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Term Sheet |
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Structured |
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General
- The notes are designed for investors who seek to participate in the appreciation of the S&P MidCap 400® Index, up to the Maximum Return of at least 20%, at maturity and who anticipate that the Index closing level will not be less than the Strike Level by more than 25% on any trading day during the Monitoring Period. Investors should be willing to forgo interest and dividend payments and, if the Index closing level is less than the Strike Level by more than 25% on any trading day during the Monitoring Period, be willing to lose some or all of their principal. Any payment on the notes is subject to the credit risk of JPMorgan Chase & Co.
- Senior unsecured obligations of JPMorgan Chase & Co. maturing November 23, 2011†
- Minimum denominations of $5,000 and integral multiples of $1,000 in excess thereof
- The terms of the notes as set forth in “Key Terms” below, including those set forth in “Key Terms — Payment at Maturity” below, to the extent they differ or conflict with those set forth in the accompanying product supplement no. 98-A-I, supersede the terms set forth in product supplement no. 98-A-I. In particular, the notes are subject to a maximum payment at maturity, which we refer to as the Maximum Return, which is not described in the accompanying product supplement no. 98-A-I. Please refer to “Supplemental Terms of the Notes” and “Selected Risk Considerations — Your Maximum Gain on the Notes Is Limited to the Maximum Return” in this term sheet for more information.
- The notes are expected to price on or about November 3, 2010 and are expected to settle on or about November 8, 2010.
Key Terms
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Index: |
The S&P MidCap 400® Index (the “Index”). For additional information about the S&P MidCap 400® Index, see Appendix A to this term sheet. |
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Knock-Out Event: |
A Knock-Out Event occurs if, on any trading day during the Monitoring Period, the Index closing level is less than the Strike Level by more than the Knock-Out Buffer Amount. |
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Knock-Out Buffer Amount: |
25% |
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Payment at Maturity: |
If a Knock-Out Event has occurred, you will receive a cash payment at maturity that will reflect the performance of the Index, subject to the Maximum Return. Under these circumstances, your payment at maturity per $1,000 principal amount note will be calculated as follows: |
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$1,000 + ($1,000 x Index Return), subject to the Maximum Return |
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If a Knock-Out Event has occurred, you will lose some or all of your investment at maturity if the Ending Index Level is less than the Strike Level. |
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If a Knock-Out Event has not occurred, you will receive a cash payment at maturity that will reflect the performance of the Index, subject to the Contingent Minimum Return and the Maximum Return. If a Knock-Out Event has not occurred, your payment at maturity per $1,000 principal amount note will equal $1,000 plus the product of (a) $1,000 and (b) the greater of (i) the Contingent Minimum Return and (ii) the Index Return, subject to the Maximum Return. For additional clarification, please see “What Is the Total Return on the Notes at Maturity, Assuming a Range of Performances for the Index?” in this term sheet. |
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Maximum Return: |
At least 20%. The actual Maximum Return and the actual maximum payment at maturity will be set on the pricing date and will not be less than 20% and $1,200 per $1,000 principal amount note, respectively. |
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Contingent Minimum Return: |
At least 4.50%. The actual Contingent Minimum Return will be determined on the pricing date and will not be less than 4.50%. |
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Monitoring Period: |
The period from the pricing date to and including the Observation Date |
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Index Return: |
Ending Index Level – Strike
Level |
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Strike Level: |
The level of the Index to be determined on the pricing date in the sole discretion of the calculation agent. The Strike Level may or may not be the closing level of the Index on the pricing date. Although the calculation agent will make all determinations and will take all actions in relation to the establishment of the Strike Level in good faith, it should be noted that such discretion could have an impact (positive or negative), on the value of your notes. The calculation agent is under no obligation to consider your interests as a holder of the notes in taking any actions, including the determination of the Strike Level, that might affect the value of your notes. |
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Ending Index Level: |
The Index closing level on the Observation Date |
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Observation Date: |
November 18, 2011† |
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Maturity Date: |
November 23, 2011† |
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CUSIP: |
48124AX77 |
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† |
Subject to postponement in the event of a market disruption event and as described under “Description of Notes — Payment at Maturity” in the accompanying product supplement no. 98-A-I |
Investing in the Capped Index Knock-Out Notes involves a number of risks. See “Risk Factors” beginning on page PS-6 of the accompanying product supplement no. 98-A-I and “Selected Risk Considerations” beginning on page TS-3 of this term sheet.
JPMorgan Chase & Co. has filed a registration statement (including a prospectus) with the Securities and Exchange Commission, or SEC, for the offering to which this term sheet relates. Before you invest, you should read the prospectus in that registration statement and the other documents relating to this offering that JPMorgan Chase & Co. has filed with the SEC for more complete information about JPMorgan Chase & Co. and this offering. You may get these documents without cost by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, JPMorgan Chase & Co., any agent or any dealer participating in this offering will arrange to send you the prospectus, the prospectus supplement, product supplement no. 98-A-I and this term sheet if you so request by calling toll-free 866-535-9248.
You may revoke your offer to purchase the notes at any time prior to the time at which we accept such offer by notifying the applicable agent. We reserve the right to change the terms of, or reject any offer to purchase, the notes prior to their issuance. In the event of any changes to the terms of the notes, we will notify you and you will be asked to accept such changes in connection with your purchase. You may also choose to reject such changes in which case we may reject your offer to purchase.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the notes or passed upon the accuracy or the adequacy of this term sheet or the accompanying prospectus supplement and prospectus. Any representation to the contrary is a criminal offense.
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Price to Public (1) |
Fees and Commissions (2) |
Proceeds to Us |
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Per note |
$ |
$ |
$ |
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Total |
$ |
$ |
$ |
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(1) |
The price to the public includes the cost of hedging our obligations under the notes through one or more of our affiliates, which includes our affiliates’ expected cost of providing such hedge as well as the profit our affiliates expect to realize in consideration for assuming the risks inherent in providing such hedge. For additional related information, please see “Use of Proceeds” beginning on page PS-15 of the accompanying product supplement no. 98-A-I, as supplemented by the “Supplemental Use of Proceeds” in this term sheet. |
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(2) |
Please see “Supplemental Plan of Distribution (Conflicts of Interest)” in this term sheet for information about fees and commissions. |
The agent for this offering, J.P. Morgan Securities LLC, which we refer to as JPMS, is an affiliate of ours. See “Supplemental Plan of Distribution (Conflicts of Interest)” in this term sheet.
The notes are not bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency, nor are they obligations of, or guaranteed by, a bank.
November 3, 2010
Additional Terms Specific to the Notes
You should read this term sheet together with the prospectus dated November 21, 2008, as supplemented by the prospectus supplement dated November 21, 2008 relating to our Series E medium-term notes of which these notes are a part, and the more detailed information contained in product supplement no. 98-A-I dated November 21, 2008. This term sheet, together with the documents listed below, contains the terms of the notes and supersedes all other prior or contemporaneous oral statements as well as any other written materials including preliminary or indicative pricing terms, correspondence, trade ideas, structures for implementation, sample structures, fact sheets, brochures or other educational materials of ours. You should carefully consider, among other things, the matters set forth in “Risk Factors” in the accompanying product supplement no. 98-A-I, as the notes involve risks not associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisers before you invest in the notes.
You may access these documents on the SEC website at www.sec.gov as follows (or if such address has changed, by reviewing our filings for the relevant date on the SEC website):
-
Product supplement no. 98-A-I dated November 21, 2008:
http://www.sec.gov/Archives/edgar/data/19617/000119312508241208/d424b21.pdf -
Prospectus supplement dated November 21, 2008:
http://www.sec.gov/Archives/edgar/data/19617/000089109208005661/e33600_424b2.pdf -
Prospectus dated November 21, 2008:
http://www.sec.gov/Archives/edgar/data/19617/000089109208005658/e33655_424b2.pdf
Our Central Index Key, or CIK, on the SEC website is 19617. As used in this term sheet, the “Company,” “we,” “us” and “our” refer to JPMorgan Chase & Co.
Supplemental Terms of the Notes
The description of the payment at maturity on the notes as set forth in this term sheet differs from the description of the payment at maturity as set forth in the accompanying product supplement no. 98-A-I. For purposes of this offering, your payment at maturity will be subject to the Maximum Return of at least 20%, which is not described in the accompanying product supplement no. 98-A-I. Accordingly, the appreciation potential of the notes is limited to the Maximum Return and the maximum amount payable at maturity per $1,000 principal amount note will be at least $1,200, regardless of the appreciation in the Index. The actual Maximum Return and the actual maximum payment at maturity will be set on the pricing date and will not be less than 20% and $1,200 per $1,000 principal amount note, respectively. Please see “Risk Factors — Your Maximum Gain on the Notes Is Limited to the Maximum Return” for more information on the risks related to the Maximum Return.
Accordingly, for purposes of this offering, you should refer to the description of the payment at maturity as set forth in this term sheet, which supersedes the section entitled “Key Terms — Payment at Maturity (If a Knock-Out Event has occurred)” and “Key Terms — Payment at Maturity (If a Knock-Out Event has not occurred)” on the cover page and the applicable sections relating to the payment at maturity in “Description of Notes — Payment at Maturity” on PS-2 of the accompanying product supplement no. 98-A-I.
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JPMorgan
Structured Investments — |
TS-1 |
What Is the Total Return on the Notes at Maturity, Assuming a Range of Performances for the Index?
The following table illustrates the hypothetical total return at maturity on the notes. The “total return” as used in this term sheet is the number, expressed as a percentage, that results from comparing the payment at maturity per $1,000 principal amount note to $1,000. The hypothetical total returns set forth below assume a Strike Level of 830, a Contingent Minimum Return of 4.50% and a Maximum Return of 20% and reflect the Knock-Out Buffer Amount of 25%. The hypothetical total returns set forth below are for illustrative purposes only and may not be the actual total returns applicable to a purchaser of the notes. The numbers appearing in the following table and examples have been rounded for ease of analysis.
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Total Return |
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Ending Index |
Index Return |
Knock Out Event |
Knock Out Event |
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1494.00 |
80.00% |
20.00% |
20.00% |
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1369.50 |
65.00% |
20.00% |
20.00% |
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1245.00 |
50.00% |
20.00% |
20.00% |
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1162.00 |
40.00% |
20.00% |
20.00% |
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1079.00 |
30.00% |
20.00% |
20.00% |
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996.00 |
20.00% |
20.00% |
20.00% |
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975.25 |
17.50% |
17.50% |
17.50% |
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954.50 |
15.00% |
15.00% |
15.00% |
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913.00 |
10.00% |
10.00% |
10.00% |
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871.50 |
5.00% |
5.00% |
5.00% |
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867.35 |
4.50% |
4.50% |
4.50% |
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850.75 |
2.50% |
4.50% |
2.50% |
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830.00 |
0.00% |
4.50% |
0.00% |
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788.50 |
-5.00% |
4.50% |
-5.00% |
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747.00 |
-10.00% |
4.50% |
-10.00% |
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705.50 |
-15.00% |
4.50% |
-15.00% |
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664.00 |
-20.00% |
4.50% |
-20.00% |
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622.50 |
-25.00% |
4.50% |
-25.00% |
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581.00 |
-30.00% |
N/A |
-30.00% |
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498.00 |
-40.00% |
N/A |
-40.00% |
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415.00 |
-50.00% |
N/A |
-50.00% |
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332.00 |
-60.00% |
N/A |
-60.00% |
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249.00 |
-70.00% |
N/A |
-70.00% |
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166.00 |
-80.00% |
N/A |
-80.00% |
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83.00 |
-90.00% |
N/A |
-90.00% |
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0.00 |
-100.00% |
N/A |
-100.00% |
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(1) The Index
closing level is not less than the Strike Level by more than 25% on any trading day
during the Monitoring Period. |
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Hypothetical Examples of Amounts Payable at Maturity
The following examples illustrate how the total returns set forth in the table above are calculated.
Example 1: A Knock-Out Event has not occurred, and the level of the Index increases from the Strike Level of 830 to an Ending Index Level of 850.75. Because a Knock-Out Event has not occurred and the Index Return of 2.50% is less than the Contingent Minimum Return of 4.50%, the investor receives a payment at maturity of $1,045 per $1,000 principal amount note.
Example 2: A Knock-Out Event has not occurred, and the level of the Index decreases from the Strike Level of 830 to an Ending Index Level of 705.50. Because a Knock-Out Event has not occurred and the Index Return of -15% is less than the Contingent Minimum Return of 4.50%, the investor receives a payment at maturity of $1,045 per $1,000 principal amount note.
Example 3: A Knock-Out Event has not occurred, and the level of the Index increases from the Strike Level of 830 to an Ending Index Level of 975.25. Because a Knock-Out Event has not occurred and the Index Return of 17.50% is greater than the Contingent Minimum Return of 4.50% but less than the Maximum Return of 20%, the investor receives a payment at maturity of $1,175 per $1,000 principal amount note, calculated as follows:
$1,000 + ($1,000 x 17.50%) = $1,175
Example 4: A Knock-Out Event has occurred, and the level of the Index decreases from the Strike Level of 830 to an Ending Index Level of 415. Because a Knock-Out Event has occurred and the Index Return is -50%, the investor receives a payment at maturity of $500 per $1,000 principal amount note, calculated as follows:
$1,000 + ($1,000 x -50%) = $500
Example 5: A Knock-Out Event has occurred, and the level of the Index increases from the Strike Level of 830 to an Ending Index Level of 954.50. Because a Knock-Out Event has occurred and the Index Return of 15% is less than the Maximum Return of 20%, the investor receives a payment at maturity of $1,150 per $1,000 principal amount note, calculated as follows:
$1,000 + ($1,000 x 15%) = $1,150
Example 6: The level of the Index increases from the Strike Level of 830 to an Ending Index Level of 1245. Because the Index Return of 50% is greater than the Maximum Return of 20%, regardless of whether a Knock-Out Event has occurred, the investor receives a payment at maturity of $1,200 per $1,000 principal amount note, the maximum payment on the notes.
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JPMorgan
Structured Investments — |
TS-2 |
Selected Purchase Considerations
- CAPPED APPRECIATION POTENTIAL — The notes provide the opportunity to participate in the appreciation of the Index, up to the Maximum Return of at least 20%, at maturity. If a Knock-Out Event has not occurred, in addition to the principal amount, you will receive at maturity at least the Contingent Minimum Return of not less than 4.50% on the notes, or a minimum payment at maturity of $1,045 for every $1,000 principal amount note. Even if a Knock-Out Event has occurred, if the Ending Index Level is greater than the Strike Level, in addition to the principal amount, you will receive at maturity a return on the notes equal to the Index Return, subject to the Maximum Return of at least 20%. The maximum payment at maturity is at least $1,200 per $1,000 principal amount note, regardless of whether a Knock-Out Event has occurred. The actual Contingent Minimum Return and Maximum Return will be set on the pricing date and will not be less than 4.50% and 20%, respectively. Because the notes are our senior unsecured obligations, payment of any amount at maturity is subject to our ability to pay our obligations as they become due.
- DIVERSIFICATION OF THE S&P MIDCAP 400® INDEX — The return on the notes is linked to the performance of the S&P MidCap 400® Index. The S&P MidCap 400® Index consists of 400 component stocks selected to provide a performance benchmark for the medium market capitalization segment (between approximately $850 million to $3.8 billion in market capitalization) of the U.S. equity markets. For additional information about the Index, see Appendix A to this term sheet.
- CAPITAL GAINS TAX TREATMENT — You should review carefully the
section entitled “Certain U.S. Federal Income Tax Consequences” in the
accompanying product supplement no. 98-A-I. Notwithstanding any disclosure in
product supplement no. 98-A-I to the contrary, our special tax counsel in this
transaction is Davis Polk & Wardwell LLP. Subject to the
limitations described therein, and based on certain factual representations
received from us, in the opinion of our special tax counsel it is reasonable to
treat the notes as “open transactions” for U.S. federal income tax
purposes. Assuming this characterization is respected, the gain or loss on your
notes should be treated as long-term capital gain or loss if you hold your
notes for more than a year, whether or not you are an initial purchaser of
notes at the issue price. However, the Internal Revenue Service (the “IRS”) or
a court may not respect this characterization or treatment of the notes, in
which case the timing and character of any income or loss on the notes could be
significantly and adversely affected. In addition, in 2007 Treasury and the
IRS released a notice requesting comments on the U.S. federal income tax treatment of “prepaid
forward contracts” and similar instruments, such as the notes. The notice
focuses in particular on whether to require holders of these instruments to
accrue income over the term of their investment. It also asks for comments on
a number of related topics, including the character of income or loss with
respect to these instruments; the relevance of factors such as the nature of
the underlying property to which the instruments are linked; the degree, if
any, to which income (including any mandated accruals) realized by Non-U.S.
Holders should be subject to withholding tax; and whether these instruments are
or should be subject to the “constructive ownership” regime, which very
generally can operate to recharacterize certain long-term capital gain as
ordinary income and impose an interest charge. While the notice requests
comments on appropriate transition rules and effective dates, any Treasury
regulations or other guidance promulgated after consideration of these issues
could materially and adversely affect the tax consequences of an investment in
the notes, possibly with retroactive effect. Both U.S. and Non-U.S. Holders
should consult their tax advisers regarding the U.S. federal income tax consequences of an
investment in the notes, including
possible alternative treatments and the issues presented by this notice. Non-U.S.
Holders should also note that they may be withheld upon unless they have
submitted a properly completed IRS Form W-8BEN or otherwise satisfied the applicable documentation
requirements.
The discussion in the preceding paragraph, when read in combination with the section entitled “Certain U.S. Federal Income Tax Consequences” in the accompanying product supplement, constitutes the full opinion of Davis Polk & Wardwell LLP regarding the material U.S. federal income tax consequences of owning and disposing of notes.
Selected Risk Considerations
An investment in the notes involves significant risks. Investing in the notes is not equivalent to investing directly in the Index or any of the component securities of the Index. These risks are explained in more detail in the “Risk Factors” section of the accompanying product supplement no. 98-A-I dated November 21, 2008.
- YOUR INVESTMENT IN THE NOTES MAY RESULT IN A LOSS — The notes do not guarantee any return of principal. The return on the notes at maturity is linked to the performance of the Index and will depend on whether a Knock-Out Event has occurred and whether, and the extent to which, the Index Return is positive or negative. If the Index closing level is less than the Strike Level by more than the Knock-Out Buffer Amount of 25% on any trading day during the Monitoring Period, a Knock-Out Event has occurred, and the protection provided by the Knock-Out Buffer Amount of 25% will terminate. Under these circumstances, you could lose some or all of your principal.
- YOUR MAXIMUM GAIN ON THE NOTES IS LIMITED TO THE MAXIMUM RETURN — If the Ending Index Level is greater than the Strike Level, for each $1,000 principal amount note, you will receive at maturity $1,000 plus an additional amount that will not exceed a predetermined percentage of the principal amount, regardless of the appreciation in the Index, which may be significant. We refer to this predetermined percentage as the Maximum Return, which will be set on the pricing date and will not be less than 20%.
- CREDIT RISK OF JPMORGAN CHASE & CO. — The notes are subject to the credit risk of JPMorgan Chase & Co. and our credit ratings and credit spreads may adversely affect the market value of the notes. Investors are dependent on JPMorgan Chase & Co.’s ability to pay all amounts due on the notes at maturity, and therefore investors are subject to our credit risk and to changes in the market’s view of our creditworthiness. Any decline in our credit ratings or increase in the credit spreads charged by the market for taking our credit risk is likely to affect adversely the value of the notes.
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JPMorgan
Structured Investments — |
TS-3 |
- POTENTIAL CONFLICTS
— We and our affiliates play a variety of roles in connection with the
issuance of the notes, including acting as calculation agent and hedging our
obligations under the notes. In performing these duties, the economic interests
of the calculation agent and other affiliates of ours are potentially adverse
to your interests as an investor in the notes.
Although the calculation agent will make all determinations and take all action in relation to establishing the Strike Level in good faith, it should be noted that such discretion could have an impact (positive or negative) on the value of your notes. The calculation agent is under no obligation to consider your interests as a holder of the notes in taking any actions, including the determination of the Strike Level, that might affect the value of your notes. - YOUR PROTECTION MAY TERMINATE ON ANY TRADING DAY DURING THE MONITORING PERIOD — If the Index closing level on any trading day during the Monitoring Period is less than the Strike Level by more than the Knock-Out Buffer Amount of 25%, you will at maturity be fully exposed to any depreciation in the Index. We refer to this feature as a contingent buffer. Under these circumstances, if the Ending Index Level is less than the Strike Level, you will lose 1% of the principal amount of your investment for every 1% that the Ending Index Level is less than the Strike Level. You will be subject to this potential loss of principal even if the Index subsequently increases such that the Index closing level is less than the Strike Level by not more than the Knock-Out Buffer Amount of 25%, or is equal to or greater than the Strike Level. If these notes had a non-contingent buffer feature, under the same scenario, you would have received the full principal amount of your notes plus the Contingent Minimum Return at maturity. As a result, your investment in the notes may not perform as well as an investment in a security with a return that includes a non-contingent buffer.
- YOUR ABILITY TO RECEIVE THE CONTINGENT
MINIMUM RETURN OF 4.50%* MAY TERMINATE ON ANY TRADING DAY DURING THE MONITORING
PERIOD — If the Index
closing level on any trading day during the Monitoring Period is less than the Strike
Level by more than the Knock-Out Buffer Amount of 25%, you will not be entitled
to receive the Contingent Minimum Return of 4.50%* on the notes. Under these
circumstances, you may lose some or all of your investment at maturity and will
be fully exposed to any depreciation in the Index.
* The actual Contingent Minimum Return on the notes will be set on the pricing date and will not be less than 4.50%. - RISK OF KNOCK-OUT EVENT OCCURRING IS GREATER IF THE INDEX IS VOLATILE — The likelihood that the Index closing level is less than the Strike Level by more than the Knock-Out Buffer Amount on any trading day during the Monitoring Period, thereby triggering a Knock-Out Event, will depend in large part on the volatility of the Index — the frequency and magnitude of changes in the level of the Index. Recently, the Index has experienced significant volatility.
- CERTAIN BUILT-IN COSTS ARE LIKELY TO AFFECT ADVERSELY THE VALUE OF THE NOTES PRIOR TO MATURITY — While the payment at maturity described in this term sheet is based on the full principal amount of your notes, the original issue price of the notes includes the agent’s commission and the estimated cost of hedging our obligations under the notes. As a result, the price, if any, at which JPMS will be willing to purchase notes from you in secondary market transactions, if at all, will likely be lower than the original issue price, and any sale prior to the maturity date could result in a substantial loss to you. The notes are not designed to be short-term trading instruments. Accordingly, you should be able and willing to hold your notes to maturity. See “Supplemental Use of Proceeds” on page TS-5 of this term sheet for additional information.
- NO INTEREST OR DIVIDEND PAYMENTS OR VOTING RIGHTS — As a holder of the notes, you will not receive interest payments, and you will not have voting rights or rights to receive cash dividends or other distributions or other rights that holders of securities composing the Index would have.
- LACK OF LIQUIDITY— The notes will not be listed on any securities exchange. JPMS intends to offer to purchase the notes in the secondary market but is not required to do so. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the notes easily. Because other dealers are not likely to make a secondary market for the notes, the price at which you may be able to trade your notes is likely to depend on the price, if any, at which JPMS is willing to buy the notes.
- MANY ECONOMIC AND
MARKET FACTORS WILL IMPACT THE VALUE OF THE NOTES — In addition to
the level of the Index on any day, the value of the notes will be affected
by a number of economic and market factors that may either offset or magnify
each other, including:
- the expected volatility of the Index;
- the time to maturity of the notes;
- whether a Knock-Out Event has occurred;
- the dividend rates on the equity securities underlying the Index;
- interest and yield rates in the market generally;
- a variety of economic, financial, political, regulatory and judicial events; and
- our creditworthiness, including actual or anticipated downgrades in our credit ratings.
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JPMorgan
Structured Investments — |
TS-4 |
Historical Information
The following graph sets forth the historical performance of the S&P MidCap 400® Index based on the weekly historical Index closing levels from January 7, 2005 through October 29, 2010. The Index closing level on November 2, 2010 was 837.82. We obtained the Index closing levels below from Bloomberg Financial Markets. We make no representation or warranty as to the accuracy or completeness of the information obtained from Bloomberg Financial Markets.
The historical levels of the Index should not be taken as an indication of future performance, and no assurance can be given as to the Index closing level on any trading day during the Monitoring Period or the Index closing level on the Observation Date. We cannot give you assurance that the performance of the Index will result in the return of any of your initial investment.
Supplemental Use of Proceeds
Notwithstanding anything to the contrary in the accompanying product supplement no. 98-A-I (in particular, the second paragraph of the “Use of Proceeds” section on PS-15 of the accompanying product supplement), for purposes of the notes offered by this term sheet, the original issue price of the notes will include the reimbursement of certain issuance costs and the estimated cost of hedging our obligations under the notes. The estimated cost of hedging includes the projected profit, which in no event will exceed $25.00 per $1,000 principal amount note, that our affiliates expect to realize in consideration for assuming the risks inherent in hedging our obligations under the notes. Because hedging our obligations entails risk and may be influenced by market forces beyond our control, the actual cost of such hedging may result in a profit that is more or less than expected, or could result in a loss.
Supplemental Plan of Distribution (Conflicts of Interest)
We own, directly or indirectly, all of the outstanding equity securities of JPMS, the agent for this offering. The net proceeds received from the sale of the notes will be used, in part, by JPMS or one of its affiliates in connection with hedging our obligation under the notes. In accordance with NASD Rule 2720, JPMS may not make sales in this offering to any of its discretionary accounts without the prior written approval of the customer.
JPMS, acting as agent for JPMorgan Chase & Co., will receive a commission that will depend on market conditions on the pricing date. In no event will that commission exceed $10.00 p er $1,000 principal amount note. See “Plan of Distribution” beginning on page PS-37 of the accompanying product supplement no. 98-A-I.
For a different portion of the notes to be sold in this offering, an affiliated bank will receive a fee and another affiliate of ours will receive a structuring and development fee. In no event will the total amount of these fees exceed $ 10.00 per $1,000 principal amount note.
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JPMorgan
Structured Investments — |
TS-5 |
APPENDIX A
The S&P MidCap 400® Index
We have derived all information contained in this term sheet regarding the S&P MidCap 400® Index, including, without limitation, its make-up, method of calculation and changes in its components, from publicly available information. Such information reflects the policies of, and is subject to change by, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. (“S&P”). We make no representation or warranty as to the accuracy or completeness of such information. The S&P MidCap 400® Index was developed by S&P and is calculated, maintained and published by S&P. S&P has no obligation to continue to publish, and may discontinue the publication of, the S&P MidCap 400® Index.
The S&P MidCap 400® Index is reported by Bloomberg L.P. under the ticker symbol “MID.”
The S&P MidCap 400® Index is intended to provide a performance benchmark for the medium capitalization segment of the U.S. equity markets. It tracks the stock price movement of 400 companies with mid-sized market capitalizations, primarily ranging from $850 million to $3.8 billion. The market capitalization requirements are reviewed periodically so as to ensure consistency with market standards. The S&P MidCap 400® Index is maintained with similar methodologies and rules as the S&P 500® Index, with variations only to account for differences in capitalization requirements.
The calculation of the level of the S&P MidCap 400® Index (discussed below in further detail) is based on the relative value of the aggregate Market Value (as defined below) of the common stocks of 400 companies (the “S&P MidCap Component Stocks”) as of a particular time as compared to the aggregate average Market Value of the common stocks of 400 similar companies on the base date of June 28, 1991 (the “base date”). Historically, the “Market Value” of any S&P MidCap Component Stock was calculated as the product of the market price per share and the number of the then-outstanding shares of such S&P MidCap Component Stock. As discussed below, on March 21, 2005, S&P began to use a new methodology to calculate the Market Value of the S&P MidCap Component Stocks and on September 16, 2005, S&P completed its transition to the new calculation methodology. S&P chooses companies for inclusion in the S&P MidCap 400® Index with the objective of achieving a distribution by broad industry groupings that approximates the distribution of these groupings in the common stock population of the medium capitalization segment of the U.S. equity market. S&P may from time to time, in its sole discretion, add companies to, or delete companies from, the S&P MidCap 400® Index to achieve the objectives stated above. Relevant criteria employed by S&P include the viability of the particular company, the extent to which that company represents the industry group to which it is assigned, the extent to which the company’s common stock is widely-held and the Market Value and trading activity of the common stock of that company.
On March 21, 2005, S&P began to calculate the S&P MidCap 400® Index based on a half float-adjusted formula, and on September 16, 2005, the S&P MidCap 400® Index became fully float adjusted. S&P’s criteria for selecting stocks for the S&P MidCap 400® Index was not changed by the shift to float adjustment. However, the adjustment affects each company’s weight in the S&P MidCap 400® Index (i.e., its Market Value).
Under float adjustment, the share counts used in calculating the S&P MidCap 400® Index reflect only those shares that are available to investors, not all of a company’s outstanding shares. S&P defines three groups of shareholders whose holdings are subject to float adjustment:
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holdings by other publicly traded corporations, venture capital firms, private equity firms, strategic partners, or leveraged buyout groups;
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holdings by government entities, including all levels of government in the United States or foreign countries; and
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holdings by current or former officers and directors of the company, founders of the company, or family trusts of officers, directors, or founders, as well as holdings of trusts, foundations, pension funds, employee stock ownership plans, or other investment vehicles associated with and controlled by the company.
However, treasury stock, stock options, equity participation units, warrants, preferred stock, convertible stock and rights are not part of the float. In cases where holdings in a group exceed 10% of the outstanding shares of a company, the holdings of that group will be excluded from the float-adjusted count of shares to be used in the S&P MidCap 400® Index calculation. Mutual funds, investment advisory firms, pension funds or foundations not associated with the company and investment funds in insurance companies, shares that trust beneficiaries may buy or sell without difficulty or significant additional expense beyond typical brokerage fees, and, if a company has multiple classes of stock outstanding, shares in an unlisted or non-traded class if such shares are convertible by shareholders without undue delay and cost, are also part of the float. Shares held in a trust to allow investors in countries outside the country of domicile (e.g., ADRs, CDIs and Canadian exchangeable shares) are normally part of the float.
For each stock, an investable weight factor (“IWF”) is calculated by dividing the available float shares, defined as the total shares outstanding less shares held in one or more of the three groups listed above where the group holdings exceed 10% of the outstanding shares, by the total shares outstanding. (On March 21, 2005, the S&P MidCap 400® Index moved
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halfway to float adjustment, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P MidCap 400® Index between March 21, 2005 and September 16, 2005 was 0.90. On September 16, 2005, S&P began to calculate the S&P MidCap 400® Index on a fully float-adjusted basis, meaning that if a stock has an IWF of 0.80, the IWF used to calculate the S&P MidCap 400® Index on and after September 16, 2005 is 0.80.) The float-adjusted Index is calculated by dividing the sum of the IWF multiplied by both the price and the total shares outstanding for each stock by the Index Divisor. For companies with multiple classes of stock, S&P calculates the weighted average IWF for each stock using the proportion of the total company market capitalization of each share class as weights.
As of the date of this term sheet, the S&P MidCap 400® Index is calculated using a base-weighted aggregate methodology: the level of the S&P MidCap 400® Index reflects the total Market Value of all 400 S&P MidCap Component Stocks relative to the S&P MidCap 400® Index’s Base Date. An indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time.
The actual total Market Value of the S&P MidCap Component Stocks on the Base Date has been set equal to an indexed value of 100. This is often indicated by the notation 6/28/91 = 100. In practice, the daily calculation of the S&P MidCap 400® Index is computed by dividing the total Market Value of the S&P MidCap Component Stocks by a number called the Index Divisor. By itself, the Index Divisor is an arbitrary number. However, in the context of the calculation of the S&P MidCap 400® Index, it is the only link to the original Base Period level of the S&P MidCap 400® Index. The Index Divisor keeps the S&P MidCap 400® Index comparable over time and is the manipulation point for all adjustments to the S&P MidCap 400® Index (“Index Maintenance”).
Index Maintenance includes monitoring and completing the adjustments for company additions and deletions, share changes, stock splits, stock dividends and stock price adjustments due to company restructurings or spin-offs.
To prevent the level of the S&P MidCap 400® Index from changing due to corporate actions, all corporate actions which affect the total Market Value of the S&P MidCap 400® Index require an Index Divisor adjustment. By adjusting the Index Divisor for the change in total Market Value, the level of the S&P MidCap 400® Index remains constant. This helps maintain the level of the S&P MidCap 400® Index as an accurate barometer of stock market performance and ensures that the movement of the S&P MidCap 400® Index does not reflect the corporate actions of individual companies in the S&P MidCap 400® Index. All Index Divisor adjustments are made after the close of trading and after the calculation of the closing level of the S&P MidCap 400® Index. Some corporate actions, such as stock splits and stock dividends, require simple changes in the common shares outstanding and the stock prices of the companies in the S&P MidCap 400® Index and do not require Index Divisor adjustments.
The table below summarizes the types of Index Maintenance adjustments and indicates whether or not an Index Divisor adjustment is required.
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Type
of |
Comments |
Divisor |
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Company added/ deleted |
Net change in market value determines divisor adjustment. |
Yes |
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Change in shares outstanding |
Any combination of secondary issuance, share repurchase or buy back – share counts revised to reflect change. |
Yes |
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Stock split |
Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting. |
No |
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Spin off |
If the spun off company is not being added to the index, the divisor adjustment reflects the decline in index market value (i.e., the value of the spun off unit). |
Yes |
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Spin off |
Spun off company added to the index, another company removed to keep number of names fixed. Divisor adjustment reflects deletion. |
Yes |
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Change in IWF due to a corporate action or a purchase or sale by an inside holder. |
Increasing (decreasing) the IWF increases (decreases) the total market value of the index. The divisor change reflects the change in market value caused by the change to an IWF. |
Yes |
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Special dividend |
When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in index market value. |
Yes |
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Type of |
Comments |
Divisor |
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Rights offering |
Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price. The calculation assumes that the offering is fully subscribed. Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price paid. |
Yes |
Stock splits and stock dividends do not affect the Index Divisor, because following a split or dividend, both the stock price and number of shares outstanding are adjusted by S&P so that there is no change in the Market Value of the S&P MidCap Component Stock. All stock split and dividend adjustments are made after the close of trading on the day before the ex-date.
Each of the corporate events exemplified in the table requiring an adjustment to the Index Divisor has the effect of altering the Market Value of the S&P MidCap Component Stock and consequently of altering the aggregate Market Value of the S&P MidCap Component Stocks (the “Post-Event Aggregate Market Value”). In order that the level of the S&P MidCap 400® Index (the “Pre-Event Index Value”) not be affected by the altered Market Value (whether increase or decrease) of the affected S&P MidCap Component Stock, a new Index Divisor (“New Divisor”) is derived as follows:
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Post-Event Aggregate Market Value |
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Pre-Event Index Value |
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New Divisor |
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New Divisor |
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Post-Event Aggregate Market Value |
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Pre-Event Index Value |
A large part of the Index Maintenance process involves tracking the changes in the number of shares outstanding of each of the S&P MidCap 400® Index companies. Four times a year, on a Friday close to the end of each calendar quarter, the share totals of companies in the S&P MidCap 400® Index are updated as required by any changes in the number of shares outstanding. After the totals are updated, the Index Divisor is adjusted to compensate for the net change in the total Market Value of the S&P MidCap 400® Index. In addition, any changes over 5% in the current common shares outstanding for the S&P MidCap 400® Index companies are carefully reviewed on a weekly basis, and when appropriate, an immediate adjustment is made to the Index Divisor.
License Agreement with S&P
S&P and J.P. Morgan Securities LLC have entered into a non-exclusive license agreement providing for the sub-license to us, and certain of our affiliated or subsidiary companies, in exchange for a fee, of the right to use the S&P MidCap 400® Index, which is owned and published by S&P, in connection with certain securities, including the notes.
The notes are not sponsored, endorsed, sold or promoted by S&P or its third party licensors. Neither S&P nor its third party licensors make any representation or warranty, express or implied, to the owners of the notes or any member of the public regarding the advisability of investing in securities generally or in the notes particularly or the ability of the S&P MidCap 400® Index to track general stock market performance. S&P’s and its third party licensors’ only relationship to JPMorgan Chase & Co. is the licensing of certain trademarks and trade names of S&P and the third party licensors and of the S&P MidCap 400® Index which is determined, composed and calculated by S&P or its third party licensors without regard to JPMorgan Chase & Co. or the notes. S&P and its third party licensors have no obligation to take the needs of JPMorgan Chase & Co. or the owners of the notes into consideration in determining, composing or calculating the S&P MidCap 400® Index. Neither S&P nor its third party licensors are responsible for or has participated in the determination of the prices and amount of the notes or the timing of the issuance or sale of the notes or in the determination or calculation of the equation by which the notes are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the notes.
NEITHER S&P, ITS AFFILIATES NOR THEIR THIRD PARTY LICENSORS GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE S&P MIDCAP 400® INDEX OR ANY DATA INCLUDED THEREIN OR ANY COMMUNICATIONS, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATIONS (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS OR DELAYS THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE MARKS, THE S&P MIDCAP 400® INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P, ITS AFFILIATES OR THEIR THIRD PARTY LICENSORS BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE.
”Standard & Poor’s,” “S&P,” “S&P MidCap 400” and “MidCap 400” are trademarks of Standard & Poor’s and have been licensed for use by J.P. Morgan Securities LLC and sub-licensed for use by JPMorgan Chase & Co.
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