producers. Other factors influencing market prices for aluminum include disruptions in S-14 61 aluminum output, the level of metal exports from the former Soviet Union, producer cut-backs and speculative activity. Production of aluminum is a three-stage process beginning with the mining of bauxite. The mining of bauxite occurs mainly in the tropics, with the major producing regions being the Caribbean, South America, Africa, Southeast Asia and Australia. Fluctuation in the supplies of bauxite or social or political disruptions in the major producing regions could affect the level of the Applicable Index. The production of aluminum from alumina is a power-intensive process and a continuous supply of electrical power is essential. A significant proportion of aluminum production capacity is located close to resources of hydroelectric power. Other economical energy sources for producing aluminum include lowgrade coal and waste gases from oil production. However, disruptions in the supply of energy to aluminum producers or an increase in the cost thereof could affect the level of the Applicable Index. Furthermore, a significant proportion of western world aluminum production capacity is controlled by a small number of companies, and such producers have in the recent past implemented temporary curtailments of output. Such efforts at supply curtailment (and the cessation thereof) could affect the value of the Applicable Index. Aluminum's major end-uses include applications in the transportation, construction, packaging and electrical industries. Potential for substitution exists in all areas, although considerations including relative weight and cost often limit substitution levels. However, the development of a substitute product could adversely affect the value of the Applicable Index. The supply of and demand for aluminum influence the aluminum price in the medium to longer term. However, in the short term price may experience rapid changes due to the influence of speculative activity in markets. All such volatility in the Benchmark Aluminum Contracts will correlate directly to volatility in the Applicable Index. Such volatility could lead some investors in the Benchmark Aluminum Contracts to withdraw from the applicable futures markets, which could adversely affect the liquidity of such markets and could adversely affect the value of the Applicable Index and, correspondingly, the value of the ComPS. EFFECT OF ADVERSE CHANGES IN COMMODITY PRICES The Applicable Index is designed to replicate to the extent provided herein the cumulative return of holding a continuous investment in the Benchmark Aluminum Contracts over time. In the event of sudden disruptions in the supplies of aluminum, such as those caused by war, accidents, weather, or acts of terrorism, prices of Benchmark Aluminum Contracts, and, consequently, the value of the Applicable Index, could become extremely volatile and unpredictable. Also, sudden and dramatic declines in Benchmark Aluminum Contract prices as may occur, for example, upon a cessation of hostilities that may exist in countries producing aluminum or upon the discovery of significant additional sources or reserves of the raw materials necessary to produce aluminum (e.g., bauxite or electricity), the introduction of new or previously withheld supplies into the market (e.g., aluminum from the former Soviet Union) or the introduction of substitute products or commodities, could have a significant adverse effect on the value of the Applicable Index and on the value of the ComPS. In addition, the price of aluminum has on occasion been subject to very rapid short-term changes due to speculative activities which, if such activities result in a price decrease, may cause the value of the ComPS to decrease. See "Description of the ComPS--Calculation of Redemption Value". SUSPENSION OR MATERIAL DISRUPTION OF FUTURES OR COMMODITIES TRADING; TEMPORARY DISTORTIONS The futures markets and the markets for aluminum are subject to temporary distortions or other disruptions due to conditions of illiquidity in the markets, the participation of speculators, government regulation and intervention and the other factors referred to in the preceding paragraph. In addition,the London Metals Exchange (the "LME") has the authority to limit trading when required in its discretion, and has in the past exercised such authority to limit the spread at which a futures contract can trade based on the cash contract (or the difference between adjacent contracts) for the same commodity. Although the LME has not imposed absolute price limits to date, many U.S. futures exchanges set and enforce a maximum or minimum price at which a contract may trade on any given day (such price, a "limit price"). In a particular futures contract, once the limit price has been reached in such a contract, no trades may be S-15 62 made on that day at a price above or below the limit price, as the case may be. Limit prices may have the effect of precluding trading in a particular contract for all or a portion of a trading day or forcing the liquidation of contracts at disadvantageous times or prices. Any such circumstances, particularly if they occur during the Rollover Period for the Applicable Index or during an Early Determination Period or the Determination Period (each as defined herein) for the Applicable Index, could adversely affect the value of the Applicable Index and/or could constitute a Market Disruption Event (as defined below) and, therefore, could adversely affect the value of the ComPS. Depending on the period of time over which a Market Disruption Event continues, the correlation between changes in the value of the Applicable Index and changes in the general level of prices of aluminum may be adversely affected. Under such circumstances, the value of the Applicable Index, and the value of the ComPS, may be adversely affected. Additionally, because application has been made to list the ComPS on the NYSE and, if listed, the ComPS will trade as equity securities on the NYSE, trading in the ComPS may be subject to interruption or delay due to extreme volatility in the trading prices of equity securities generally on the NYSE (the so-called "circuit breaker" rules), notwithstanding the specific price movements of the ComPS. MARKET DISRUPTION EVENTS In the event of a Market Disruption Event during the Determination Period, the Early Redemption Value or Redemption Value, as applicable, payable in respect of the ComPS will be calculated using the Applicable Index on the day or days on which open-outcry trading on either the New York Mercantile Exchange (the "NYMEX") or the LME is scheduled to occur or occurs (each, a "Trading Day") immediately following the termination of such Market Disruption Event. However, if such Market Disruption Event remains in effect for longer than 20 consecutive Trading Days and, in the reasonable judgment of Morgan Guaranty, such Market Disruption Event is likely to remain in effect, then the Applicable Index Settlement Value for each Trading Day subject to a Market Disruption Event may be determined in good faith by Morgan Guaranty based on alternative pricing sources reasonably believed by it to be indicative of then-prevailing prices for notional transactions in futures contracts or commodities equal in size to the Applicable Index Settlement Value, although Morgan Guaranty has no obligation to do so, and such value will be utilized in the calculation of the Redemption Value for such days. Because Morgan Guaranty's obligations under the 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 Aluminum Excess Return Index and the spot prices of aluminum have shown some positive correlation with inflation and some negative correlation with stock and bond returns (in each case in the United States), there can be no assurance that such correlations will prevail in the future. As a result, investors who invest in ComPS in reliance on these correlations should individually assess the likelihood of such correlations continuing. CHANGES IN LAWS OR REGULATIONS OR INTERPRETATIONS THEREOF Prices of commodities and commodity futures contracts may be adversely affected by the promulgation of new laws or regulations or by the reinterpretation of existing laws or regulations (including, without limitation, those relating to taxes and duties on commodities or commodity components) by one or more governments, governmental agencies or instrumentalities, courts or other official bodies. Any such event could adversely affect the value of the Applicable Index and, correspondingly, could adversely affect the value of the ComPS. Additionally, the occurrence of certain events increasing the cost of holding or trading the Benchmark Aluminum Contracts and the inability to find a suitable replacement Benchmark Aluminum Contract could lead Morgan Guaranty to cause the Applicable Index Settlement Value to be fixed, in which event the Redemption Value of the ComPS would not vary through Stated Maturity. S-16 63 EXTENSION OF SETTLEMENT DATE OR STATED MATURITY If any Benchmark Aluminum Contract were to be affected by a Market Disruption Event during any Early Determination Period or the Determination Period, the applicable Settlement Date would be postponed until the later of (i) the applicable Early Redemption Date or the Stated Maturity and (ii) the fifth Business Day after the last day of the applicable Early Determination Period or the Determination Period. Such delay could be of indefinite duration, during which time a holder of ComPS will not receive the Early Redemption Value or Redemption Value thereof, as applicable. In the event that payment of the Redemption Value is postponed beyond the Stated Maturity, interest will accrue on the Face Amount in the manner described under the caption "Description of the ComPS--Calculation of Redemption Value", but no dividends will be payable after Stated Maturity. In the event payment of the Early Redemption Value is postponed beyond the applicable Early Redemption Date, no dividends will be payable, and no interest will accrue and be payable, with respect to ComPS redeemed on such Early Redemption Date. DISCONTINUANCE OF PUBLISHING OF THE JPMCI ALUMINUM EXCESS RETURN 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 during the remaining term of the ComPS, based on the methodology described in the accompanying Prospectus under "Description of the ComPS". However, such good-faith calculation may result in a ComPS Redemption Price or ComPS Early Redemption Price for the ComPS which is less than the ComPS Redemption Price or ComPS Early Redemption Price, as applicable, for such ComPS had it been calculated on the basis of the 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 under "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value", if any Benchmark Aluminum Contract becomes less liquid or representative, the JPMCI Policy Committee could recommend a replacement Benchmark Aluminum Contract. Such a change from a less liquid to a more liquid contract may result in a lower Early Redemption Value or Redemption Value for the ComPS than would have been the case if the less liquid contract had remained the benchmark. If at any time no replacement contracts can be found to serve as a Benchmark Aluminum Contract, the Applicable Index Settlement Value of the ComPS will be determined at such time as described under the caption "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value". Such an early determination of the Applicable Index Settlement Value may result in the holders of the ComPS receiving an amount that is less than what indicative commodity and futures prices prevailing on any Early Redemption Date or at the Stated Maturity would otherwise imply. Because Morgan Guaranty will be the Calculation Agent, such early determination may raise adverse interests. Additionally, if at any time any Benchmark Aluminum Contract, or the trading thereof, becomes subject to any increased cost or additional tax, Morgan Guaranty reserves the right to designate a replacement Benchmark Aluminum Contract or, if no such contract is designated, to cause, at its option, the Applicable Index Settlement Value of the ComPS to be determined at such time as described under "Description of the ComPS--Early Determination of Applicable Index Settlement Value and Redemption Value". Because Morgan Guaranty will, at the time any Benchmark Aluminum Contract becomes subject to such increased cost or additional tax, in its discretion decide whether or not to cause an early determination of the Applicable Index Settlement Value of the ComPS, exercise of such option may raise an adverse interest. Such a change in contracts due to the imposition of any increased cost or additional tax may result in a lower Redemption Value for such ComPS than would have been the case if the contract on which such increased cost or additional tax were imposed had remained a Benchmark Aluminum Contract. Any early determination of the Applicable Index Settlement Value may cause the market price of ComPS in any existing secondary market to decline. S-17 64 EARLY REDEMPTION The ComPS may be redeemed prior to their Stated Maturity upon the occurrence of a Special Event or redeemed at the option of the holders thereof on each Optional Redemption Date. In the case of a redemption upon the occurrence of a Special Event, the Early Redemption Value paid by the Company at such time may be significantly less than the Redemption Value that would otherwise have been payable had the ComPS not been redeemed prior to their Stated Maturity and the occurrence of such Special Event may cause the market price of ComPS in any existing secondary market to decline. In the case of an optional redemption by holders, it is likely, under usually-prevailing market conditions, that the Early Redemption Value paid by the Company will be less than the amount such holder could have realized by selling such ComPS in an existing secondary market, if any, ratably during the Early Determination Period. Delay in payment of the ComPS Early Redemption Price (as a result of a Market Disruption Event or a delay in the provision by DTC to the Company of the Applicable Notice (as defined below)) will not entitle holders of ComPS to additional dividends on the ComPS or the accrual of any interest on such ComPS Early Redemption Price. CERTAIN CONSIDERATIONS REGARDING HEDGING Prospective purchasers of the ComPS who intend to hedge against the risks associated with the market for aluminum should recognize the complexities of utilizing the ComPS in this manner. The formula under which the Principal Amount is calculated is not guaranteed to produce distributions to holders having readily definable relationships with other aluminum market instruments and products. As described below, because the Applicable Index is an Excess Return Index, the value of the ComPS will reflect not only the price of the Benchmark Aluminum Contracts but also the state of the futures market for Benchmark Aluminum Contracts (i.e., whether such market is in "backwardation" or "contango" over time, as discussed above). Also, under certain circumstances, amounts payable on the ComPS may be based on the good faith determination of Morgan Guaranty and not on the Applicable Index. For these reasons, investors should be cautious in using the ComPS in a hedging program. The risks associated with utilizing the ComPS in a hedging program may be magnified in periods of substantial aluminum price volatility, since properly correlating the ComPS either as a hedge of other assets or correlating the ComPS to a hedge thereof may become more difficult. Also, investing in ComPS should not be considered a complete investment program. UNCERTAIN UNITED STATES FEDERAL INCOME TAX CHARACTERIZATION OF COMPS As discussed below, assuming that the Company will be classified for U.S. Federal income tax purposes as a partnership, each holder of ComPS will be required to include in its gross income its distributive share of any item of income or gain realized by the Company. Morgan Guaranty and the Company initially intend to treat the Related Note as a contingent debt instrument, but in light of the absence of direct authority on the proper characterization of the Related Note and the proper consequences of a contingent debt instrument, the Internal Revenue Service may apply, and may require Morgan Guaranty, the Company and/or the holders of ComPS to apply, a different characterization or consequences. Such alternate characterization or consequences may be materially less favorable for holders of ComPS for United States federal income tax purposes than the characterization and consequences to be applied initially by Morgan Guaranty and the Company. See "United States Federal Income Taxation" below. J.P. MORGAN & CO. INCORPORATED J.P. Morgan, whose origins date to a merchant banking firm founded in London in 1838, is the holding company for a group of global subsidiaries that provide a wide range of financial services to corporations, governments, financial institutions, institutional investors, professional firms, privately held companies, nonprofit organizations, and financially sophisticated individuals. J.P. Morgan's activities are summarized in the accompanying Prospectus. S-18 65 J.P. MORGAN INDEX FUNDING COMPANY, LLC J.P. Morgan Index Funding Company, LLC, is a Delaware limited liability company formed pursuant to (i) the filing of a certificate of formation with the Secretary of State of the State of Delaware on November 21, 1995 and (ii) the amended and restated limited liability company agreement, dated May 15, 1996, and effective as of November 21, 1995 (the "LLC Agreement"), filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. J.P. Morgan will directly or indirectly acquire all Common Securities of the Company. The Company exists for the exclusive purposes of (i) issuing the ComPS and Common Securities, and from time to time issuing additional series of preferred and common securities, (ii) investing the gross proceeds of the ComPS and Common Securities in the Related Note, and investing the proceeds of such additional issuances of preferred and common securities in other debt obligations of Morgan Guaranty, and (iii) engaging in only those other activities necessary or incidental thereto. Pursuant to the LLC Agreement, the Common Securities will initially be owned by J.P. Morgan and by J.P. Morgan Ventures Corporation, a Delaware corporation and a wholly-owned subsidiary of J.P. Morgan ("JPM Ventures"). J.P. Morgan and JPM Ventures will be the Managing Members of the Company (as defined in the LLC Agreement). The LLC Agreement and the Agreement as to Expenses and Liabilities, dated as of [ ], 1996, between J.P. Morgan and the Company (the Expense Agreement"), provide that J.P. Morgan will pay for all debts and obligations (other than with respect to the ComPS to the extent set forth herein) and all costs and expenses of the Company, including any taxes and all costs and expenses with respect thereto, to which the Company may become subject. The Company and J.P. Morgan have agreed that any person to whom such debts, obligations, costs and expenses are owed will have the right to enforce J.P. Morgan's obligations in respect of such debts, obligations, costs and expenses directly against J.P. Morgan without first proceeding against the Company. The rights of the holders of the ComPS, including economic rights, rights to information and voting rights, are set forth in the LLC Agreement. See "Description of the ComPS". USE OF PROCEEDS The Company will invest the proceeds from the sale of the ComPS offered hereby and the related Common Securities in a Related Note of Morgan Guaranty, the proceeds of which will be used by Morgan Guaranty for general corporate purposes and for hedging its obligations under the Related Note. At the time of the pricing of the ComPS, Morgan Guaranty hedged its anticipated exposure under the Related Note and, subject to market conditions, Morgan Guaranty expects that it will continue to hedge its exposure under the Related Note from time to time following this offering of ComPS by taking long or short positions in the Benchmark Aluminum Contracts or in listed or over-the-counter options contracts in, or other derivative or synthetic instruments related to, several or all of the Benchmark Aluminum Contracts. There can be no assurance that Morgan Guaranty's initial hedging did not, and that its continued hedging will not, affect the price of the Benchmark Aluminum Contracts (and, as a result, the Initial Price and the subsequent value of the ComPS). In addition, J.P. Morgan and its affiliates may from time to time purchase or otherwise acquire a long or short position in the ComPS and may, in their sole discretion, hold or resell such ComPS. Morgan Guaranty may also take positions in other types of appropriate financial instruments that may become available in the future. To the extent Morgan Guaranty has a long hedge position in several or all of the Benchmark Aluminum Contracts or options contracts in, or other derivative or synthetic instruments related to, several or all of the Benchmark Aluminum Contracts, Morgan Guaranty may liquidate a portion or all of its holdings, as applicable, at or about the time of any Early Redemption Date or the Stated Maturity of the Related Note (which correspond to the Early Redemption Dates and the Stated Maturity of the ComPS). Depending on, among other things, future market conditions, the aggregate amount and the composition of those positions are likely to vary S-19 66 over time. Profits or losses from any such position cannot be ascertained until that position is closed out and any offsetting position or positions are taken into account. However, none of the contracts or securities acquired in connection with any hedging activity will be held for the benefit of holders of ComPS. DESCRIPTION OF THE ComPS The ComPS will be issued pursuant to the LLC Agreement. The following summary of the principal terms and provisions of the ComPS does not purport to be complete and is subject to, and qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement constitutes a part and the LLC Agreement, a copy of which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. GENERAL The Principal Amount of each of the ComPS, which is initially equal to the Face Amount, will vary over the life of the ComPS in relation to the JPMCI Aluminum Excess Return Index (the "Applicable Index"). As described herein, the Applicable Index will change based on the daily percentage change in value of the Benchmark Aluminum Contracts. The Principal Amount repayable on any Early Redemption Date, upon the occurrence of any Special Event Redemption or at Stated Maturity will be determined, pursuant to the terms described herein (including, without limitation, the averaging of the Applicable Index over the Early Determination Period or the Determination Period, as applicable, and the present-valuing of the dividends and Principal Amount in connection with redemptions prior to Stated Maturity), by comparing the level of the JPMCI Aluminum Excess Return Index set on the date of issuance of the ComPS with the level determined pursuant to the terms hereof for any such date of redemption. The LLC Agreement authorizes the Company to issue Preferred and Common Securities. All of the Common Securities will be owned, directly or indirectly, by J.P. Morgan. Payments of interest on and redemptions of principal of the ComPS and the related Common Securities will be made on a pro rata basis among the ComPS and the related Common Securities, except that upon the occurrence of a liquidation, termination or winding up of the Company, the rights of the holders of the Common Securities to receive payment of periodic dividends and payments upon liquidation, redemption or otherwise will be subordinated to the rights of the holders of all Preferred Securities of the Company. The Guarantee does not permit the incurrence of any indebtedness by the Company (other than any preferred securities thereof) while any Preferred Securities are outstanding. The payment of distributions out of money held by the Company, and payments upon liquidation, termination or winding-up of the Company, are guaranteed by J.P. Morgan to the extent described under "Description of the Guarantee". The Guarantee does not cover payment of distributions when Morgan Guaranty has not made payment of principal or interest, as applicable, on the Related Note. In such event, the remedy of a holder of ComPS is to direct the Company to enforce its rights under the Related Note and the Related Note Guarantee with respect to such Related Note. See "-- Voting Rights" and "Effect of Obligations Under the Guarantee, the Related Note Guarantee and the Related Note". DIVIDENDS Dividends on the ComPS will be fixed at a rate per annum of [ ]% of the Face Amount of $[40] per Preferred Security. The amount of dividends payable for any period will be computed on the basis of a 360-day year of twelve 30-day months (and actual days elapsed, in the case of periods of less than a month) and will include the first day but exclude the last day of such period. Dividends on the ComPS will be cumulative, will accrue from and including the Issue Date and will be payable monthly in arrears on the last calendar day of each month, commencing [ ], 1996, when, as and if available for payment. Dividends on the ComPS will be payable to the holders thereof as they appear on the books and records of the Company on the relevant record dates, which, as long as the ComPS remain in book-entry only form, S-20 67 will be one Business Day prior to the relevant payment dates. Subject to any applicable laws and regulations and the provisions of the LLC Agreement, each such payment will be made as described under "-- Book-Entry Only Issuance -- The Depository Trust Company". In the event that the ComPS do not continue to remain in book-entry only form, the Company shall have the right to select relevant record dates, which shall be at least one Business Day prior to the relevant payment dates. In the event that any date on which dividends are to be made on the ComPS is not a Business Day, then payment of the dividends payable on such date will be made on the next succeeding Business Day with the same force and effect as if made on such date and no interest on such distributions will accrue from and after such date, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. A "Business Day" shall mean any day other than Saturday, Sunday or any other day on which banking institutions in The City of New York, New York are permitted or required by any applicable law to close. The payment of dividends on the ComPS out of moneys held by the Company is guaranteed by J.P. Morgan on a subordinated basis as and to the extent set forth under "Description of the Guarantee". The Guarantee is effective from the time of issuance of the ComPS, but the Guarantee covers dividends and other payments on the ComPS only if and to the extent that Morgan Guaranty has made a payment to the Company of interest or principal on the Related Note, as the case may be. REDEMPTION AT STATED MATURITY Unless previously redeemed pursuant to the optional or special redemption provisions and subject to extension in the case of a Market Disruption Event (as defined below), each of the outstanding ComPS will be redeemed by the Company, in cash, on the Stated Maturity, at the ComPS Redemption Price. The ComPS Redemption Price is the sum of (a) the Redemption Value per Preferred Security plus (b) accrued but unpaid dividends on such ComPS to but excluding the date of redemption. CALCULATION OF REDEMPTION VALUE The Principal Amount of each Preferred Security is indexed to the JPMCI Aluminum Excess Return Index (the "Applicable Index"), which is calculated based on the change in value of certain aluminum futures contracts included from time to time in the JPM Indices (such contracts, from time to time, the "Benchmark Aluminum Contracts"). On the date of this Prospectus Supplement, the Benchmark Aluminum Contract is the LME High Grade Primary Aluminum contract. Subject to the more complete definitions and formulae contained in the accompanying Prospectus, the Principal Amount of each Preferred Security payable at Stated Maturity, subject to extension in the case of a Market Disruption Event (the "Redemption Value"), shall be determined by multiplying the Face Amount of each Preferred Security by a fraction, the numerator of which is the Applicable Index Settlement Value and the denominator of which is the Applicable Index Commencement Value. For purposes of this Prospectus Supplement, the "Applicable Index Settlement Value" means the arithmetic average of the daily values of the Applicable Index for each day of the Determination Period (the period of ten consecutive Trading Days on which no Market Disruption Event occurs commencing immediately following the twentieth scheduled Business Day prior to Stated Maturity), and the "Applicable Index Commencement Value" means [ ]. The ComPS Redemption Price will first be payable on the later of the Stated Maturity and the fifth Business Day after the completion of the Determination Period. For a complete description and definition of an Excess Return Index, see "Description of ComPS -- Calculation of Redemption Value" and "The JPM Indices -- Excess Return Methodology" in the accompanying Prospectus. As defined in the accompanying Prospectus under "Description of ComPS -- Market Disruption Events", a Market Disruption Event, as determined by Morgan Guaranty, is the occurrence of one or more of the following on any Trading Day with respect to any Benchmark Aluminum Contract underlying the Applicable Index, or an exchange on which any Benchmark Aluminum Contract is traded (a "Relevant Exchange"): (a) a day on which the fluctuation of the price of any Benchmark S-21 68 Aluminum Contract underlying the Applicable Index is materially limited by the rules of a Relevant Exchange setting the maximum or minimum price for such day (a "Limit Price"); (b) a day on which the official settlement price on the relevant exchange (the "Settlement Price") is the Limit Price; (c) the failure of a Relevant Exchange to determine, announce or publish the Settlement Price with respect to a Benchmark Aluminum Contract underlying the Applicable Index; (d) the material suspension of trading in any Benchmark Aluminum Contract underlying the Applicable Index on a Relevant Exchange; (e) the failure of trading to commence, or the permanent discontinuation of trading, in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange and (f) the imposition of any material limitation on trading in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange. EARLY DETERMINATION OF APPLICABLE INDEX SETTLEMENT VALUE AND REDEMPTION VALUE Morgan Guaranty reserves the right at its discretion to make any modifications to the JPM Indices based on the recommendations of the JPMCI Policy Committee. As discussed in the accompanying Prospectus, the JPMCI Policy Committee advises Morgan Guaranty with respect to, among other things, the composition of the JPM Indices, the price sources upon which the JPM Indices are based (i.e., the underlying futures contracts, including the Benchmark Aluminum Contracts), and the weightings and calculation methodology of the JPM Indices, with a view toward maintaining the JPM Indices as appropriate commodity investment benchmarks that serve as a measure of performance of the commodity markets. The inclusion requirements for the futures contracts underlying the JPM Indices require that such futures contracts be sufficiently liquid and representative price sources. It is possible, however, that any such underlying contract could become less liquid or representative and, as a result, the JPMCI Policy Committee may recommend a modification in the calculation methodology or the contracts underlying the JPM Indices and, therefore, the Applicable Index. Any such replacement contract (i) will be required to satisfy the JPMCI Inclusion Criteria, as described in the accompanying Prospectus under the caption "The JPMCI Policy Committee", (ii) must be traded in a market or with a self-regulator which has established either (a) a comprehensive information sharing agreement with the exchange, if any, on which the ComPS are then traded or (b) suitable alternative arrangements with the Commission and (iii) will be with respect to the same general commodity type as the contract being replaced (e.g., assuming the JPMCI Policy Committee recommends a modification and assuming the requirements of clauses (i) and (ii) are satisfied, a NYMEX crude oil futures contract 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., an aluminum futures contract may not be replaced by a gold futures contract). If at any time no contract satisfying both clauses (i) and (ii) of the previous paragraph can be found to serve as a Benchmark Aluminum Contract, the Applicable Index Settlement Value of the ComPS will be determined at such time (in accordance with the methodology set forth above under the caption "Description of the ComPS--Calculation of Redemption Value") as if the last date of the inclusion of the final Benchmark Aluminum Contract in the JPM Indices were the Stated Maturity. However, the ComPS will not be redeemed on such date; rather, the ComPS will remain outstanding to Stated Maturity, will continue to be entitled to dividends and will be redeemed at Stated Maturity for a Redemption Value calculated using the Applicable Index Settlement Value determined at such time as no contract satisfying clauses (i) and (ii) of the previous paragraph was able to be found. Such ComPS will also be subject to redemption upon the occurrence of a Special Event and optional redemption on each Optional Redemption Date (treating the Applicable Index Settlement Value determined pursuant to the terms of this paragraph as the Applicable Index Early Settlement Value for any Early Redemption Date). Additionally, if at any time any Benchmark Aluminum Contract, or the trading thereof, becomes subject to any increased cost or additional tax, whether imposed by any exchange or otherwise, Morgan Guaranty reserves the right to (x) designate a replacement Benchmark Aluminum Contract, satisfying both clauses (i) and (ii) of the second preceding paragraph, which contract is subject to an amount of cost or tax less than or equal to such increased amount or (y) if no contract satisfying clause (x) of this paragraph is designated by Morgan Guaranty, to cause, at its option, the Applicable Index Settlement Value of the S-22 69 ComPS to be determined at such time (in accordance with the methodology set forth above) as if the date of such increase in cost or tax (or, in Morgan Guaranty's discretion, the last calendar day of the month in which the determination of the Applicable Index Settlement Value is completed) were the Stated Maturity. However, the ComPS will not be redeemed at such time; rather, the ComPS will remain outstanding to Stated Maturity, will continue to be entitled to dividends and will be redeemed at Stated Maturity for a Redemption Value calculated using the Applicable Index Settlement Value determined pursuant to the terms of this paragraph. Such ComPS will also be subject to redemption upon the occurrence of a Special Event and optional redemption on each Optional Redemption Date (treating the Applicable Index Settlement Value determined pursuant to the terms of this paragraph as the Applicable Index Early Settlement Value for any Early Redemption Date) 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. See "Risk Factors -- Potential Modification to the JPM Indices and/or the Applicable Index". OPTIONAL REDEMPTION The ComPS will be subject to redemption prior to their Stated Maturity at the election of the holders thereof on each [ ] prior to the Stated Maturity, beginning [ ], 1997 (each, an "Optional Redemption Date"). In order to effect an Optional Redemption, any such redeeming holder will be required to provide notice of the number of ComPS shares to be redeemed on such Early Redemption Date to a Participant or Direct Participant in DTC, and such Participant or Direct Participant must communicate such notice to DTC no earlier than 32 scheduled Business Days prior to but no later than 22 scheduled Business Days prior to the applicable Early Redemption Date. The DTC will then provide notice to the Company or its Transfer Agent of the total number of ComPS shares to be redeemed on the Optional Redemption Date (the "Applicable Notice"). Each Applicable Notice will be provided by DTC to the Company by 12:30 p.m. New York time on the Business Day next succeeding the last day of the applicable notice period. Each Applicable Notice will be irrevocable upon receipt by the Company or its Transfer Agent, and may not be withdrawn or modified after such receipt. Additionally, the Early Determination Period will not commence until the Company has received the Applicable Notice and the applicable Optional Redemption Date will be subject to extension in the case of a Market Disruption Event. The redeeming holders will be entitled to the ComPS Early Redemption Price for each Preferred Security redeemed, which is equal to (a) the Early Redemption Value for such ComPS plus (b) accrued and unpaid dividends thereon to but excluding the scheduled Optional Redemption Date. The Early Redemption Value of such ComPS shall be determined in accordance with the formula specified in the Prospectus; provided that, for the purposes of this Prospectus Supplement, "unused costs" shall equal [ ]. See "-- Book Entry Issuance -- The Depository Trust Company" herein and "Description of ComPS -- Early Redemption Upon the Occurrence of a Special Event or at the Election of the Holders of the ComPS" in the Prospectus of which this Prospectus Supplement constitutes a part. SPECIAL EVENT REDEMPTION The ComPS will be subject to redemption by the Company prior to Stated Maturity, at its option, upon the occurrence of a Tax Event or an Investment Company Event (each, a "Special Event"), as discussed herein. "Tax Event" means that the Company shall have obtained an opinion of nationally recognized independent tax counsel experienced in such matters (a "Tax Opinion") to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any S-23 70 governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the date of this Prospectus Supplement, there is more than an insubstantial risk that at such time or within 90 days of the date thereof (i) the Company is or would be subject to United States Federal income tax with respect to income accrued or received on the Related Note, (ii) the interest payable on the Related Note is not, or would not be, deductible by Morgan Guaranty for United States Federal income tax purposes, (iii) the contingent principal in excess of the Face Amount, if any, payable on the Related Note is not, or would not be, deductible by Morgan Guaranty for United States Federal income tax purposes or (iv) the Company is or would be subject to more than a de minimis amount of other taxes, duties, assessments or other governmental charges. "Investment Company Event" means that the Company shall have received an opinion of a nationally recognized independent counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation, a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority or the expiration or revocation of any exemption from any provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), obtained by the Company (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Company is or will be considered an "investment company" that is required to be registered as such under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the date of this Prospectus Supplement. If at any time a Tax Event or an Investment Company Event shall occur and be continuing, J.P. Morgan shall elect to either: (a) direct Morgan Guaranty to redeem the Related Note in whole or in part, upon not less than 22 scheduled Business Days' notice to DTC, within 90 days following the occurrence of such Special Event, in which case the Company shall redeem in cash on a pro rata basis ComPS and related Common Securities having an aggregate Principal Amount equal to the Principal Amount of the Related Note so redeemed, at a price per Preferred Security of the Early Redemption Value, plus an amount equal to all accrued and unpaid dividends on such ComPS to but excluding such Early Redemption Date; provided, that Morgan Guaranty shall only be entitled to redeem the Related Note in part if such partial redemption is sufficient to cause such Special Event to cease; or (b) in the case of a Tax Event, allow the Related Note and the ComPS to remain outstanding and indemnify the Company for all taxes payable by it as a result of such Tax Event (if any); provided that, if at the time there is available to the Company the opportunity to eliminate, within such 90-day period, the Special Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure, that has no adverse effect on the Company, J.P. Morgan, Morgan Guaranty or the holders of ComPS, the Company will pursue such measure in lieu of redemption; provided further that Morgan Guaranty shall have no right to redeem the Related Note and J.P. Morgan shall have no right to direct the Company to redeem the ComPS while the Company is pursuing any such ministerial action or reasonable measure unless the Special Event shall not have been so eliminated by the 85th day following the occurrence thereof, in which case J.P. Morgan shall be permitted to direct Morgan Guaranty to provide notice to the Company of the redemption of the Related Note. Under current United States Federal income tax law, upon the occurrence of a Special Event, a redemption of ComPS, whether or not upon dissolution of the Company, would be a taxable event to such holders. See "United States Federal Income Taxation". REDEMPTION PROCEDURES In the case of a redemption by a holder of ComPS on an Optional Redemption Date, any such redeeming holder will be required to provide notice of the number of ComPS shares to be redeemed on such Optional Redemption Date to a Participant or Direct Participant in DTC, and such Participant or Direct Participant must communicate such notice to DTC no earlier than 32 scheduled Business Days prior to but S-24 71 no later than 22 scheduled Business Days prior to the applicable Optional Redemption Date. Following receipt by DTC of such notice, DTC will assign a new CUSIP number to ComPS with respect to which such notice has been given, and such ComPS will no longer be usable for settling trades with other DTC book-entry securities. In the case of a redemption of ComPS upon the occurrence of a Special Event, the Company will provide notice of such redemption to the Transfer Agent and to DTC on a date not less than 22 scheduled Business Days prior to such Early Redemption Date stating, among other things, the date of such redemption. The related Common Securities will be redeemed on a pro rata basis with the ComPS except that, in the case of any dissolution or liquidation in which the assets of the Company are insufficient to repay in full the Principal Amount of all Preferred Securities then outstanding, all Preferred Securities will be redeemed prior to the redemption of any Common Securities. ComPS registered in the name of and held by DTC (as defined herein) or its nominee will be redeemed in accordance with DTC's standard procedures. See "--Book-Entry Only Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, of the ComPS is conditioned upon delivery or book-entry transfer of such ComPS (together with necessary endorsements) to the Company at any time (whether prior to, on or after the relevant Redemption Date) after the required notice is given (to the extent such notice is required). See "--Book-Entry Only Issuance--The Depository Trust Company". Payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, for such ComPS will be made by the delivery of cash no later than the applicable Settlement Date with respect to such ComPS (subject to delay in the case of a Market Disruption Event) or, if later, the time of delivery or book-entry transfer of such ComPS. If the Company holds money sufficient to pay the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, of the ComPS on the applicable Settlement Date, then immediately at the close of business on such Settlement Date, such ComPS will cease to be outstanding and dividends with respect to such ComPS will cease to accrue, whether or not such ComPS are delivered to the Company, and all rights of the holder of such ComPS shall terminate and lapse, other than the right to receive the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, upon delivery of the ComPS. Provided that Morgan Guaranty has paid to the Company the required amount of cash due upon any redemption or at the maturity of the Related Note, the Company will irrevocably deposit with DTC no later than the close of business on the applicable Settlement Date funds sufficient to pay the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, payable with respect to ComPS on such date and will give the Depositary irrevocable instructions and authority to pay such amount to the holders of ComPS entitled thereto. See "--Book-Entry Only Issuance--The Depository Trust Company". In the event that any Settlement Date is not a Business Day, then payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, payable on such date will be made on the next succeeding Business Day with the same force and effect as if made on such date and no interest on such distributions will accrue from and after such date, except that, if such Business Day falls in the next calendar year such payment will be made on the immediately preceding Business Day. In the event that payment of the ComPS Redemption Price or the ComPS Early Redemption Price, as applicable, is improperly withheld or refused and not paid by the Company or by J.P. Morgan pursuant to the Guarantee, dividends on such ComPS will continue to accrue from the original Redemption Date to the actual date of payment by the Company to DTC. The Company may not redeem fewer than all of the outstanding ComPS on any Redemption Date unless all accrued and unpaid dividends have been or are concurrently being paid on all ComPS for all monthly dividend periods terminating on or prior to the applicable Redemption Date. If a partial redemption as a result of a Special Event Redemption by Morgan Guaranty of a part or all of the Related Note would result in the delisting of the ComPS by any national securities exchange (or automated inter-dealer quotation system, including The Nasdaq Stock Market ("Nasdaq")) on which the ComPS are then listed, Morgan Guaranty may only redeem the Related Note in whole and, as a result, the Company may only redeem the ComPS in whole. S-25 72 Subject to the foregoing and to applicable law (including, without limitation, United States Federal securities laws), J.P. Morgan or its affiliates may, at any time and from time to time, purchase outstanding ComPS by tender, in the open market or by private agreement. LIQUIDATION DISTRIBUTION UPON DISSOLUTION In the event of any liquidation, dissolution, winding-up or termination of the Company (each, a "Liquidation Event"), whether voluntary or involuntary, the holders of ComPS on the date of such Liquidation Event will be entitled to be paid out of the assets of the Company the Liquidation Distribution. The "Liquidation Distribution" will be equal to (a) the Early Redemption Value with respect to such ComPS (treating the date of such distribution as the Early Redemption Date) plus (b) the amount of accrued and unpaid dividends on such ComPS to but excluding the date of payment. To the extent the assets of the Company are insufficient to repay all amounts due to holders of all Preferred Securities of the Company, holders of all Preferred Securities then outstanding (including the ComPS) will be entitled to a pro rata share of the assets of the Company, based upon the relative Principal Amounts of all Preferred Securities outstanding. In addition, in the event that the assets of the Company exceed the amount necessary to pay to all holders of ComPS the full amount of the Liquidation Distribution, such excess will be paid to the holders of Common Securities. Pursuant to the LLC Agreement, the legal existence of the Company shall terminate on November 21, 2105. VOTING RIGHTS Except as described herein and under "--Modification of the LLC Agreement", and as otherwise required by law and the LLC Agreement, the holders of the ComPS will have no voting rights. Pursuant to the provisions of the Guarantee, certain amendments to or modifications of the Guarantee may only be effected with the approval of a majority in aggregate Principal Amount at such time of the ComPS and all other affected Preferred Securities. See "Description of the Guarantee--Modification of the Guarantee". Pursuant to the provisions of the Related Note and the LLC Agreement, certain amendments to or modifications of the Related Note may only be effected with the approval of a majority in aggregate Principal Amount at such time of the ComPS. See "Description of the Related Note--Modification of the Related Note". Notwithstanding that holders of ComPS are entitled to vote or consent under any of the circumstances described above, any of the ComPS that are owned at such time by J.P. Morgan or any entity directly or indirectly controlling or controlled by, or under direct or indirect common control with, J.P. Morgan, shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if such ComPS were not outstanding. The procedures by which holders of ComPS may exercise their voting rights are described below under "--Book-Entry Only Issuance--The Depository Trust Company" and in the LLC Agreement. MODIFICATION OF THE LLC AGREEMENT The LLC Agreement may be amended or modified if approved by a written instrument executed by a majority in interest of the holders of Common Securities; provided that, if any proposed amendment provides for (i) any action that would adversely affect the powers, preferences or special rights of the ComPS or (ii) the dissolution, winding up or termination of the Company other than pursuant to the terms of the LLC Agreement, then the holders of all affected outstanding Preferred Securities (or, in the case of an event described in clause (ii), all Preferred Securities) of the Company voting together as a single class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of holders of not less than a majority in aggregate Principal Amount of S-26 73 all affected outstanding Preferred Securities (or, in the case of an event described in clause (ii), all Preferred Securities) of the Company affected thereby. The LLC Agreement further provides that it may be amended without the consent of the holders of the ComPS to (i) cure any ambiguity, (ii) correct or supplement any provision in the LLC Agreement that may be defective or inconsistent with any other provision of the LLC Agreement, (iii) add to the covenants, restrictions or obligations of J.P. Morgan, (iv) conform to changes in, or a change in interpretation or application of, certain requirements of the 1940 Act by the Commission and (v) conform to certain requirements of the Code with respect to the characterization of the Company as a partnership for U.S. Federal income tax purposes (including, without limitation, an alteration of the capitalization of the Company or the events causing dissolution of the Company) upon any such change, which amendment does not adversely affect the rights, preferences or privileges of the holders of the ComPS. LISTING [The ComPS have been authorized for listing on the [ ] under the symbol "[ ]", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement.] [Prior to this offering, there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] ACCOUNTING TREATMENT The financial statements of the Company will be included in the consolidated financial statements of J.P. Morgan, with the ComPS included on the balance sheet as "Long-term debt not qualifying as risk-based capital", with a footnote disclosing (1) that the Company is a wholly-owned subsidiary of J.P. Morgan, (2) that the sole assets of the Company are the Related Note and other similar notes, specifying the principal amount, interest rate and maturity of each and (3) that considered together, the Guarantee and the Related Note Guarantee and J.P. Morgan's obligations under the LLC Agreement and the Expense Agreement constitute a full and unconditional guarantee by J.P. Morgan with respect to the ComPS. MERGERS, CONSOLIDATIONS OR AMALGAMATIONS The Company may not consolidate, amalgamate, merge with or into or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other entity, except upon satisfaction of the conditions set forth in Section 2.8 of the LLC Agreement, which includes in certain circumstances approval of 2/3 of the outstanding Principal Amount of all Preferred Securities. In addition, so long as any ComPS are outstanding and are not held directly or indirectly entirely by J.P. Morgan, the Company may not voluntarily liquidate, dissolve, wind-up or terminate on or prior to the Stated Maturity. BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY The Depository Trust Company ("DTC") will act as securities depositary for the ComPS. The ComPS will be issued only as fully-registered securities registered in the name of Cede & Co. (DTC's nominee). One or more fully-registered global ComPS certificates, representing the total aggregate number of ComPS, will be issued and will be deposited with DTC. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' S-27 74 accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, such as securities brokers and dealers, banks and trust companies that clear transactions through or maintain a direct or indirect custodial relationship with a Direct Participant either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Commission. Purchases of ComPS within the DTC system must be made by or through Direct Participants, which will receive a credit for the ComPS on DTC's records. The ownership interest of each actual purchaser of each Preferred Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchases, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owners purchased ComPS. Transfers of ownership interests in the ComPS are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the ComPS, except in the event that use of the book-entry system for the ComPS is discontinued. To facilitate subsequent transfers, all the ComPS deposited by Participants with DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of ComPS with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the ComPS. DTC's records reflect only the identity of the Direct Participants to whose accounts such ComPS are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements that may be in effect from time to time. In the case of a Special Event Redemption, redemption notices shall be sent to Cede & Co. If less than all of the ComPS are being redeemed, DTC will reduce the amount of the interest of each Direct Participant in such ComPS in accordance with its procedures. In the case of an Optional Redemption, redemption notices shall be provided by Beneficial Owners and Participants to DTC in accordance with its procedures. DTC will then provide the Applicable Notice to the Company or its Transfer Agent of the number of ComPS to be redeemed on the applicable Optional Redemption Date. The Applicable Notice will be irrevocable upon receipt by the Company or its Transfer Agent, and may not be withdrawn or modified after such receipt. Although voting with respect to the ComPS is limited, in those cases where a vote is required, neither DTC nor Cede & Co. will itself consent or vote with respect to ComPS. Under its usual procedures, DTC would mail an Omnibus Proxy to the Company as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. consenting or voting rights to those Direct Participants to whose accounts the ComPS are credited on the record date (identified in a listing attached to the Omnibus Proxy). J.P. Morgan and the Company believe that the arrangements among DTC, Direct and Indirect Participants and Beneficial Owners will enable the Beneficial Owners to exercise rights equivalent in substance to the rights that can be directly exercised by a holder of a limited liability company interest in the Company. Dividend payments on the ComPS will be made to DTC. DTC's practice is to credit Direct Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payment date. Payments by participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name", and such payments will be the responsibility of such Participant and not of DTC, the Company or S-28 75 J.P. Morgan, subject to any statutory or regulatory requirements to the contrary that may be in effect from time to time. Payment of dividends to DTC is the responsibility of the Company, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depositary with respect to the ComPS at any time by giving reasonable notice to the Company. Under such circumstances, in the event that a successor securities depositary is not obtained, ComPS certificates are required to be printed and delivered. Additionally, the Company may decide to discontinue use of the system of book-entry transfers through DTC (or any successor depositary) with respect to the ComPS. In that event, certificates for the ComPS will be printed and delivered. The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that J.P. Morgan believes to be reliable, but neither J.P. Morgan nor the Company takes responsibility for the accuracy thereof. GOVERNING LAW The LLC Agreement and the ComPS will be governed by and interpreted in accordance with the laws of the State of Delaware. DESCRIPTION OF THE RELATED NOTE Set forth below is a summary of the terms of the Related Note in which the Company will invest the proceeds from the issuance and sale of the ComPS and the related Common Securities. The following description does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement is a part and the Related Note, the form of which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms are used herein as defined in the Related Note. GENERAL The Related Note will be issued as an unsecured, unsubordinated obligation of Morgan Guaranty, limited in initial principal amount to approximately $[ ] , such amount being the sum of the aggregate Initial Public Offering Price shown on the cover page hereof for the ComPS and the related Common Securities issued in connection therewith. The Related Note is not subject to a sinking fund provision. The entire Principal Amount of the Related Note will mature and become due and payable, together with any accrued and unpaid interest thereon, if any, on the Stated Maturity (subject to extension in the case of a Market Disruption Event), subject to the prior redemption of the Related Note in whole or in part at the option of the holders of ComPS or in certain circumstances upon the occurrence of a Special Event. If Morgan Guaranty redeems the Related Note in whole or in part, the Company must redeem on a pro rata basis ComPS and related Common Securities having an aggregate Principal Amount equal to the Principal Amount of the Related Note so redeemed at the ComPS Early Redemption Price. See "Description of the ComPS--Redemption at Stated Maturity; --Special Event Redemption". RELATED NOTE REDEMPTION PRICE The amount payable under the Related Note by Morgan Guaranty to the Company at any time shall equal (a) the Principal Amount of the Related Note at such time plus (b) any accrued but unpaid distributions due to the Company (the "Related Note Redemption Price"). The Principal Amount of the Related Note at any time shall equal the aggregate Principal Amount of outstanding ComPS and the related Common Securities at such time. The timing and amount of payments on the Related Note mirror the aggregate financial terms of the ComPS. S-29 76 SUBORDINATION Morgan Guaranty's obligations under the Related Note are effectively subordinated to all liabilities (including indebtedness) of its consolidated and unconsolidated subsidiaries. Moreover, Morgan Guaranty's subsidiaries may incur indebtedness and other liabilities and have obligations to third parties. Generally, the claims of such third parties to the assets of Morgan Guaranty's subsidiaries will be superior to those of Morgan Guaranty as a stockholder, and, therefore, the Related Note may be deemed to be effectively subordinated to the claims of such third parties. Upon any payment or distribution of all or substantially all of the assets of Morgan Guaranty or in the event of any insolvency, bankruptcy, receivership, liquidation, dissolution, reorganization or other similar proceeding, whether voluntary or involuntary, relative to Morgan Guaranty or its creditors, the holders of all Senior Indebtedness of Morgan Guaranty will be entitled to receive payment pari passu and pro rata with the Company. However, depositors in Morgan Guaranty will have a preference over holders of Senior Indebtedness of Morgan Guaranty upon any such event. As used in the Related Note, the term "Senior Indebtedness" means the principal of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for money borrowed, whether outstanding as of the date hereof or hereafter created, issued or incurred (other than Morgan Guaranty's obligations to its depositors), except any indebtedness expressly subordinated to such Senior Indebtedness, and (b) any deferrals, renewals or extensions of any such Senior Indebtedness. The Related Note does not limit the amount of Senior Indebtedness which Morgan Guaranty may incur. INTEREST The Related Note shall bear interest at the rate of [ ] % per annum on the Face Amount from the original date of issuance, payable monthly in arrears on the last calendar day of each month (each, an "Interest Payment Date"), commencing [ ], 1996, to the Company, subject to certain exceptions, at the close of business on the Business Day next preceding the relevant Interest Payment Date. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any period shorter than a full monthly period for which interest is computed will be computed on the basis of the actual number of days elapsed per 30-day month. In the event that any date on which interest is payable on the Related Note is not a Business Day, payment of the interest payable on such date will be made on the next succeeding Business Day with the same force and effect as if made on such date and no interest on such distributions will accrue from and after such date, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. OPTIONAL REDEMPTION The Company shall have the right to call for redemption prior to each Optional Redemption Date a Principal Amount of the Related Note sufficient to allow it to pay the ComPS Early Redemption Price to any holders of ComPS who exercise their right to redeem any or all of such holders' ComPS and a pro rata portion of the related Common Securities. See "Description of the ComPS--Optional Redemption". SPECIAL EVENT REDEMPTION Upon the occurrence of a Special Event, Morgan Guaranty will have the right to elect to, under certain circumstances, (a) redeem the Related Note at the Related Note Redemption Price or (b) in the case of a Tax Event, allow the Related Note to remain outstanding and indemnify the Company for any taxes payable by it as a result of such Tax Event. See "Description of the ComPS--Special Event Redemption". S-30 77 EVENTS OF DEFAULT The Related Note Events of Default are described in "Description of the Related Notes --Related Note Events of Default" in the Prospectus of which this Prospectus Supplement constitutes a part. A default or event of default under any Senior Indebtedness would not constitute a default or event of default under the Related Note. MODIFICATION OF THE RELATED NOTE The Related Note contains provisions permitting Morgan Guaranty and the Company, with the consent of the holders of not less than a majority in Principal Amount of the outstanding ComPS, to modify the Related Note, subject to certain exceptions. See "Description of the Related Notes --Modification of the Related Notes" in the Prospectus of which this Prospectus Supplement constitutes a part. CONSOLIDATION, MERGER AND SALE The Related Note provides that Morgan Guaranty may, without the consent of the Company or the holders of the ComPS, consolidate or merge with or into, or sell or transfer all or substantially all of its property or assets to, any corporation or association; provided that (i) the corporation (if other than Morgan Guaranty) or association formed by or resulting from any such consolidation or merger or which shall have received such property or assets shall have assumed Morgan Guaranty's obligations under the Related Note and (ii) immediately after giving effect to such transaction, Morgan Guaranty or such successor corporation shall not be in default under the terms of the Related Note. GOVERNING LAW The Related Note will be governed by, and construed in accordance with, the laws of the State of New York. MISCELLANEOUS Morgan Guaranty will have the right at all times to assign any of its rights or obligations under the Related Note to J.P. Morgan or to a direct or indirect wholly-owned subsidiary of Morgan Guaranty; provided that, in the event of any such assignment, Morgan Guaranty will remain jointly and severally liable for all such obligations. Subject to the foregoing, the Related Note will be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns. The Related Note is not a deposit or other obligation of a bank and is not insured by the Federal Deposit Insurance Corporation or any other federal agency. The obligations of Morgan Guaranty under the Related Note are pari passu with all present and future Senior Indebtedness of Morgan Guaranty (as defined herein) and are junior to Morgan Guaranty's obligations to its depositors in the event of a receivership. In addition, J.P. Morgan's obligations under the Guarantee and the Related Note Guarantee and Morgan Guaranty's obligations under the Related Note are effectively subordinated to all liabilities (including indebtedness) of the consolidated and unconsolidated subsidiaries of each. DESCRIPTION OF THE GUARANTEE Set forth below is a summary of information concerning the Guarantee that will be delivered by J.P. Morgan for the benefit of the holders of ComPS. The terms of the Guarantee will be those set forth in the Guarantee Agreement. The following summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement is a part and the form of Guarantee, which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. S-31 78 GENERAL Pursuant to the Guarantee, J.P. Morgan irrevocably and unconditionally agrees, on a subordinated basis, to pay in full to the holders of the ComPS the Guarantee Payments (as defined herein) (except to the extent paid by the Company), as and when due, regardless of any defense, right of set-off or counterclaim that the Company may have or assert. The following payments with respect to ComPS issued by the Company (the "Guarantee Payments"), to the extent not paid by the Company, will be subject to the Guarantee (without duplication): (i)(A) any accrued and unpaid dividends that are required to be paid on the ComPS and (B) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only if to the extent that, in each case, Morgan Guaranty has made payment of interest or principal on the Related Note, as the case may be, and (ii) upon a Liquidation Event (other than in connection with the redemption of all of the ComPS at Stated Maturity or redemption of the Related Note) the lesser of (A) the Liquidation Distribution to the extent the Company has funds available therefor and (B) the amount of assets of the Company remaining available for distribution to holders of the ComPS upon such Liquidation Event. J.P. Morgan's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by J.P. Morgan to the holders of ComPS or by causing the Company to pay such amounts to such holders. The Guarantee will be effective with respect to the ComPS from the time of issuance of the ComPS to the extent Morgan Guaranty has made payments under the Related Note. If Morgan Guaranty does not make payments on the Related Note, the Company may not pay distributions on the ComPS issued and may not have funds available therefor. See "Description of the Related Note". MODIFICATION OF THE GUARANTEE; ASSIGNMENT Except with respect to any changes that do not adversely affect the rights of holders of all Preferred Securities (in which case no vote will be required), the Guarantee may be amended only with the prior approval of the holders of not less than a majority in aggregate Principal Amount of the outstanding ComPS and all other Preferred Securities entitled to vote thereon, voting as a single class. All guarantees and agreements contained in the Guarantee shall bind the successors, assignees, receivers, trustees and representatives of J.P. Morgan and shall inure to the benefit of the holders of the ComPS. REMEDIES OF HOLDERS If J.P. Morgan fails to perform any of its payment or other obligations with respect to the ComPS under the Guarantee, any holder of ComPS may institute a legal proceeding directly against J.P. Morgan to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against the Company or any other person or entity. Subject to the award by a court of competent jurisdiction of legal fees in connection with any such legal proceeding, each holder will be required to bear its own costs in connection with instituting a legal proceeding directly against J.P. Morgan, which cost may be significant. TERMINATION OF THE GUARANTEE The Guarantee will terminate with respect to the ComPS upon full payment of the aggregate ComPS Early Redemption Price or ComPS Redemption Price, as applicable, or upon full payment of the amounts payable in accordance with the LLC Agreement upon liquidation of the Company. The Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of ComPS must restore payment of any sums paid under such ComPS or the Guarantee (e.g., upon a subsequent bankruptcy of Morgan Guaranty or J.P. Morgan). STATUS OF THE GUARANTEE The Guarantee will constitute an unsecured obligation of J.P. Morgan and will rank (i) subordinate and junior in right of payment to all other liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock outstanding as of the date hereof of J.P. Morgan and (iii) senior to J.P. S-32 79 Morgan's common stock. The terms of the ComPS provide that each holder of ComPS by acceptance thereof agrees to the subordination provisions and other terms of the Guarantee. The Guarantee will constitute a guarantee of payment and not of collection (that is, the guaranteed party may institute a legal proceeding directly against the guarantor to enforce its rights under the Guarantee without instituting a legal proceeding against any other person or entity). GOVERNING LAW The Guarantee will be governed by and construed and interpreted in accordance with the laws of the State of New York. DESCRIPTION OF THE RELATED NOTE GUARANTEE Set forth below is a summary of information concerning the Related Note Guarantee that will be delivered by J.P. Morgan for the benefit of the Company. The terms of the Related Note Guarantee will be those set forth in the Related Note Guarantee Agreement. The following summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Prospectus of which this Prospectus Supplement is a part and the form of Related Note Guarantee, which is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and the accompanying Prospectus. The Related Note Guarantee will be held by the Company, as the holder of the Related Note. GENERAL Pursuant to the Related Note Guarantee, J.P. Morgan irrevocably and unconditionally agrees, on a subordinated basis, to pay in full to the Company the Related Note Guarantee Payments (as defined herein), as and when due, regardless of any defense, right of set-off or counterclaim that Morgan Guaranty may have or assert with respect to its obligation to make such Related Note Guarantee Payments. The following payments with respect to the Related Note issued by Morgan Guaranty (the "Related Note Guarantee Payments") will be subject to the Related Note Guarantee (without duplication): (i) any accrued and unpaid distributions that are required to be paid by Morgan Guaranty on the Related Note and (ii) any principal payable by Morgan Guaranty under the Related Note, as and when payable by Morgan Guaranty. J.P. Morgan's obligation to make a Related Note Guarantee Payment may be satisfied by direct payment of the required amounts by J.P. Morgan to the Company or by causing Morgan Guaranty to pay such amounts to the Company. The Related Note Guarantee will be a full and unconditional guarantee with respect to the Related Note from the time of issuance of the Related Note. MODIFICATION OF THE RELATED NOTE GUARANTEE; ASSIGNMENT The Related Note Guarantee may be amended only with the prior approval of the Company. All guarantees and agreements contained in the Related Note Guarantee shall bind the successors, assignees, receivers, trustees and representatives of J.P. Morgan and shall inure to the benefit of the Company as the holder of the Related Note. REMEDIES OF THE COMPANY The Company has the sole right to direct the time, method and place of conducting any proceeding for any remedy available to it in respect of the Related Note Guarantee. TERMINATION OF THE RELATED NOTE GUARANTEE The Related Note Guarantee will terminate with respect to the Related Note upon full payment of the Related Note Redemption Price (as defined below) of the Related Note. The Related Note Guarantee will continue to be effective or will be reinstated with respect to the Related Note, as the case may be, if at any S-33 80 time the Company must restore payment of any sums paid under the Related Note or the Related Note Guarantee (e.g., upon a subsequent bankruptcy of J.P. Morgan). STATUS OF THE RELATED NOTE GUARANTEE The Related Note Guarantee will constitute an unsecured obligation of J.P. Morgan and will rank (i) subordinate and junior in right of payment to all other liabilities of J.P. Morgan, (ii) pari passu with the most senior preferred or preference stock outstanding as of the date hereof of J.P. Morgan and (iii) senior to J.P. Morgan's common stock. The terms of the ComPS provide that each holder of ComPS by acceptance thereof agrees to the subordination provisions and other terms of the Related Note Guarantee. The Related Note Guarantee will constitute a guarantee of payment and not of collection (that is, the Company may institute a legal proceeding directly against J.P. Morgan to enforce its rights under the Related Note Guarantee without instituting a legal proceeding against Morgan Guaranty). GOVERNING LAW The Related Note Guarantee will be governed by and construed and interpreted in accordance with the laws of the State of New York. EFFECT OF OBLIGATIONS UNDER THE GUARANTEE, THE RELATED NOTE GUARANTEE AND THE RELATED NOTE As set forth in the LLC Agreement, the sole purpose of the Company is to issue the Securities and other Preferred and Common Securities, and to invest the proceeds from such issuances in the Related Note and other debt obligations of Morgan Guaranty. As long as payments of interest and other payments are made when due on the Related Note, such payments will be sufficient to cover dividends and payments due on the ComPS because of the following factors: (i) the Principal Amount of the Related Note will be equal to the sum of the aggregate Principal Amount of the ComPS and the related Common Securities; (ii) the interest rate and the interest and other payment dates on the Related Note will match the dividend rate and dividend and other payment dates for the ComPS; (iii) J.P. Morgan shall pay all, and the Company shall not be obligated to pay, directly or indirectly, any, costs and expenses of the Company other than principal of and dividends on the ComPS and the related Common Securities; and (iv) the LLC Agreement further provides that the J.P. Morgan shall not cause the Company to, among other things, engage in any activity that is not consistent with the purposes of the Company. Payments of dividends (to the extent Morgan Guaranty has made payments of interest on the Related Note) and other payments due on the ComPS (to the extent Morgan Guaranty has made payment of principal and other amounts on the Related Note) are guaranteed by J.P. Morgan as and to the extent set forth under "Description of the Guarantee" herein and in the accompanying Prospectus. If Morgan Guaranty does not make interest payments on the Related Note, it is expected that the Company will not have sufficient funds to pay dividends on the ComPS. The Guarantee is a full and unconditional guarantee from the time of its issuance but does not apply to any dividends or other payments unless and until Morgan Guaranty has made payment of interest or other payments on the Related Note. If Morgan Guaranty fails to make interest or other payments on the Related Note when due, the LLC Agreement provides a mechanism whereby the holders of the ComPS, using the procedures described in the LLC Agreement, may direct the Company to enforce its rights under the Related Note and the Related Note Guarantee. If J.P. Morgan fails to perform any of its payment or other obligations with respect to the ComPS under the Guarantee, any holder of ComPS may institute a legal proceeding directly against J.P. Morgan to enforce such holder's rights under the Guarantee without first instituting a legal proceeding against the Company or any other person or entity. S-34 81 The Related Note Guarantee by J.P. Morgan guarantees to the Company the payment of any distributions on and principal of the Related Note as provided pursuant to the terms of the Related Note, at such times and in such amounts as provided therein. J.P. Morgan's obligations under the Related Note Guarantee will be subordinated and junior in right of payment to all liabilities of J.P. Morgan, pari passu with the most senior preferred stock outstanding as of the date hereof of J.P. Morgan and senior to the common stock of J.P. Morgan. The LLC Agreement and the Expense Agreement provide that J.P. Morgan will pay, or cause to be paid, all debts and obligations (other than with respect to the ComPS) and all costs and expenses of the Company, including any taxes and all costs and expenses with respect thereto, to which the Company may become subject. The LLC Agreement and the Expense Agreement provide that any person to whom such debts, obligations, costs and expenses are owed will have the right to enforce J.P. Morgan's obligations in respect of such debts, obligations, costs and expenses directly against J.P. Morgan without first proceeding against the Company. J.P. Morgan, through its obligations under the Guarantee, the Related Note Guarantee, the LLC Agreement and the Expense Agreement, taken together, will provide a full and unconditional guarantee, on a subordinated basis, of payments due on the ComPS. See "Description of the Guarantee -- General" and "Description of the Related Note Guarantee -- General" herein and in the accompanying Prospectus. Upon any voluntary or involuntary liquidation, dissolution, winding-up or termination of the Company, the holders of Securities will be entitled to receive the Liquidation Distribution. Holders of ComPS will be entitled to the benefits of the Guarantee with respect to the Liquidation Distribution. See "Description of the ComPS -- Liquidation Distribution Upon Dissolution". Upon any voluntary or involuntary liquidation or bankruptcy of Morgan Guaranty, the Company as holder of the Related Note would be pari passu with creditors of Morgan Guaranty (other than any depositors therein), equal in right of payment with all Senior Indebtedness and entitled to receive payment in full of principal, premium, if any, and interest, before any stockholders of Morgan Guaranty receive payments of distributions. UNITED STATES FEDERAL INCOME TAXATION GENERAL The following is a summary of the material United States Federal income tax consequences of the purchase, ownership and disposition of ComPS by U.S. Holders (as defined herein). Unless otherwise stated, this summary deals only with ComPS held as capital assets by holders who purchase the ComPS upon original issuance ("Initial Holders"). This summary does not address tax considerations applicable to investors that may be subject to special U.S. Federal income tax treatment, such as dealers in securities or persons that will hold the ComPS as a position in a "straddle" (within the meaning of Section 1092 of the Internal Revenue Code of 1986, as amended (the "Code")), or as part of a "conversion transaction" (within the meaning of Section 1258 of the Code) or "synthetic security" or other integrated investment comprised of ComPS and one or more other investments. This summary also does not address the tax consequences to persons that have a functional currency other than the U.S. Dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of ComPS. Further, it does not include any description of any alternative minimum tax consequences or the tax laws of any state or local government or of any foreign government that may be applicable to the ComPS. This summary is based on the Code, Treasury regulations thereunder and administrative and judicial interpretations thereof, as of the date hereof, all of which are subject to change, possibly on a retroactive basis. In the opinion of Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Company ("Tax Counsel"), the statements contained in the following summary, to the extent they constitute matters of law, accurately describe the material U.S. Federal income tax consequences to holders of the acquisition, ownership and disposition of ComPS. For purposes of this summary, a "U.S. Holder" shall mean a holder who is (i) a citizen or a resident of the United States (or any state thereof), (ii) a S-35 82 corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate or trust, the income of which is subject to U.S. Federal income tax regardless of its source, and (iv) any other person subject to U.S. Federal income tax on net income. CLASSIFICATION OF THE RELATED NOTE No statutory, judicial or administrative authority directly addresses the characterization of the Related Note or instruments similar to the Related Note for U.S. Federal income tax purposes. As a result, significant aspects of the U.S. Federal income tax consequences of investment in ComPS are not certain. No ruling is being requested from the Internal Revenue Service (the "IRS") with respect to the Related Note and no assurance can be given that the IRS will agree with the conclusions expressed herein. In the absence of clear authority and based on the advice of Tax Counsel, it is the intention of the Company to treat the Related Note as a contingent debt instrument with interest accruing (and currently taxable to holders) at the stated coupon rate. By purchasing the ComPS, the holders will agree to treat the Related Note in the same manner. CLASSIFICATION OF THE COMPANY In connection with the issuance of the ComPS, it is Tax Counsel's opinion that, under current law and assuming full compliance with the terms of the LLC Agreement and the Related Note, and based on certain facts and assumptions contained in the opinion of Tax Counsel, the Company will be classified for U.S. Federal income tax purposes as a partnership and not as an association taxable as a corporation. Accordingly, for U.S. Federal income tax purposes, each holder of ComPS will be required to include in its gross income its distributive share of any item of income or gain realized by the Company including any interest accrued with respect to the Related Note. No portion of the income accrued by the Company will be eligible for the dividends received deduction. By acquiring one or more ComPS, each holder thereof agrees to treat such ComPS as an interest in a partnership holding the Related Note. The Company will have a calendar year tax year and will use the accrual method of accounting. Accordingly, calendar year holders will be required to include their distributive share of the income accrued by Company in their taxable year that corresponds to the year in which the Company accrued such income. Holders with a different taxable year will include such income in their taxable year that includes the December 31 of the Company's taxable year in which the Company accrued the income. U.S. HOLDERS TAXATION OF INCOME ACCRUED BY THE COMPANY Assuming the Related Notes are treated as contingent debt instruments for U.S. Federal income tax purposes, the following rules are believed to apply, subject to the discussion below: (1) a U.S. Holder would be required to include its distributive share of the stated interest on the Related Note in income as it is accrued by the Company, and would not be entitled to the dividends received deduction with respect thereto; (2) upon the redemption of the ComPS (whether optional or Special Event redemption or at Stated Maturity) or liquidation of the Company, it is expected that a U.S. Holder will have gain or loss equal to the difference between the amount realized by the U.S. Holder and such Holder's tax basis in the ComPS; any loss would be capital loss, but the tax characterization of gain is not clear and may be ordinary income rather than capital gain; (3) for the purpose of computing gain or loss, a U.S. Holder's tax basis in the ComPS would equal the cost of the ComPS increased by such Holder's distributive share of income accrued with respect to the income of the Company and decreased by the amount of dividends received by such Holder; and S-36 83 (4) any capital gain or loss on the redemption of the ComPS will be characterized as a long-term capital gain or loss if at the time of redemption or liquidation the holding period in the ComPS is in excess of one year. However, even assuming the Related Note is properly treated as a contingent debt instrument, in the absence of authority concerning the proper tax treatment of such instruments, no assurance can be given that the above tax consequences would be accepted by the IRS or upheld by a court. Moreover, a variety of different tax characterizations can apply to the Related Note. For example the Related Note can be viewed as a "notional principal contract" (as defined in Treasury Regulations 1.446-3), a non-contingent debt instrument coupled with a cash-settled forward purchase contract or some other contractual arrangement. Accordingly, the tax consequences of investment in ComPS may not be as described above. For example, (i) gain on redemption of the ComPS or on liquidation of the Company may be ordinary income rather than capital gain, (ii) a U.S. Holder might be required to accrue income at a rate greater than the stated rate on the Related Note, and have less income or gain (or a greater loss) upon disposition or redemption of ComPS, or (iii) all or part of the stated interest on the Related Note might be treated as a nontaxable return of capital, increasing the amount of income or gain (or decreasing the loss) upon disposition or redemption of ComPS. In connection with clause (ii) of the preceding paragraph, recently proposed Treasury Regulations with respect to contingent debt instruments would require the accrual of interest income on the Related Note based on the projected yield to maturity of the Related Note. The projected yield would take into account the projected Related Note Redemption Price (based upon forward pricing for the Applicable Index). This method might result in an annual inclusion of income at a rate in excess of the stated rate of interest on the Related Note. An adjustment would be made at maturity to reflect the actual Related Note Redemption Price as compared to the projected amount. Moreover, any gain on redemption of ComPS or upon liquidation of the Company would be ordinary income and any loss would be ordinary loss to the extent of the amount of prior interest accrual. These proposed regulations by their terms only apply to debt issued at least 60 days after publication of final regulations, and therefore would not apply to the Related Note. However, no assurance can be given that the IRS or the courts would not apply the principles of the regulations to the Related Note. MONTHLY ALLOCATIONS OF INCOME In general, the Company's taxable income from the Related Note for each month will be allocated, pursuant to a monthly convention, to holders who hold ComPS on the record date for the payment of dividends for that month. Thus, taxable income is allocated when paid and not on an accrual basis. As a result, the taxable income allocated to a holder who sells (or buys) ComPS between record dates will not accurately reflect the accrued interest on the Related Note for the holder's actual holding period for ComPS during the month of sale (or purchase), which may affect such holder's tax liability and tax basis in the ComPS. However, the IRS may determine that the use of this monthly convention is not permitted. If this monthly convention is not allowed, taxable income of the Company from the Related Note in the month of sale might be reallocated among the sellers and buyers of ComPS. The LLC Agreement permits the Company to revise its method of allocation between sellers and buyers to conform to a method permitted by future regulations. SALE OR OTHER DISPOSITION OF COMPS Upon the sale or other disposition of ComPS (other than redemption of ComPS by the Company), a U.S Holder would have gain or loss equal to the difference between the amount realized by the U.S. Holder and such Holder's tax basis in the ComPS disposed of. Generally, it is believed that such gain or loss will be capital gain or loss, although such gain might be ordinary income. Any such capital gain or loss will be a long-term capital gain or loss if upon disposition the ComPS will have been held for more than one year. S-37 84 SECONDARY MARKET PURCHASERS The Company will not make an election under Section 754 of the Code to adjust the Company's tax basis of the Related Note to reflect the price paid for ComPS by a secondary market purchaser. This could result in adverse tax consequences to such a purchaser which holds such ComPS until Stated Maturity or early redemption, such as taxable ordinary income in excess of the economic profit on the ComPS, offset by a capital loss that might result in no tax benefit. Secondary market purchasers should consult their tax advisors concerning the consequences of acquiring ComPS and holding such ComPS until Stated Maturity or early redemption. NON-UNITED STATES HOLDERS In the case of a holder of ComPS that is not a U.S. Holder, although no assurance can be given it is believed that payments made with respect to ComPS will not be subject to U.S. withholding tax; provided that such holder complies with applicable certification requirements. The Company may withhold on such payments, in which case the holder will be entitled to file a claim with the IRS claiming a refund of such withholding tax. No assurance can be given whether such a claim would be successful. Any capital gain realized upon the redemption, sale or other disposition of ComPS by a holder that is not a U.S. Holder will generally not be subject to U.S. Federal income tax if (i) such gain is not effectively connected with a U.S. trade or business of such holder and (ii) in the case of an individual, such individual is not present in the United States for 183 days or more in the taxable year of the redemption, sale or other disposition or the gain is not attributable to a fixed place of business maintained by such individual in the United States. INFORMATION REPORTING TO HOLDERS The Company will annually report each holder's distributive share of the Company's income, gains, expenses and losses to the holders and the IRS on Schedule K-1. The Company currently intends to report such information by late February following each calendar year even though the Company is not legally required to report to record holders until April 15 following each calendar year. The Company will provide the Schedule K-1 information to nominees (other than certain clearing agencies) that fail to provide the information statements described below and such nominees will be required to forward such information to the beneficial owners of the ComPS. Under section 6031 of the Code, any person (other than certain clearing agencies) that holds ComPS as a nominee at any time during a calendar year is required to furnish the Company with a statement containing certain information on the nominee, the beneficial holders and the ComPS so held. Such information includes (i) the name, address and taxpayer identification number of the nominee and each beneficial owner and (ii) as to each beneficial owner (x) whether such person is a United States person, a tax-exempt entity, a foreign government, an international organization or any whollyowned agency or instrumentality of the either of the foregoing and (y) certain information on ComPS that were held, bought or sold on behalf of such person throughout the year. In addition, brokers and financial institutions that hold ComPS for their own account through a clearing agency are required to furnish the Company additional information as to themselves and their ownership of ComPS. The information referred to above for any calendar year must be furnished to the Company on or before the following January 31. Nominees, brokers and financial institutions that fail to provide the Company with such information may be subject to penalties. BACKUP WITHHOLDING Payments made on, and proceeds from the sale of, the ComPS may be subject to a "backup" withholding tax of 31% unless the holder complies with certain identification requirements. Any withheld amounts will be allowed as a credit against the holder's United States Federal income tax, provided that the required information is provided to the IRS. THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD S-38 85 CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE COMPS, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS. ERISA CONSIDERATIONS Generally, employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 ("ERISA") or Section 4975 of the Code ("Plans"), may purchase ComPS, subject to the investing fiduciary's determination that the investment in ComPS satisfies ERISA's fiduciary standards and other requirements applicable to investments by the Plans. In any case, J.P. Morgan, Morgan Guaranty and/or any affiliates of either may be considered a "party in interest" (within the meaning of ERISA) or a "disqualified person" (within the meaning of Section 4975 of the Code) with respect to certain Plans. The acquisition and ownership of ComPS by a Plan (or by an individual retirement arrangement or other plans described in Section 4975(e)(i) of the Code) with respect to which J.P. Morgan, Morgan Guaranty or any of its affiliates of either is considered a party in interest or a disqualified person may constitute or result in a prohibited transaction under ERISA or Section 4975 of the Code, unless such ComPS are acquired pursuant to and in accordance with an applicable exemption. As a result, Plans with respect to which J.P. Morgan, Morgan Guaranty or any affiliates of either is a party in interest or a disqualified person should not acquire ComPS. Any other Plans or other entities whose assets include plan assets subject to ERISA proposing to acquire ComPS should consult with their own ERISA counsel. UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to the Underwriters, and the Underwriters have agreed, severally and not jointly, to purchase, the ComPS. In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the ComPS offered hereby if any of the ComPS are purchased. In the event of default by any Underwriter and failure by the other Underwriters to purchase such defaulting Underwriter's portion of the ComPS, the Underwriting Agreement provides that, in certain circumstances, the Underwriting Agreement may be terminated. The Underwriters propose to offer the ComPS, in part, directly to the public at the initial public offering price set forth on the cover page of this Prospectus Supplement, and, in part, to certain securities dealers at such price less a concession of $[ ] per Preferred Security. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $[ ] per Preferred Security to certain brokers and dealers. After the ComPS are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives. In view of the fact that the proceeds of the sale of the ComPS will ultimately be used to purchase the Related Note of Morgan Guaranty, the Underwriting Agreement provides that Morgan Guaranty will pay as compensation ("Underwriters' Compensation") to the Underwriters $[ ] per Preferred Security (or $[ ] in the aggregate) for the accounts of the several Underwriters. [The ComPS have been authorized for listing on the [ ] under the symbol "[ ] ", subject to official notice of issuance. Trading of the ComPS on the [ ] is expected to commence within a 30-day period after the date of this Prospectus Supplement.] [Prior to this offering, there has been no market for the ComPS. In order to meet one of the requirements for listing the ComPS on the [ ], the Underwriters will undertake to sell ComPS to a minimum of 400 beneficial holders.] The Company and J.P. Morgan have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. S-39 86 This Prospectus Supplement and related the Prospectus may be used by direct or indirect wholly-owned subsidiaries of J.P. Morgan in connection with offers and sales related to secondary market transactions in the ComPS. Such subsidiaries may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of a sale. The Underwriters, certain agents and their associates may be customers of, engage in transactions with, and perform services for, J.P. Morgan in the ordinary course of business. The lead Underwriter is an indirect, wholly-owned subsidiary of J.P. Morgan. The participation of the lead Underwriter in the offer and sale of the ComPS complies with the requirements of Schedule E of the By-laws of the National Association of Securities Dealers, Inc. (the "NASD") regarding underwriting of securities of an affiliate and complies with any restrictions imposed on such Underwriters by the Board of Governors of the Federal Reserve System. LEGAL MATTERS The validity of the Securities offered hereby will be passed upon by Margaret M. Foran, Vice President, Assistant General Counsel and Assistant Secretary of J.P. Morgan, and by Cravath, Swaine & Moore, New York, New York, counsel for the Underwriter. Ms. Foran owns or has the right to acquire a number of shares of Common Stock of J.P. Morgan equal to or less than 0.01% of the outstanding Common Stock of J.P. Morgan. EXPERTS The audited financial statements contained in J.P. Morgan's Annual Report on Form 10-K for the year ended December 31, 1995 (included in J.P. Morgan's Annual Report to Stockholders), are incorporated by reference in this Prospectus Supplement in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. S-40 87 ANNEX I GLOSSARY OF TERMS The following are abbreviated definitions of certain capitalized terms used in the Prospectus Supplement. The LLC Agreement, the Guarantee, the Related Note Guarantee and the Related Note may contain more complete definitions of certain of the terms defined herein, as well as definitions of certain other terms not defined herein, and reference should be made to the LLC Agreement, the Guarantee, the Related Note Guarantee and the Related Note, as applicable, for complete definitions of such terms. APPLICABLE INDEX........the JPMCI Aluminum Excess Return Index. APPLICABLE INDEX COMMENCEMENT VALUE...................[ ] APPLICABLE INDEX SETTLEMENT VALUE........the arithmetic average of the values of the Applicable Index during the Determination Period; provided, however, that if the Applicable Index Settlement Value has been permanently determined prior to such time, the Applicable Index Settlement Value shall equal the value so determined. APPLICABLE INDEX EARLY SETTLEMENT VALUE........for each day of the Early Determination Period, the value of the Applicable Index for such day of the Early Determination Period; provided, however, that if the Applicable Index Settlement Value has been permanently determined prior to such time, the Applicable Index Early Settlement Value shall equal the value so determined. BENCHMARK ALUMINUM CONTRACTS...............the aluminum futures contracts included from time to time in the JPM Indices, which shall initially be the LME High Grade Primary Aluminum contract. BUSINESS DAY............any day other than a Saturday, Sunday or any other day on which banking institutions in The City of New York, New York, are permitted or required by any applicable law to close. CODE....................the Internal Revenue Code of 1986, as amended. COMMISSION..............the Securities and Exchange Commission. COMMON SECURITIES.......the common securities of the Company representing voting limited liability company interests in the Company, to be directly or indirectly owned by J.P. Morgan. COMPS EARLY REDEMPTION PRICE...................On any Early Redemption Date, an amount equal to (i) the Early Redemption Value per Preferred Security plus (ii) accrued and unpaid dividends to but excluding the date of redemption. COMPS REDEMPTION PRICE...................at Stated Maturity, an amount equal to (i) the Redemption Value per Preferred Security plus (ii) accrued and unpaid dividends to but excluding Stated Maturity. DETERMINATION PERIOD....the 10 consecutive Trading Days on which no Market Disruption Event occurs immediately following the 20th scheduled Business Day prior to Stated Maturity. A-1 88 DIVIDENDS...............cumulative cash dividends of [ ]% per annum on the Face Amount (calculated on the basis of a 360 day year of twelve 30-day months) accruing from the Issue Date and payable monthly in arrears. DTC.....................the Depository Trust Company. EARLY DETERMINATION PERIOD..................the 10 consecutive Trading Days which are Business Days on which U.S. Treasury Bond markets are open and on which no Market Disruption Event occurs immediately following the 20th scheduled Business Day prior to the applicable Early Redemption Date. EARLY REDEMPTION VALUE...................the average for the 10 days of the Early Determination Period of the discounted present value of the future dividends and the indexed Principal Amount of the ComPS, as set forth in the accompanying Prospectus under "Description of ComPS--Early Redemption Upon the Occurrence of a Special Event or at the Election of the Holders of the ComPS". EARLY REDEMPTION DATE....................each Optional Redemption Date and the date of any Special Event Redemption or Liquidation Distribution. ERISA...................the Employee Retirement Income Security Act of 1974. EXCHANGE ACT............the Securities Exchange Act of 1934, as amended. FACE AMOUNT.............[$40]. GUARANTEE...............the Guarantee Agreement executed by J.P. Morgan on behalf of the holders of each series of Preferred Securities. GUARANTEE PAYMENTS......without duplication, (i)(A) any accrued and unpaid dividends that are required to be paid on the ComPS and (B) the ComPS Early Redemption Price or the ComPS Redemption Price, as applicable, but if and only to the extent that, in each of case, Morgan Guaranty has made a payment of interest or principal, as the case may be, on the Related Note and (ii) upon a Liquidation Event (other than in connection with the redemption of all the ComPS upon the maturity or redemption of the Related Note), the lesser of (A) the Liquidation Distribution to the extent the Company has funds available therefor, and (B) the amount of assets of the Company remaining available for distribution to holders of all Preferred Securities upon such Liquidation Event. INITIAL HOLDERS.........holders who purchase any ComPS upon original issuance. INTEREST PAYMENT DATE...with respect to the Related Note, the last calendar day of each month, beginning [ ], 1996. INVESTMENT COMPANY EVENT...................the receipt by the Company of an opinion of a nationally recognized independent counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation, a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority or the expiration or revocation of any applicable exemption obtained by the Company (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Company is or will be considered an "investment company" that is A-2 89 required to be registered under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the date of this Prospectus. IRS.....................Internal Revenue Service. ISSUE DATE..............[ ], 1996. JPMCI...................The J.P. Morgan Commodity Index. LIQUIDATION DISTRIBUTION............in respect of any Liquidation Event, the sum of (a) the Early Redemption Value (treating the date of such distribution as the Early Redemption Date), plus (b) the amount of accrued and unpaid dividends on such Preferred Security to but excluding the date of payment. LIQUIDATION EVENT.......any liquidation, dissolution, winding-up or termination of the Company, whether voluntary or involuntary. LLC AGREEMENT...........the amended and restated limited liability company agreement among J.P. Morgan, JPM Ventures and holders of Preferred Securities subsequently becoming members thereof dated May 15, 1996, and effective as of November 21, 1995. LME.....................the London Metals Exchange. MARKET DISRUPTION EVENT...................the occurrence of one or more of the following on any Trading Day with respect to any Benchmark Aluminum Contract underlying the Applicable Index, or an exchange on which any Benchmark Aluminum Contract is traded (a "Relevant Exchange"): (a) a day on which the fluctuation of the price of any Benchmark Aluminum Contract underlying the Applicable Index is materially limited by the rules of a Relevant Exchange setting the maximum or minimum price for such day (a "Limit Price"); (b) a day on which the Settlement Price is the Limit Price; (c) the failure of a Relevant Exchange to determine, announce or publish the Settlement Price with respect to a Benchmark Aluminum Contract underlying the Applicable Index; (d) the material suspension of trading in any Benchmark Aluminum Contract underlying the Applicable Index on a Relevant Exchange; (e) the failure of trading to commence, or the permanent discontinuation of trading, in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange; and (f) the imposition of any material limitation on trading in any Benchmark Aluminum Contract underlying the Applicable Index on any Relevant Exchange. NASDAQ..................The Nasdaq Stock Market. 1940 ACT................the Investment Company Act of 1940, as amended. OPTIONAL REDEMPTION.....the redemption of ComPS by the holders thereof on any Optional Redemption Date for the ComPS Early Redemption Price. OPTIONAL REDEMPTION DATE....................each [ ] prior to Stated Maturity, subject to extension in the case of (i) delay in the provision by DTC of the Applicable Notice or (ii) the occurrence and continuance of a Market Disruption Event. PRINCIPAL AMOUNT........at any time, (i) in the case of ComPS, the Redemption Value or Early Redemption Value, as applicable, as if determined as of such time, and A-3 90 (ii) in the case of the Related Note, the principal amount thereof at such time determined pursuant to the terms thereof. REDEMPTION DATE.........either the Stated Maturity or an Early Redemption Date, as applicable. REDEMPTION VALUE........at Stated Maturity, the Face Amount per Preferred Security multiplied by a fraction, the numerator of which is the Applicable Index Settlement Value and the denominator of which is the Applicable Index Commencement Value. RELATED NOTE............the [ ]% unsecured, unsubordinated debt obligation of Morgan Guaranty due 20[ ]. RELATED NOTE EVENT OF DEFAULT.................(i) default for 30 days in the payment of interest on the Related Note; (ii) default in payment of principal amount at the Stated Maturity or any amount payable upon any redemption of the Related Note; (iii) failure by Morgan Guaranty for 90 days after receipt of notice to it to comply with any of its covenants or agreements contained in the Related Note; and (iv) certain events of bankruptcy, insolvency, receivership or reorganization involving Morgan Guaranty or certain affiliates. ROLLOVER PERIOD.........the period during which each replacement of shorter- dated Benchmark Aluminum Contracts with longer-dated Benchmark Aluminum Contracts as the basis for the change in value of the Applicable Index occurs. SECURITIES..............the ComPS and the Common Securities. SECURITIES ACT..........the Securities Act of 1933. SENIOR INDEBTEDNESS.....with respect to Morgan Guaranty, the principal of, premium, if any, and interest on (a) all indebtedness of Morgan Guaranty for money borrowed, whether outstanding as of the date hereof or hereafter created, issued or incurred (other than Morgan Guaranty's obligations to its depositors), except any indebtedness expressly subordinated to such Senior Indebtedness, and (b) any deferrals, renewals or extensions of any such Senior Indebtedness. SPECIAL EVENT...........either a Tax Event or an Investment Company Event. SPECIAL REDEMPTION......upon the occurrence and during the continuation of a Special Event, Morgan Guaranty will have the right to redeem the Related Note in whole or in part for cash at the Related Note Redemption Price, with the result that the Company will redeem on a pro rata basis ComPS and related Common Securities in an equal Principal Amount for cash at the ComPS Early Redemption Price. SPECIAL REDEMPTION DATE....................any date in respect of which upon the occurrence and continuation of a Tax Event or an Investment Company Event Morgan Guaranty shall have called for redemption in whole or in part the Related Note, and the Company shall have called for redemption on a pro rata basis an equal Principal Amount of the ComPS and related Common Securities. STATED MATURITY.........[ ], 20[ ]. TAX COUNSEL.............Cravath, Swaine & Moore, special tax counsel to J.P. Morgan and the Company. A-4 91 TAX EVENT...............the receipt by the Company of an opinion of nationally recognized independent tax counsel experienced in such matters (a "Tax Opinion") to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the date of this Prospectus Supplement, that there is more than an insubstantial risk that at such time or within 90 days of the date thereof (i) the Company is or would be subject to United States Federal income tax with respect to income accrued or received on any Related Note, (ii) the interest payable on any Related Note is not or would not be deductible by Morgan Guaranty for United States Federal income tax purposes, (iii) the contingent principal in excess of the Face Amount of any series of Preferred Securities (if any) payable on any Related Note is not or would not be deductible by Morgan Guaranty for United States Federal income tax purposes or (iv) the Company is or would be subject to more than a de minimis amount of other taxes, duties or other governmental charges. TRADING DAY.............any day on which open-outcry trading on either the New York Mercantile Exchange (the "NYMEX") or the LME is scheduled to occur or occurs. A-5 92 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY J.P. MORGAN, THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF J.P. MORGAN, OR THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE ------ Summary of the Offering......................... S-4 The Offering.................................... S-5 Risk Factors.................................... S-10 J.P. Morgan & Co. Incorporated.................. S-18 J.P. Morgan Index Funding Company, LLC.......... S-19 Use of Proceeds................................. S-19 Description of the ComPS........................ S-20 Description of the Related Note................. S-29 Description of the Guarantee.................... S-31 Description of the Related Note Guarantee....... S-33 Effect of Obligations Under the Guarantee, the Related Note Guarantee and the Related Note... S-34 United States Federal Income Taxation........... S-35 ERISA Considerations............................ S-39 Underwriting.................................... S-39 Legal Matters................................... S-40 Experts......................................... S-40
ANNEX I Glossary of Terms............................... A-1
PROSPECTUS Available Information........................... 2 Incorporation of Certain Documents by Reference..................................... 2 J.P. Morgan & Co. Incorporated.................. 3 J.P. Morgan Index Funding Company, LLC.......... 5 Use of Proceeds................................. 6 Consolidated Ratios of J.P. Morgan.............. 6 Description of All Preferred Securities......... 7 Description of the ComPS........................ 7 Risk Factors with Respect to All Preferred Securities.................................... 17 Risk Factors with Respect to ComPS.............. 18 The Underlying Markets.......................... 24 The JPM Indices................................. 27 Description of the Related Notes................ 34 Description of the Guarantee.................... 35 Description of the Related Note Guarantee....... 37 Plan of Distribution............................ 38 Legal Matters................................... 39 Experts......................................... 40
ANNEX I Glossary of Terms............................... A-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SERIES AL1 PREFERRED SECURITIES INDEXED TO THE JPMCI ALUMINUM EXCESS RETURN INDEX J.P. MORGAN INDEX FUNDING COMPANY, LLC PREFERRED SECURITIES GUARANTEED TO THE EXTENT SET FORTH HEREIN BY J.P. MORGAN & CO. INCORPORATED PROSPECTUS SUPPLEMENT [ ] , 1996 - ------------------------------------------------------ - ------------------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----