Product supplement no. 940-I To prospectus dated May 30, 2006 and prospectus supplement dated May 30, 2006 | Registration Statement no. 333-134553 Dated January 29, 2008 Rule 424(b)(2) |
LEHMAN BROTHERS HOLDINGS INC.
Return Optimization Securities with Partial Protection Linked to the Common Stock of a Reference Stock Issuer
General
| • | Lehman Brothers Holdings Inc. may from time to time offer and sell Return Optimization Securities with Partial Protection Linked to the Common Stock of a Reference Stock Issuer. This product supplement no. 940-I describes terms that will apply generally to the notes, and supplements the terms described in the accompanying base prospectus and MTN prospectus supplement. A separate term sheet or pricing supplement, as the case may be, will describe the applicable Reference Stock and the terms that apply specifically to the notes, including any changes to the terms specified below. We refer to the term sheets and pricing supplements generally as terms supplements. If the terms described in the relevant terms supplement are inconsistent with those described herein or in the accompanying base prospectus and MTN prospectus supplement, the terms described in the relevant terms supplement shall control. |
| • | The notes are the senior unsecured obligations of Lehman Brothers Holdings Inc. |
| • | Payment is linked to a Reference Stock as described below. |
| • | Your investment will be fully exposed to any decline in the Share Price of the Reference Stock beyond the applicable Protection Percentage. You will lose some of your investment at maturity if the Final Share Price of the Reference Stock is below its Initial Share Price by more than the Protection Percentage. |
| • | Investing in the notes is not equivalent to investing in the Reference Stock. |
| • | Unless otherwise specified in the relevant terms supplement, the Payment at Maturity will depend on the Share Return and the specific terms of the notes as set forth in the relevant terms supplement. |
| • | For important information about tax consequences, see “Certain U.S. Federal Income Tax Consequences” beginning on page SS-21. |
| • | Denominations of $10 and integral multiples thereof, unless otherwise specified in the relevant terms supplement. |
| • | The minimum initial investment, if any, will be specified in the relevant terms supplement. |
| • | The notes will not be listed on any securities exchange, unless otherwise specified in the relevant terms supplement. |
Investing in the Return Optimization Securities with Partial Protection Linked to the Common Stock of a Reference Stock Issuer involves a number of risks. See “Risk Factors” beginning on page SS-1 in this product supplement.
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 product supplement no. 940-I, the accompanying base prospectus, the MTN prospectus supplement, the relevant terms supplement and any other related prospectus supplements. Any representation to the contrary is a criminal offense.
LEHMAN BROTHERS
January 29, 2008
Key Terms
Reference Stock: | The common stock to which the notes are linked, as specified in the relevant terms supplement. |
Reference Stock Issuer: | The issuer of the Reference Stock, as specified in the relevant terms supplement. |
Payment at Maturity: | If the Share Return is positive, you will receive a cash payment per $10 principal amount note equal to: |
$10 + ($10 × Leverage Factor × Share Return);
| provided, however, that, if applicable, in no event will you receive an amount greater than $10 + ($10 × Maximum Gain). |
| Your principal is protected against a decline in the Share Price up to the Protection Percentage. If the Share Return is negative and its absolute value is less than or equal to the Protection Percentage, you will receive a cash payment of $10 per $10 principal amount note. |
| Your investment will be fully exposed to any decline in the Share Price beyond the Protection Percentage. If the Final Share Price is less than the Initial Share Price by more than the Protection Percentage, for every 1% decline in the Share Price beyond the Protection Percentage, you will lose an amount equal to 1% of the principal amount of your notes. In this situation, you will receive a cash payment per $10 principal amount note equal to: |
$10 + [$10 × (Share Return + Protection Percentage)]
Share Return: | Unless otherwise specified in the relevant terms supplement: |
Final Share Price – Initial Share Price
| Initial Share Price |
Maximum Gain: | A fixed percentage, as specified, if applicable, in the relevant terms supplement. |
Leverage Factor: | As specified in the relevant terms supplement. |
Protection Percentage: | A fixed percentage, as specified in the relevant terms supplement. |
Initial Share Price: | The Share Price on the Trade Date or such other date or dates as are specified in the relevant terms supplement, divided by the Stock Adjustment Factor. |
Final Share Price: | The Share Price on the Final Valuation Date or such other date or dates as are specified in the relevant terms supplement. |
Stock Adjustment Factor: | Unless otherwise specified in the terms supplement, the Stock Adjustment Factor will be set initially at 1.0, subject to adjustment upon the occurrence of certain corporate events affecting the Reference Stock. See “Description of Notes—Anti-dilution Adjustments.” |
Final Valuation Date: | The Final Share Price will be calculated on the Final Valuation Date, as specified in the relevant terms supplement. The Final Valuation Date is subject to postponement in the event of certain market disruption events and as described under “Description of Notes—Payment at Maturity.” |
Share Price: | With respect to any trading day, the closing price of a share of the Reference Stock on that day. |
Maturity Date: | As specified in the relevant terms supplement. The Maturity Date of the notes is subject to postponement in the event of certain market disruption events and as described under “Description of Notes—Payment at Maturity.” |
Settlement Date: | As specified in the relevant terms supplement. |
Trade Date: | As specified in the relevant terms supplement. |
The relevant terms supplement, this product supplement no. 940-I and the accompanying base prospectus and MTN prospectus supplement contain the terms of the notes. In making your investment decision, you should rely only on the information contained or incorporated by reference in the relevant terms supplement, this product supplement no. 940-I and the accompanying base prospectus and MTN prospectus supplement with respect to the notes offered and with respect to Lehman Brothers Holdings Inc. We have not authorized anyone to give you any additional or different information. The information in the relevant terms supplement, this product supplement no. 940-I and the accompanying base prospectus and MTN prospectus supplement may be accurate only as of the dates of each of these documents, respectively.
The notes described in the relevant terms supplement and this product supplement no. 940-I are not appropriate for all investors and involve important legal and tax consequences and investment risks, which should be discussed with your professional advisors. You should be aware that the regulations of Financial Industry Regulatory Authority, Inc. (“FINRA”) and the laws of certain jurisdictions (including regulations and laws that require brokers to ensure that investments are suitable for their customers) may limit the availability of the notes. The relevant terms supplement, this product supplement no. 940-I and the accompanying base prospectus and MTN prospectus supplement do not constitute an offer to sell or a solicitation of an offer to buy the notes in any circumstances in which such offer or solicitation is unlawful.
In this product supplement no. 940-I, the relevant terms supplement and the accompanying base prospectus and MTN prospectus supplement, “we,” “us” and “our” refer to Lehman Brothers Holdings Inc., unless the context requires otherwise.
We are offering to sell, and are seeking offers to buy, the notes only in jurisdictions where offers and sales are permitted. Neither this product supplement no. 940-I nor the accompanying base prospectus, MTN prospectus supplement or terms supplement constitutes an offer to sell, or a solicitation of an offer to buy, any notes by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation. Neither the delivery of this product supplement no. 940-I nor the accompanying base prospectus, MTN prospectus supplement or terms supplement nor any sale made hereunder implies that there has been no change in our affairs or that the information in this product supplement no. 940-I and accompanying base prospectus, MTN prospectus supplement or terms supplement is correct as of any date after the date hereof.
You must (i) comply with all applicable laws and regulations in force in any jurisdiction in connection with the possession or distribution of this product supplement no. 940-I and the accompanying base prospectus, MTN prospectus supplement and any applicable terms supplement, and the purchase, offer or sale of the notes and (ii) obtain any consent, approval or permission required to be obtained by you for the purchase, offer or sale by you of the notes under the laws and regulations applicable to you in force in any jurisdiction to which you are subject or in which you make such purchases, offers or sales; neither we nor the agents shall have any responsibility therefor.
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Your investment in the notes will involve certain risks. The notes do not pay interest or guarantee any return of principal at, or prior to, maturity. Investing in the notes is not equivalent to investing directly in the Reference Stock. In addition, your investment in the notes entails other risks not associated with an investment in conventional debt securities.You should consider carefully the following discussion of risks as well as the other information contained in this product supplement, the accompanying MTN prospectus supplement and base prospectus and the documents incorporated in the prospectus by reference before you decide that an investment in the notes is suitable for you. In addition, you should consider carefully the discussion of risks set forth in the relevant terms supplement before you decide that an investment in the notes is suitable for you.You should reach an investment decision only after you have carefully considered with your advisors the suitability of an investment in the notes in light of your particular circumstances.
The notes differ from conventional debt securities. The notes do not pay interest or guarantee the return of your investment.
The notes do not pay interest and may not return any of your investment at maturity. The amount payable at maturity will be determined pursuant to the terms described in this product supplement no. 940-I and the relevant terms supplement. You will lose some of your investment at maturity if the Final Share Price is below the Initial Share Price by more than the Protection Percentage.
Your potential return on your investment in the notes may be limited to the Maximum Gain and could be less than if you held a direct leveraged investment in the Reference Stock.
The opportunity to benefit from the possible increases in the Share Price through an investment in the notes may be limited because the amount you receive on the Maturity Date may be limited to a fixed percentage of the principal amount, which we refer to as the Maximum Gain, regardless of the Reference Stock’s leveraged appreciation, which may be significantly greater than the Maximum Gain. The Maximum Gain is a fixed percentage that will be specified in the relevant terms supplement, if applicable. If a Maximum Gain is applicable, the appreciation potential of the notes will be limited to the Maximum Gain even if the Share Return multiplied by the Leverage Factor is greater than the Maximum Gain. Accordingly, if a Maximum Gain is applicable, and the Final Share Price times the Leverage Factor exceeds the Initial Share Price by a percentage that is more than the Maximum Gain, your return on the notes will be less than the return you would achieve by taking an actual leveraged position in the Reference Stock.
The Final Share Price may be below the Share Price at the Maturity Date or at other times during the term of the notes.
Because the Final Share Price is calculated based on the Share Price on the Final Valuation Date and not on the Maturity Date or any other date during the term of the notes, significant volatility in the Share Price at or around the time of the Final Valuation Date could materially affect the Payment at Maturity. For example, a significant decline in the Share Price on the Final Valuation Date would result in a corresponding decline in the Payment at Maturity notwithstanding a significant increase in the Share Price on any date or dates subsequent to the Final Valuation Date. Under these circumstances, you may receive a lower Payment at Maturity than you would have received if you had invested in the Reference Stock directly, given that its value could be realized on any date or dates other than, or in addition to, the Final Valuation Date.
You should be willing to hold your notes to maturity.
The notes are not designed to be short-term trading instruments. The price at which you will be able to sell your notes to us or our affiliates prior to maturity, if at all, may be at a substantial discount
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from the principal amount of the notes, even in cases where the Share Price has appreciated since the Trade Date. The potential returns described in the relevant terms supplement assume that your notes are held to maturity.
You will have no ownership rights in the Reference Stock.
Investing in the notes is not equivalent to investing in the Reference Stock. As an investor in the notes, you will not have any ownership interest or rights in the Reference Stock, such as voting rights, dividend payments or other distributions. Your return on the notes will not reflect the return you would realize if you actually owned the Reference Stock and received dividends, if any, paid on the Reference Stock.
Our affiliates’ compensation may serve as an incentive to sell you these notes.
We and our affiliates act in various capacities with respect to the notes. Lehman Brothers Inc. and other of our affiliates may act as a principal, agent or dealer in connection with the notes. Such affiliates, including the sales representatives, may derive compensation from the distribution of the notes and such compensation may serve as an incentive to sell these notes instead of other investments.
The inclusion in the original issue price of each agent’s commission and the cost of hedging our obligations under the notes through one or more of our affiliates is likely to adversely affect the value of the notes prior to maturity.
While the Payment at Maturity will be based on the full principal amount of your notes as described in the relevant terms supplement, the original issue price of the notes includes each agent’s commission and the cost of hedging our obligations under the notes through one or more of our affiliates. Such cost 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. As a result, assuming no change in market conditions or any other relevant factors, the price, if any, at which Lehman Brothers Inc. will be willing to purchase notes from you in secondary market transactions, if at all, is likely to be lower than the original issue price. In addition, any such prices may differ from values determined by pricing models used by Lehman Brothers Inc., as a result of dealer discounts, mark-ups and other transaction costs.
We have no affiliation with the Reference Stock Issuer.
The Reference Stock Issuer is not an affiliate of ours and is not involved in any of our offerings of notes pursuant to this product supplement in any way. Consequently, we have no control of the actions of the Reference Stock Issuer, including any corporate actions of the type that would require the calculation agent to adjust the payment to you at maturity. The Reference Stock Issuer has no obligation to consider your interest as an investor in the notes in taking any corporate actions that might affect the value of your notes. None of the money you pay for the notes will go to the Reference Stock Issuer.
We cannot assure you that the public information provided with respect to the Reference Stock Issuer is accurate or complete.
All disclosures contained in the relevant terms supplement and this product supplement regarding the Reference Stock Issuer are derived from publicly available documents and other publicly available information. We have not participated in the preparation of such documents or made any due diligence inquiry with respect to the Reference Stock Issuer in connection with the offering of the notes. We do not make any representation that such publicly available documents are, or that any other publicly available information regarding the Reference Stock Issuer is, accurate or complete, and we are not responsible for public disclosure of information by the issuer of the Reference Stock, whether contained in filings with the Securities and Exchange Commission, which we refer to as the SEC, or otherwise. Furthermore, we cannot give any assurance that all events occurring prior to the date of the
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relevant terms supplement, including events that would affect the accuracy or completeness of the public filings of the Reference Stock Issuer or the value of the Reference Stock, the Final Share Price and the value of the Payment at Maturity, will have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning the Reference Stock Issuer could affect the amount you will receive at maturity of the notes and, therefore, the value of the notes. Any prospective purchaser of the notes should undertake such independent investigation of the Reference Stock Issuer as in its judgment is appropriate to make an informed decision with respect to an investment in the notes.
The Reference Stock may change following certain corporate events.
Following certain corporate events relating to the Reference Stock Issuer, such as a stock-for-stock merger where such issuer is not the surviving entity or a merger event where holders of that Reference Stock would receive all cash or a distribution of property with respect to that Reference Stock, the calculation agent will have the option to replace that Reference Stock with the common stock of a U.S. company selected from among the common stocks of U.S. companies with the same primary Standard Industrial Classification Code (“SIC Code”) as that Reference Stock that the calculation agent deems to be most similar to the Reference Stock. In the event of any such corporate event, you will become subject to the closing price risk of the Successor Reference Stock. We describe the specific corporate events that can lead to these adjustments, the procedures for selecting another reference stock and reference stock issuer on the basis of SIC Code, market capitalization, dividend history and stock price volatility, as well as the procedures for adjusting the Share Price upon the occurrence of certain other corporate events, in the section of this product supplement entitled “Description of Notes—Anti-dilution Adjustments—Reorganization Events.” You should read this section in order to understand these and other adjustments that may be made to your notes. The occurrence of these corporate events and the consequent adjustments may materially and adversely affect the value of the notes.
Anti-dilution protection is limited.
The calculation agent will make adjustments to the Stock Adjustment Factor, which will be set initially at 1.0, and for certain adjustment events (as defined below) affecting the Reference Stock, including stock splits and certain corporate actions. The calculation agent is not required, however, to make such adjustments in response to all corporate actions, including if the Reference Stock Issuer or another party makes a partial tender offer or partial exchange offer for that Reference Stock. If such a dilution event occurs and the calculation agent is not required to make an adjustment, the value of the notes may be materially and adversely affected. See “Description of Notes—Anti-dilution Adjustments” for further information.
We may exercise any and all rights we may have as a lender to, or a security holder of, the Reference Stock Issuer.
If we or any of our affiliates are lenders to, or hold securities of, the Reference Stock Issuer, we will have the right, but not the obligation, to exercise or refrain from exercising our rights as a lender to, or holder of securities of, that issuer. Any exercise of our rights as a lender or holder of securities of the Reference Stock Issuer, or our refraining from such exercise, will be made without regard to your interests and could affect the value of the notes.
Secondary trading may be limited.
Unless otherwise specified in the relevant terms supplement, the notes will not be listed on a securities exchange. There may be little or no secondary market for the notes. Even if there is a secondary market for the notes, it may not provide enough liquidity to allow you to trade or sell the notes easily.
Lehman Brothers Inc. may act as a market maker for the notes, but is not required to do so. Because we do not expect that other market makers will participate significantly in the secondary
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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 Lehman Brothers Inc. is willing to buy the notes. If at any time Lehman Brothers Inc. or another agent does not act as a market maker, it is likely that there would be little or no secondary market for the notes.
Prior to maturity, the value of the notes will be influenced by many unpredictable factors.
Many economic and market factors will influence the value of the notes. We expect that, generally, the Share Price on any day will affect the value of the notes more than any other single factor. However, you should not expect the value of the notes in the secondary market, if any, to vary in proportion to changes in the Share Price. The value of the notes will be affected by a number of other factors that may either offset or magnify each other, including:
| • | the rate at which dividends are paid on the Reference Stock (while not paid to holders of the notes, dividend payments on the Reference Stock may influence the Share Price and the market value of options on the Reference Stock and, therefore, affect the market value of the notes); |
| • | supply and demand for the notes, including inventory positions of Lehman Brothers Inc. or any other market maker; |
| • | the expected frequency and magnitude of changes in the market Share Price (volatility); |
| • | economic, financial, political, regulatory or judicial events that affect the Reference Stock or stock markets generally; |
| • | interest rates and yields in the market generally; |
| • | the time remaining to the maturity of the notes; and |
| • | our creditworthiness, including actual or anticipated downgrades in our credit ratings. |
Some or all of these factors may influence the price that you will receive if you choose to sell your notes prior to maturity. The impact of any of the factors set forth above may enhance or offset some or all of any change resulting from another factor or factors.
Historical performance of the Reference Stock is not an indication of future performance.
You cannot predict the future performance of the Reference Stock based on the historical performance of the Reference Stock. Notwithstanding any prior increases in the Share Price, if any, the Share Price may decrease after the issuance of the notes such that you will not receive any positive return of your investment and will lose some of your investment at maturity.
Market disruptions may adversely affect your return.
The calculation agent may, in its sole discretion, determine that the markets have been affected in a manner that prevents it from properly calculating the Final Share Price or the Share Return on the Final Valuation Date and calculating the amount that we are required to pay you, if any, at maturity. These events may include disruptions or suspensions of trading in the markets as a whole. If the calculation agent, in its sole discretion, determines that any such event has occurred, it is possible that the Final Valuation Date and the Maturity Date will be postponed and your return will be adversely affected. See “Description of Notes—Market Disruption Events” in this product supplement.
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If a market disruption event occurs on a day that would otherwise be the Final Valuation Date, there will be a delay in settlement of the notes.
If a market disruption event occurs on a day that would otherwise be the Final Valuation Date, settlement of the notes will be delayed, depending on the circumstances surrounding the market disruption event, for a number of trading days (up to a maximum of eight days, or such other period of time as is specified in the relevant terms supplement) following the Maturity Date.
The tax consequences of an investment in the notes are uncertain.
Investors should consider the tax consequences of investing in the notes. No statutory, judicial or administrative authority directly addresses the characterization of the notes or instruments similar to the notes for United States federal income tax purposes. As a result, significant aspects of the United States federal income tax consequences of an investment in the notes are not certain. Lehman Brothers Holdings Inc. is not requesting any ruling from the Internal Revenue Service with respect to the notes and cannot assure you that the Internal Revenue Service will agree with the treatment described in this product supplement no. 940-I. The Internal Revenue Service could assert other characterizations that could affect the timing, amount and character of income or deductions. Lehman Brothers Holdings Inc. intends to treat, and by purchasing a note, for all tax purposes, you agree to treat, a note as a cash-settled financial contract, rather than as a debt instrument. You should consult your own tax advisor concerning the alternative characterizations. Neither Lehman Brothers Holdings Inc. nor any of its affiliates provide tax advice. See “Certain U.S. Federal Income Tax Consequences” in this product supplement no. 940-I.
Lehman Brothers Holdings Inc. employees holding the notes must comply with policies that limit their ability to trade the notes and may affect the value of their notes.
If you are an employee of Lehman Brothers Holdings Inc. or one of its affiliates, you may acquire the notes only in compliance with all of our internal policies and procedures. Because these policies and procedures limit the dates and times that you may transact in the notes, you may not be able to purchase any notes described in the relevant terms supplement from us and your ability to trade or sell any such notes in the secondary market may be limited.
Certain of our, or our affiliates’, activities may adversely affect the value of your notes.
Lehman Brothers Inc. and other affiliates of ours may trade the Reference Stock and other financial instruments, if any, related to the Reference Stock on a regular basis, for their accounts and for other accounts under their management. Lehman Brothers Inc. and these affiliates may also underwrite or assist unaffiliated entities in the issuance or underwriting of the Reference Stock and may issue or underwrite or assist unaffiliated entities in the issuance or underwriting of other securities or financial instruments linked to the Reference Stock. To the extent that we or one of our affiliates serves as issuer, agent or underwriter for such securities or financial instruments, our or their interests with respect to such products may be adverse to those of the holders of the notes. Any of these trading activities could potentially affect the Share Price and, accordingly, could affect the value of the notes and the amount, if any, payable to you at maturity.
We or our affiliates may currently or from time to time engage in business with the Reference Stock Issuer, including extending loans to, or making equity investments in, or providing advisory services to, the Reference Stock Issuer, including merger and acquisition advisory services. In the course of this business, we or our affiliates may acquire non-public information about the Reference Stock Issuer or the Reference Stock, and we will not disclose any such information to you. In addition, one or more of our affiliates may publish research reports or otherwise express views about the Reference Stock Issuer, and these reports may or may not recommend that investors buy or hold the Reference Stock. Any prospective purchaser of notes should undertake such independent investigation of the Reference Stock Issuer as in its judgment is appropriate to make an informed decision with respect to an investment in the notes.
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In addition, we or one of our affiliates may serve as issuer, agent or underwriter for additional issuances of notes with returns linked or related to changes in the Share Price. By introducing competing products into the marketplace in this manner, we or one or more of our affiliates could adversely affect the value of the notes.
On or prior to the date of the relevant terms supplement, we, through our affiliates or others, may hedge some or all of our anticipated exposure in connection with the notes by taking positions in the Reference Stock or in instruments whose value is derived from the Reference Stock. While we cannot predict an outcome, such hedging activity, or other hedging or investment activity we engage in (e.g., other than in connection with the notes), could potentially increase the Initial Share Price, and, therefore, effectively establish a higher Share Price that the Reference Stock must achieve in order for you to obtain a positive return on your investment or avoid a loss of principal at maturity. From time to time, prior to the maturity of the notes, we may pursue a dynamic hedging strategy that involves taking long or short positions in the Reference Stock or in instruments whose value is derived from the Reference Stock. We cannot assure you that none of these activities will have a material impact on the Share Price or the value of the notes.
An affiliate of ours may act as a calculation agent on the notes, creating a potential conflict of interest between you and us.
Lehman Brothers Inc., one of our affiliates, will act as the calculation agent. The calculation agent will determine, among other things, the Final Share Price, the Share Return, the Stock Adjustment Factor, anti-dilution adjustments and reorganization events, the selection of any Successor Reference Stock and the Payment at Maturity, as specified in the applicable terms supplement. The calculation agent will also be responsible for determining whether a market disruption event has occurred. In performing these duties, Lehman Brothers Inc. may have interests adverse to the interests of the holders of the notes, which may affect your return on the notes, particularly where Lehman Brothers Inc., as the calculation agent, is entitled to exercise discretion.
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USE OF PROCEEDS; HEDGING
Unless otherwise specified in the relevant terms supplement, the net proceeds we receive from the sale of the notes will be used, in whole or in part, by us or by one or more of our affiliates in connection with hedging our obligations under the notes. The balance of the proceeds, if any, will be used for general corporate purposes.
On or prior to the date of the relevant terms supplement, we, through our affiliates or others, may hedge some or all of our anticipated exposure in connection with the notes by taking positions in the Reference Stock or in instruments whose value is derived from the Reference Stock. While we cannot predict an outcome, such hedging activity, or other hedging or investment activity we engage in (e.g., hedging activity other than in connection with the notes), could potentially increase the Initial Share Price, and, therefore, effectively establish a higher Share Price that the Reference Stock must achieve in order for you to receive at maturity of the notes more than the applicable principal amount of your notes. From time to time, prior to the maturity of the notes, we may pursue a dynamic hedging strategy that involves taking long or short positions in the Reference Stock or in instruments whose value is derived from the Reference Stock. Although we have no reason to believe that any of these activities will have a material impact on the Share Price or the value of the notes, we cannot assure you that these activities will not have such an effect. See “Risk Factors—Certain of our, or our affiliates’, activities may adversely affect the value of your notes.”
We have no obligation to engage in any manner of hedging activity and will do so solely at our discretion and for our own account. No note holder shall have any rights or interest in our hedging activity or any positions we may take in connection with our hedging activity.
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THE REFERENCE STOCK
Summary business information regarding the Reference Stock Issuer
In the relevant terms supplement, we will provide summary information regarding the business of the Reference Stock Issuer based on its publicly available documents. We take no responsibility for, or make any representation regarding the accuracy or completeness of, such information.
Companies with securities registered under the Exchange Act are required to file periodically certain financial and other information specified by the SEC. Information provided to or filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, NE, Washington, DC 20549, and copies of such materials can be obtained from the Public Reference Section of the SEC, 100 F Street, NE, Washington, DC 20549, at prescribed rates. In addition, information provided to or filed with the SEC electronically can be accessed through a website maintained by the SEC. The address of the SEC’s website is http://www.sec.gov. Information regarding the Reference Stock Issuer may also be obtained from other sources, including, but not limited to, press releases, newspaper articles and other publicly disseminated documents.
This product supplement and the relevant terms supplement relate only to the notes offered thereby and do not relate to the Reference Stock or other securities of the Reference Stock Issuer. We have derived any and all disclosures contained in this product supplement and the relevant terms supplement regarding the Reference Stock Issuer from the publicly available documents described above. In connection with the offering of the notes, we have not participated in the preparation of such documents or made any due diligence inquiry with respect to the Reference Stock Issuer. We do not make any representation that such publicly available documents are, or that any other publicly available information regarding the Reference Stock Issuer is, accurate or complete. Furthermore, we cannot give any assurance that all events occurring prior to the date of the relevant terms supplement (including events that would affect the accuracy or completeness of the publicly available documents described in the preceding paragraph) that would affect the trading price of the Reference Stock (and therefore the Stock Adjustment Factor) will have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning the Reference Stock Issuer could affect the Payment at Maturity and, therefore, the value of the note. See “Risk Factors—We have no affiliation with the Reference Stock Issuer,” “—We cannot assure you that the public information provided with respect to the Reference Stock Issuer is accurate or complete,” and “—Certain of our, or our affiliates’, activities may adversely affect the value of your notes.”
Historical performance of the Reference Stock
In the relevant terms supplement, we will provide historical price information on the Reference Stock. You should not take any such historical prices as an indication of future performance.
Hypothetical returns on your notes
The relevant terms supplement may include a table, chart or graph showing various hypothetical returns on your notes based on a range of hypothetical Final Share Prices of the Reference Stock and various key assumptions shown in the relevant terms supplement, in each case assuming the investment is held from the issue date until the scheduled Maturity Date.
Any table, chart or graph showing hypothetical returns will be provided for purposes of illustration only. It should not be viewed as an indication or prediction of future investment results. Rather, it is intended merely to illustrate the impact that various hypothetical market values of the Reference Stock on the Final Valuation Date could have on the hypothetical returns on your notes, if held to the scheduled Maturity Date, calculated in the manner described in the relevant terms supplement and assuming all other variables remained constant. Any payments at maturity listed in the
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relevant terms supplement will be entirely hypothetical. They will be based on assumed Final Share Prices, among other considerations. The assumed Share Prices may vary from each other, and such assumed prices (and/or any other assumptions made in connection with the calculation of hypothetical returns on the notes) may prove to be erroneous.
The return on your notes may bear little relation to, and may be much less than, the return that you might achieve were you to invest in the Reference Stock directly. Among other things, the return on the Reference Stock could include substantial dividend payments, which you will not receive as an investor in your notes, and an investment in the Reference Stock is likely to have tax consequences that are different from an investment in your notes.
We describe various risk factors that may affect the market value of your notes, and the unpredictable nature of that market value, under “Risk Factors” above.
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DESCRIPTION OF NOTES
The following description of the terms of the notes supplements the description of the general terms of the notes set forth under “Description of the Notes” in the accompanying MTN prospectus supplement and “Description of Debt Securities” in the accompanying base prospectus. A separate terms supplement will describe the Reference Stock and the terms that apply specifically to the notes, including any changes to the terms specified below. Capitalized terms used but not defined in this product supplement no. 940-I have the meanings assigned in the accompanying base prospectus or MTN prospectus supplement or in the terms supplement. The term “note” refers to each $10 principal amount of our Return Optimization Securities with Partial Protection Linked to the Common Stock of a Reference Stock Issuer.
General
The Return Optimization Securities with Partial Protection Linked to the Common Stock of a Reference Stock Issuer are senior unsecured obligations of Lehman Brothers Holdings Inc. that are linked to the Reference Stock as specified in the relevant terms supplement. The notes are a series of securities referred to in the accompanying base prospectus and MTN prospectus supplement. The notes will be issued by Lehman Brothers Holdings Inc. under an indenture dated September 1, 1987, as amended or supplemented from time to time, between us and Citibank, N.A., as trustee. We may, without the consent of the holders of the notes, create and issue additional notes ranking equally with the notes and otherwise similar in all respects so that such further notes shall be consolidated and form a single series with the notes. No additional notes can be issued if an event of default has occurred with respect to the notes.
The notes will not pay interest, and they guarantee only a partial return of principal equivalent to the Protection Percentage at maturity. Instead, at maturity you will receive a payment in cash, the amount of which will vary depending on the performance of the Reference Stock and the Final Share Price, calculated in accordance with the applicable formula set forth below.
The notes are our unsecured and unsubordinated obligations and will rankpari passu with all of our other unsecured and unsubordinated obligations.
The notes will be issued in denominations of $10 and integral multiples thereof, unless otherwise specified in the relevant terms supplement. The principal amount and issue price of each note is $10, unless otherwise specified in the relevant terms supplement. The notes will be represented by one or more permanent global notes registered in the name of DTC or its nominee, as described under “Description of Notes—Forms of Notes” in the MTN prospectus supplement and “Description of Debt Securities—Information in the Prospectus Supplement” in the base prospectus.
The specific terms of the notes will be described in the relevant terms supplement accompanying this product supplement no. 940-I. The terms described in that document supplement those described herein and in the accompanying base prospectus and MTN prospectus supplement. If the terms described in the relevant terms supplement are inconsistent with those described herein or in the accompanying base prospectus or MTN prospectus supplement, the terms described in the relevant terms supplement shall control.
Payment at Maturity
The Maturity Date for the notes will be set forth in the relevant terms supplement and is subject to adjustment if such day is not a business day or if the Final Valuation Date is postponed as described below.
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Your return on the notes will be linked to the performance of the Reference Stock from the Trade Date to the Final Valuation Date.
| • | If the Share Return is positive, you will receive a cash payment per $10 principal amount note equal to: |
$10 + ($10 × Leverage Factor × Share Return);
provided, however, that, if applicable, in no event will you receive an amount greater than $10 + ($10 × Maximum Gain).
| • | Your principal is protected against a decline in the Share Price up to the Protection Percentage. If the Share Return is negative and its absolute value is less than or equal to the Protection Percentage, you will receive a cash payment of $10 per $10 principal amount note. |
| • | Your investment will be fully exposed to any decline in the Share Price beyond the Protection Percentage. If the Final Share Price is less than the Initial Share Price by more than the Protection Percentage, for every 1% decline in the Share Price beyond the Protection Percentage, you will lose an amount equal to 1% of the principal amount of your notes. In this situation, you will receive a cash payment per $10 principal amount note equal to: |
$10 + [$10 × (Share Return + Protection Percentage)]
| You will lose some of your investment at maturity if the Final Share Price is below the Initial Share Price by more than the Protection Percentage. |
The “Leverage Factor” will be an amount set forth in the relevant terms supplement.
The “Protection Percentage” will be an amount set forth in the relevant terms supplement.
The “Trade Date” will be the date set forth in the relevant terms supplement.
The “Maximum Gain” will be a fixed percentage, if applicable, as specified in the relevant terms supplement. It represents the maximum achievable percentage return on the notes.
The “Settlement Date” will be the date set forth in the relevant terms supplement.
Unless otherwise specified in the relevant terms supplement, the “Share Return,” as calculated by the calculation agent, is the percentage change in the Share Price calculated by comparing the Final Share Price to the Initial Share Price. The Share Return, unless otherwise specified in the relevant terms supplement, is calculated as follows:
| Share Return = | Final Share Price - Initial Share Price
| |||||
| Initial Share Price |
The “Initial Share Price”, unless otherwise specified in the relevant terms supplement, means the Share Price on the Trade Date, divided by the Stock Adjustment Factor.
The “Final Share Price”, unless otherwise specified in the relevant terms supplement, means the Share Price on the Final Valuation Date or on such other date or dates as are specified in the relevant terms supplement.
The “Share Price” will be, with respect to any trading day, the closing price of a share of the Reference Stock on that day.
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Unless otherwise specified in the relevant terms supplement, the “closing price” for one share of the Reference Stock (or one unit of any other security for which a closing price must be determined) on any trading day means:
| • | if the Reference Stock (or any such other security) is listed or admitted to trading on a national securities exchange, the last reported sale price, regular way, of the principal trading session on such day on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on which the Reference Stock (or any such other security) is listed or admitted to trading, |
| • | if the Reference Stock (or any such other security) is listed or admitted to trading on any national securities exchange but the last reported sale price is not available pursuant to the preceding bullet point, the last reported sale price of the principal trading session on the over-the-counter market as reported on the Nasdaq National Market or OTC Bulletin Board Service (the “OTC Bulletin Board”) operated by FINRA on such day; |
| • | if the Reference Stock (or any such other security) is not listed or admitted to trading on any national securities exchange but is included in the OTC Bulletin Board, the last reported sale price of the principal trading session on the OTC Bulletin Board on such day; or |
| • | if, because of a market disruption event (as defined under “—Market Disruption Events”) or otherwise, the last reported sale price for the Reference Stock (or any such other security) is not available for such trading day pursuant to the preceding bullet points, then (i) if such market disruption event has occurred on a day other than the originally scheduled Final Valuation Date or any day thereafter, the calculation agent’s good faith estimate of the price of the Reference Stock (or such other security) as of the close of trading on such trading day, in its sole discretion, and (ii) if such market disruption event has occurred with respect to the Reference Stock on the originally scheduled Final Valuation Date, the price determined pursuant to the second sentence of the definition of “Final Valuation Date.” |
The term OTC Bulletin Board will include any successor service thereto.
The “price” for one share of the Reference Stock (or one unit of any other security for which a price must be determined) on any trading day means:
| • | if the Reference Stock (or any such other security) is listed or admitted to trading on a national securities exchange, the highest intraday bid price on such day on the principal United States securities exchange registered under the Exchange Act, on which the Reference Stock (or any such other security) is listed or admitted to trading; |
| • | if the Reference Stock (or any such other security) is not listed or admitted to trading on any national securities exchange but is included in the OTC Bulletin Board, the highest reported bid price reported on the OTC Bulletin Board on such day; or |
| • | if a bid price is not available pursuant to the preceding bullet points, the calculation agent’s good faith estimate of such bid price, in its sole discretion. |
Unless otherwise specified in the relevant terms supplement, the “Stock Adjustment Factor” shall be set initially at 1.0 for the Reference Stock, subject to adjustment upon the occurrence of certain corporate events affecting the Reference Stock. See “—Anti-dilution Adjustments.”
“Relevant Exchange”, for the Reference Stock means the primary U.S. exchange or market for trading for such Reference Stock, as specified in the relevant terms supplement.
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Unless otherwise specified in the relevant terms supplement, a “trading day” is a day, as determined by the calculation agent, on which trading is generally conducted on the New York Stock Exchange (the “NYSE”), the American Stock Exchange (the “AMEX”), the Nasdaq Global Select Market, the Nasdaq Global Market, the Chicago Mercantile Exchange, the Chicago Board Options Exchange and in the over-the-counter market for equity securities in the United States.
The “Final Valuation Date”, which will be a single date, will be specified in the relevant terms supplement and any such date is subject to adjustment as described below. If the Final Valuation Date is not a trading day or if there is a market disruption event on such day, the Final Valuation Date will be postponed to the immediately succeeding trading day during which no market disruption event will have occurred or is continuing;provided, however, if a market disruption event with respect to the Reference Stock occurs on each of the eight trading days following the originally scheduled Final Valuation Date, the calculation agent shall determine the Final Share Price based upon its good faith estimate of the price of the Reference Stock as of the close of trading on that eighth scheduled trading day, in its sole discretion.
The Maturity Date will be set forth in the relevant terms supplement. If the scheduled Maturity Date (as specified in the relevant terms supplement) is not a business day, then any payment on the notes that would otherwise be due on the scheduled Maturity Date will instead be due on the next succeeding business day following such scheduled Maturity Date, with the same force and effect as if paid on the scheduled Maturity Date, and no interest will accrue as a result of the delayed payment. If, due to a non-trading day or a market disruption event, the Final Valuation Date is postponed so that it falls fewer than three business days prior to the scheduled Maturity Date, the Maturity Date will be the third business day following that Final Valuation Date, as postponed, unless otherwise specified in the relevant terms supplement. We describe market disruption events in this product supplement under “Description of Notes—Market Disruption Events.”
Other Payment Terms
We will irrevocably deposit with The Depository Trust Company (“DTC”) no later than the opening of business on the applicable date or dates funds sufficient to make payments of the amount payable at maturity. We will give DTC irrevocable instructions and authority to pay such amount to the holders of the notes entitled thereto.
A “business day” is, unless otherwise specified in the relevant terms supplement, any day that is not a Saturday or Sunday and that is not a day on which banking institutions in The City of New York are authorized or obligated by law to close.
Subject to the foregoing and to applicable law (including, without limitation, United States federal laws), we or our affiliates may, at any time and from time to time, purchase outstanding notes by tender, in open market or by private agreement.
Calculation Agent
Lehman Brothers Inc., one of our affiliates, will act as the calculation agent. The calculation agent will determine, among other things, the Final Share Price, the Share Return, the Stock Adjustment Factor, anti-dilution adjustments and reorganization events, the selection of any Successor Reference Stock and the Payment at Maturity, as specified in the applicable terms supplement. The calculation agent will also be responsible for determining whether a market disruption event has occurred. All calculations, determinations and adjustments made by the calculation agent will be at the sole discretion of the calculation agent and will, in the absence of manifest error, be conclusive for all purposes and binding on you and on us. We may appoint a different calculation agent from time to time after the date of the relevant terms supplement without your consent and without notifying you.
The calculation agent will provide written notice to the trustee at its New York office, on which notice the trustee may conclusively rely, of the amount to be paid at maturity on or prior to 11:00 a.m. on the business day preceding the Maturity Date.
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All calculations with respect to the Final Share Price and the Share Return will be rounded to the nearest one hundred-thousandth, with five one-millionths rounded upward (e.g., .876545 would be rounded to .87655); all dollar amounts related to determination of the payment per $10 principal amount note at maturity, if any, will be rounded to the nearest ten-thousandth, with five one hundred-thousandths rounded upward (e.g., .76545 would be rounded up to .7655); and all dollar amounts paid on the aggregate principal amount of notes per holder will be rounded to the nearest cent, with one-half cent rounded upward.
Market Disruption Events
Certain events may prevent the calculation agent from calculating the Final Share Price on the Final Valuation Date (and, consequently, the Share Return) or calculating the amount, if any, that we will pay to you at maturity. These events may include disruptions or suspensions of trading on the markets as a whole. We refer to these events individually as a “market disruption event.”
“Market Disruption Event”, unless otherwise specified in the relevant terms supplement, means, with respect to the Reference Stock (or any security for which a closing price must be determined):
| • | the occurrence or existence of a suspension, absence or material limitation of trading of the Reference Stock (or such security) in the primary market for the Reference Stock (or such security) at any time during the one-hour period preceding the close of the principal trading session in such market; |
| • | a breakdown or failure in the price and trade reporting systems of the primary market for the Reference Stock (or such security) as a result of which the reported trading prices for the Reference Stock (or such security) during the last one-hour period preceding the close of the principal trading session in such market are materially inaccurate; |
| • | the occurrence or existence of a suspension, absence or material limitation of trading in the primary market for trading in futures or options contracts related to the Reference Stock (or such security), if available, at any time during the last one hour-period preceding the close of the principal trading session in such market; or |
| • | a decision to permanently discontinue trading in the relevant futures or options contracts; |
in each case as determined by the calculation agent in its sole discretion.
For the purpose of determining whether a market disruption event has occurred, unless otherwise specified in the relevant terms supplement:
| • | a limitation on the hours or number of days of trading will not constitute a market disruption event if it results from an announced change in the regular business hours of the relevant exchange or market; |
| • | limitations pursuant to the rules of any relevant exchange similar to NYSE Rule 80B (or any applicable rule or regulation enacted or promulgated by the NYSE, any other U.S. self-regulatory organization, the Securities Exchange Commission or any other relevant authority of scope similar to NYSE Rule 80B as determined by the calculation agent in its sole discretion) on trading during significant market fluctuations will constitute a suspension, absence or material limitation of trading; |
| • | a suspension of trading in futures or options contracts on the Reference Stock (or such security) by the primary securities market trading in such contracts, if available, by reason of: |
| ¡ | a price change exceeding limits set by such securities exchange or market, |
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| ¡ | an imbalance of orders relating to such contracts, or |
| ¡ | a disparity in bid and ask quotes relating to such contracts will, in each such case, constitute a suspension, absence or material limitation of trading in futures or options contracts related to the Reference Stock (or such security); and |
| ¡ | a suspension, absence or material limitation of trading on the primary securities market on which futures or options contracts related to the Reference Stock (or such other security) are traded will not include any time when such securities market is itself closed for trading under ordinary circumstances. |
Anti-dilution Adjustments
The Stock Adjustment Factor is subject to adjustment by the calculation agent as a result of the anti-dilution and reorganization adjustments described in this section.
No adjustments to the Stock Adjustment Factor will be required unless the Stock Adjustment Factor adjustment would require a change of at least 0.1% in the Stock Adjustment Factor then in effect. The Stock Adjustment Factor resulting from any of the adjustments specified in this section will be rounded to the nearest one ten-thousandth with five one hundred-thousandths being rounded upward. The calculation agent will not be required to make any adjustments to the Stock Adjustment Factor after the close of business on the business day immediately preceding the Maturity Date.
No adjustments to the Stock Adjustment Factor will be required other than those specified below. The required adjustments specified in this section do not cover all events that could affect the closing price of the Reference Stock on any trading day during the term of the notes. No adjustments will be made for certain other events, such as offerings of common stock by the Reference Stock Issuer for cash or in connection with acquisitions or otherwise or the occurrence of a partial tender offer or exchange offer for the Reference Stock by the Reference Stock Issuer or any third party. See “Risk Factors—Anti-dilution protection is limited.”
Lehman Brothers Inc., as calculation agent, shall be solely responsible for (1) the determination and calculation of any adjustments to the Stock Adjustment Factor and of any related determinations and calculations with respect to any distributions of stock, other securities or other property or assets, including cash, in connection with any corporate event described in this section, and (2) the determination of any Successor Reference Stock, and its determinations and calculations shall be conclusive absent manifest error.
We will, within ten business days following the occurrence of an event that requires an adjustment to the Stock Adjustment Factor (other than as a result of a Reorganization Event as described below), or if we are not aware of this occurrence, as soon as practicable after becoming so aware, provide notice to the calculation agent, which shall provide written notice to the trustee, which shall provide notice to the holders of the notes of the occurrence of this event and, if applicable, a statement in reasonable detail setting forth the adjusted Stock Adjustment Factor.
Stock Splits and Reverse Stock Splits
If the Reference Stock is subject to a stock split or reverse stock split, then once any split has become effective, the Stock Adjustment Factor relating to the Reference Stock will be adjusted so that the new Stock Adjustment Factor shall equal the product of:
| • | the prior Stock Adjustment Factor, and |
| • | the number of shares that a holder of one share of the Reference Stock before the effective date of that stock split or reverse stock split would have owned or been entitled to receive immediately following the applicable effective date. |
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Stock Dividends or Distributions
If the Reference Stock is subject to a (i) stock dividend, i.e., issuance of additional shares of the Reference Stock, that is given ratably to all holders of shares of the Reference Stock, or (ii) distribution of shares of the Reference Stock as a result of the triggering of any provision of the corporate charter of the Reference Stock Issuer, then, once the dividend has become effective and the shares are trading ex-dividend, the Stock Adjustment Factor will be adjusted so that the new Stock Adjustment Factor shall equal the prior Stock Adjustment Factor plus the product of:
| • | the prior Stock Adjustment Factor, and |
| • | the number of additional shares issued in the stock dividend with respect to one share of the Reference Stock. |
Non-cash Distributions
If the Reference Stock Issuer distributes shares of capital stock, evidences of indebtedness or other assets or property of the Reference Stock Issuer to holders of the Reference Stock (other than (i) dividends, distributions and rights or warrants referred to under “—Stock Splits and Reverse Stock Splits” and “—Stock Dividends or Distributions” above and (ii) cash distributions or dividends referred under “—Cash Dividends or Distributions” below), then, once the distribution has become effective and the shares are trading ex-dividend, the Stock Adjustment Factor will be adjusted so that the new Stock Adjustment Factor shall equal the product of:
| • | the prior Stock Adjustment Factor, and |
| • | a fraction whose numerator is the Current Market Price of the Reference Stock and whose denominator is the amount by which such Current Market Price exceeds the Fair Market Value of such distribution; provided, however, that if the Fair Market Value of such distribution equals or exceeds the Current Market Price of the Reference Stock, the calculation agent shall determine in its sole discretion the appropriate adjustment to the Stock Adjustment Factor. |
The “Current Market Price” of the Reference Stock means the arithmetic average of the closing prices of the Reference Stock for the ten trading days prior to the trading day immediately preceding the ex-dividend date of the distribution requiring an adjustment to the Stock Adjustment Factor.
The “ex-dividend date” shall mean, with respect to distributions of a dividend, the first trading day on which transactions in the Reference Stock trade on the relevant exchange without the right to receive that distribution.
The “Fair Market Value” of any such distribution means the value of such distribution on the ex-dividend date for such distribution, as determined by the calculation agent. If such distribution consists of property traded on the ex-dividend date on a U.S. national securities exchange, the Fair Market Value will equal the closing price of such distributed property on such ex-dividend date.
Notwithstanding the foregoing, a distribution on the Reference Stock described in clause (a), (d) or (e) of the section entitled “—Reorganization Events” below that also would require an adjustment under this section shall not cause an adjustment to the Stock Adjustment Factor of the Reference Stock and shall be treated as a Reorganization Event (as defined below) only pursuant to clause (a), (d) or (e) under the section entitled “—Reorganization Events.” A distribution on the Reference Stock described in the section entitled “—Issuance of Transferable Rights or Warrants” that also would require an adjustment under this section shall cause an adjustment only pursuant to the section entitled “—Issuance of Transferable Rights or Warrants.”
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Cash Dividends or Distributions
If the Reference Stock Issuer pays dividends or makes other distributions consisting exclusively of cash to all holders of Reference Stock during any fiscal quarter during the term of the notes, in an aggregate amount that, together with other such dividends or distributions made during such quarterly fiscal period, exceeds the Dividend Threshold, then, once the dividend or distribution has become effective and the shares are trading ex-dividend, the Stock Adjustment Factor will be adjusted so that the new Stock Adjustment Factor shall equal the product of:
| • | the prior Stock Adjustment Factor, and |
| • | a fraction whose numerator is the Current Market Price of the Reference Stock and whose denominator is the amount by which such Current Market Price exceeds the amount in cash per share the Reference Stock Issuer distributes to holders of Reference Stock in excess of the Dividend Threshold; provided, however, that if the amount in cash per share of such dividend or distribution equals or exceeds the Current Market Price of the Reference Stock, the calculation agent shall determine in its sole discretion the appropriate adjustment to the Stock Adjustment Factor. |
“Dividend Threshold” shall mean the amount of any cash dividend or cash distribution distributed per share of the Reference Stock that exceeds the immediately preceding cash dividend or other cash distribution, if any, per share of the Reference Stock by more than 10% of the closing price of the Reference Stock on the trading day immediately preceding the ex-dividend date, unless otherwise specified in the relevant terms supplement.
Issuance of Transferable Rights or Warrants
If the Reference Stock Issuer issues transferable rights or warrants to all holders of the Reference Stock to subscribe for or purchase the Reference Stock, including new or existing rights to purchase the Reference Stock at an exercise price per share less than the closing price of the Reference Stock on both (i) the date on which the exercise price of such rights or warrants is determined and (ii) the expiration date of such rights and warrants pursuant to a shareholder’s rights plan or arrangement, and if the expiration date of such rights or warrants precedes the Maturity Date of the notes, then the Stock Adjustment Factor will be adjusted on the business day immediately following the issuance of such transferable rights or warrants so that the new Stock Adjustment Factor shall equal the prior Stock Adjustment Factor plus the product of:
| • | the prior Stock Adjustment Factor, and |
| • | the number of shares of the Reference Stock that can be purchased with the cash value of such warrants or rights distributed on one share of the Reference Stock. |
The number of shares that can be purchased will be based on the closing price of the Reference Stock on the date the new Stock Adjustment Factor is determined. The cash value of such warrants or rights, if the warrants or rights are traded on a U.S. national securities exchange, will equal the closing price of such warrant or right, or, if the warrants or rights are not traded on a U.S. national securities exchange, the calculation agent will determine, in its good faith estimate, the price of such warrant or right on the date on which the new Stock Adjustment Factor is determined, in its sole discretion.
Reorganization Events
If prior to the Maturity Date,
| (a) | there occurs any reclassification or change of the Reference Stock, including, without limitation, as a result of the issuance of tracking stock by the Reference Stock Issuer, |
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| (b) | the Reference Stock Issuer, or any surviving entity or subsequent surviving entity of the Reference Stock Issuer (a “Successor Entity”), has been subject to a merger, combination or consolidation and is not the surviving entity, |
| (c) | any statutory exchange of securities of the Reference Stock Issuer or any Successor Entity with another corporation occurs, other than pursuant to clause (b) above, |
| (d) | the Reference Stock Issuer is liquidated or is subject to a proceeding under any applicable bankruptcy, insolvency or other similar law, |
| (e) | the Reference Stock Issuer issues to all of its shareholders equity securities of an issuer other than the Reference Stock Issuer, other than in a transaction described in clauses (b), (c) or (d) above (a “Spin-off Event”), or |
| (f) | a tender or exchange offer or going-private transaction is commenced for all the outstanding shares of the Reference Stock Issuer and is consummated for all or substantially all of such shares, as determined by the calculation agent in its sole discretion (an event in clauses (a) through (f), a “Reorganization Event”), |
then, instead of adjusting the Stock Adjustment Factor, the calculation agent, in its sole discretion without consideration for the interests of investors, shall either:
| (A) | determine a Successor Reference Stock (as defined below) to the Reference Stock that experiences any such Reorganization Event (the “Original Reference Stock”) after the close of the principal trading session on the trading day immediately prior to the effective date of such Reorganization Event in accordance with the following paragraph (the successor stock, as so determined, the “Successor Reference Stock” and the successor stock issuer, the “Successor Reference Stock Issuer”); or |
| (B) | deem the closing price and the Stock Adjustment Factor of the Original Reference Stock on the trading day immediately prior to the effective date of such Reorganization Event to be the closing price or price and Stock Adjustment Factor of the Original Reference Stock on every remaining trading day to, and including, the Final Valuation Date. |
Upon the determination by the calculation agent of any Successor Reference Stock pursuant to clause (A) of the preceding sentence, the term “Reference Stock” in this product supplement or the relevant terms supplement shall no longer be deemed a reference to the Original Reference Stock and shall be deemed instead a reference to the Successor Reference Stock for all purposes, and references in this product supplement or the relevant terms supplement to “issuer” of the Original Reference Stock shall be deemed to be to the Successor Reference Stock Issuer.
Upon the selection of the Successor Reference Stock by the calculation agent pursuant to clause (A) of the preceding sentence:
| (i) | the Initial Share Price for the Successor Reference Stock will be the closing price of the Successor Reference Stock on the trading day immediately following the effective date of the Reorganization Event multiplied by the Initial Share Price of the Original Reference Stock and divided by the closing price of the Original Reference Stock on the trading day immediately prior to the effective date of such Reorganization Event; |
| (iv) | the Stock Adjustment Factor for the Successor Reference Stock shall be 1.0, subject to adjustment for certain corporate events related to the Successor Reference Stock in accordance with “— Anti-dilution Adjustments.” |
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For the avoidance of doubt, in the case of an issuance by the Reference Stock Issuer to all of its shareholders of equity securities of an issuer other than the Reference Stock Issuer as described in clause (e) above, if the closing price of the Reference Stock as of the effective date of such issuance does not increase or decline by at least 50% from the Initial Share Price of the Reference Stock, such issuance shall not constitute a Reorganization Event and no adjustments shall be made under this “—Reorganization Events” section. Instead, the Reference Stock will be subject to adjustments as described under “—Non-cash Distributions” above.
The “Successor Reference Stock” will be the common stock of a U.S. company selected by the calculation agent from among the common stocks of U.S. companies then registered to trade on the NYSE or NASDAQ, that is not already that Reference Stock, with the same primary SIC Code as the Original Reference Stock that, in the sole discretion of the calculation agent, is the most comparable to the Original Reference Stock, taking into account such factors as the calculation agent deems relevant, including, without limitation, market capitalization, dividend history and stock price volatility;provided, however, that the Successor Reference Stock will not be any stock that is subject to a trading restriction under the trading restriction policies of Lehman Brothers Holdings Inc. or any of its affiliates that would materially limit the ability of Lehman Brothers Holdings Inc. or any of its affiliates to hedge the notes with respect to such stock (a “Hedging Restriction”);provided furtherthat if the Successor Reference Stock cannot be identified, as set forth above, as a stock for which a Hedging Restriction does not exist, the Successor Reference Stock will be selected by the calculation agent from the largest market capitalization stock of a U.S. company within the same Division and Major Group classification (as defined by the Office of Management and Budget) as the primary SIC Code for the Original Reference Stock.
Following a Reorganization Event in which a Successor Reference Stock is selected, the Stock Adjustment Factor of the Successor Reference Stock will be subject to adjustment as described above under this “Anti-dilution Adjustments” section, and, if no Successor Reference Stock is selected, the Original Reference Stock Issuer will, upon a subsequent Reorganization Event, be subject to the election by the calculation agent described in clause (A) and (B) of the first paragraph under “—Anti-dilution Adjustments—Reorganization Events”.
We will, or will cause the calculation agent to, provide written notice to the Trustee, to us and to DTC within thirty business days immediately following the effective date of any Reorganization Event, of the Successor Reference Stock Issuer, the Successor Reference Stock and the Initial Share Price for the Successor Reference Stock, as well as the Original Reference Stock so replaced. We expect that such notice will be passed on to you, as a beneficial owner of the notes, in accordance with the standard rules and procedures of DTC and its direct and indirect participants.
Events of Default and Acceleration
Unless otherwise specified in the relevant terms supplement, in case an event of default with respect to the notes shall have occurred and be continuing, the amount declared due and payable per $10 principal amount note upon any acceleration of the notes shall be determined by the calculation agent and shall be an amount in cash equal to the amount payable at maturity per $10 principal amount note as described in this product supplement under the caption “Description of Notes—Payment at Maturity,” calculated as if the date of acceleration were the Maturity Date and a date preceding the date of acceleration were the Final Valuation Date with such date set to equal the number of business days between the original Final Valuation Date and the original Maturity Date. See “Description of Debt Securities—Defaults” in the accompanying base prospectus.
If the maturity of the notes is accelerated because of an event of default as described above, we shall, or shall cause the calculation agent to, provide written notice to the trustee at its New York office, on which notice the trustee may conclusively rely, and to DTC of the cash amount due with respect to the notes as promptly as possible and in no event later than two business days after the date of acceleration.
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Modification
Under the heading “Description of Debt Securities—Modification of the Indentures” in the accompanying base prospectus is a description of when the consent of each affected holder of debt securities is required to modify the indenture.
Defeasance
The provisions described in the accompanying base prospectus under the heading “Description of Debt Securities—Defeasance” are not applicable to the notes, unless otherwise specified in the relevant terms supplement.
Listing
The notes will not be listed on any securities exchange, unless otherwise specified in the relevant terms supplement.
Book-Entry Only Issuance—The Depository Trust Company
The Depository Trust Company, or DTC, will act as securities depositary for the notes. The notes will be issued only as fully registered securities registered in the name of Cede & Co. (DTC’s nominee). One or more fully registered global notes certificates, representing the total aggregate principal amount of the notes, will be issued and will be deposited with DTC. See the description contained in the accompanying MTN prospectus supplement under the heading “Description of Notes—Forms of Notes.”
Registrar, Transfer Agent and Paying Agent
Payment of amounts due at maturity on the notes will be payable and the transfer of the notes will be registrable at the principal corporate trust office of Citibank, N.A. (“Citibank”) in The City of New York.
Citibank or one of its affiliates will act as registrar and transfer agent for the notes. Citibank will also act as paying agent and may designate additional paying agents.
Registration of transfers of the notes will be effected without charge by or on behalf of Citibank, but upon payment (with the giving of such indemnity as Citibank may require) in respect of any tax or other governmental charges that may be imposed in relation to it.
Governing Law
The notes will be governed by and construed in accordance with the law of the State of New York.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax consequences of the purchase, ownership and disposition of the notes as of the date of this product supplement no. 940-I. If any information in the MTN prospectus supplement or the base prospectus is inconsistent with this product supplement no. 940-I, you should rely on the information in this product supplement no. 940-I. If any information in the relevant terms supplement is inconsistent with this product supplement no. 940-I, you should rely on the information in the relevant terms supplement. The relevant terms supplement may also add, update or change information contained in this product supplement no. 940-I.
Except where noted, this summary deals only with a note held as a capital asset by a United States holder (as defined below) who purchases the note on original issue at its initial offering price and it does not deal with special situations. For example, except where noted, this summary does not address:
| • | tax consequences to holders of notes who may be subject to special tax treatment, such as dealers in securities or currencies, traders in securities that elect to use the mark-to-market method of accounting for their securities, financial institutions, regulated investment companies, real estate investment trusts, pass-through entities, tax-exempt entities or insurance companies; |
| • | tax consequences to persons holding notes as part of a hedging, integrated, constructive sale or conversion transaction or a straddle; |
| • | tax consequences to holders of notes whose “functional currency” is not the U.S. dollar; |
| • | alternative minimum tax consequences, if any; or |
| • | any state, local or foreign tax consequences. |
If a partnership holds our notes, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership holding our notes, you should consult your tax advisors.
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and regulations, rulings and judicial decisions as of the date of this product supplement no. 940-I. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those discussed below.
Certain aspects of the United States federal income tax treatment of securities such as the notes are not clear. If you are considering the purchase of notes, you should consult your own tax advisors concerning the United States federal income tax consequences of investing in the notes in light of your particular situation and any consequences arising under the laws of any other taxing jurisdiction.
United States holders
The following discussion is a summary of certain United States federal income tax consequences that will apply to you if you are a United States holder of notes.
For purposes of this discussion, a United States holder is a beneficial owner of a note that is for United States federal income tax purposes:
| • | an individual citizen or resident of the United States; |
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| • | a corporation (or any other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any State thereof, or the District of Columbia; |
| • | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| • | a trust if (1) it is subject to the primary supervision of a court within the United States and one or more United States persons has the authority to control all substantial decisions of the trust or (2) it has a valid election in effect under applicable Treasury regulations to be treated as a United States person. |
A non-United States holder is a beneficial owner (other than a partnership) of notes that is not a United States holder.
General
No statutory, judicial or administrative authority directly addresses the characterization of the notes or instruments similar to the notes for United States federal income tax purposes. As a result, significant aspects of the United States federal income tax consequences of an investment in the notes are not certain. No ruling is being requested from the Internal Revenue Service with respect to the notes and no assurance can be given that the Internal Revenue Service will agree with the treatment described herein. Lehman Brothers Holdings Inc. intends to treat, and by purchasing a note, for all tax purposes, you agree to treat, a note as a cash-settled financial contract, rather than as a debt instrument. If you take a contrary position, you may be required to disclose such contrary position on a statement attached to your timely filed United States federal income tax return for the taxable year in which a note is acquired. You should consult your own tax advisor concerning alternative characterizations. Except where noted, the remainder of this discussion assumes that this treatment is correct, although no assurance is given in this regard.
Sale, exchange or other disposition, or cash settlement upon maturity
Upon the receipt of cash on the Maturity Date of the notes, you will recognize gain or loss. The amount of that gain or loss will be the extent to which the amount of the cash received differs from your tax basis in the note. Your tax basis in a note generally will equal the amount you paid to acquire the note. It is uncertain whether any such gain or loss would be treated as ordinary income or loss or capital gain or loss. Absent a future clarification in current law (by an administrative determination, judicial ruling or otherwise), where required, Lehman Brothers Holdings Inc. intends to report any such gain or loss to the Internal Revenue Service in a manner consistent with the treatment of that gain or loss as capital gain or loss. If that gain or loss is treated as capital gain or loss, then any such gain or loss will generally be long-term capital gain or loss if you have held the note for more than one year as of the Maturity Date. If you are an individual, long-term capital gains will be subject to reduced rates of taxation. The deductibility of capital losses is subject to certain limitations.
Upon a sale, exchange or other disposition of a note prior to the Maturity Date, you will recognize gain or loss in an amount equal to the difference between the amount of cash received and your tax basis in the note. Any such gain or loss will be treated as capital gain or loss. If you have held the note for more than one year as of the date of such sale, exchange or other disposition, any such capital gain or loss will generally be long-term capital gain or loss. If you are an individual, long-term capital gains will be subject to reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Alternative characterizations
There can be no assurance that the Internal Revenue Service will agree with the foregoing treatment of the notes, and it is possible that the Internal Revenue Service could assert another
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treatment and a court could agree with such assertion. For instance, it is possible that the Internal Revenue Service could seek to treat the notes as debt, in particular because the notes in form are debt instruments. For notes with maturities of one year or less, the Internal Revenue Service could seek to apply the rules governing short-term debt obligations. In such a case, holders may be required to accrue income in advance of the receipt of cash and treat any gain realized on the sale, exchange or maturity of the notes as ordinary income. Any loss realized upon maturity would likely be treated as capital loss, except possibly to the extent of amounts, if any, previously included in income. For notes with maturities of more than one year, the Internal Revenue Service could seek to apply the regulations governing contingent payment debt obligations. Those regulations would require you to accrue interest income at a market rate, and generally would characterize gain and, to some extent, loss as ordinary rather than capital. Additionally, the Internal Revenue Service could assert that the selection and substitution of a Successor Reference Stock in the case of certain Reorganization Events results in a taxable exchange of the notes at the time of such selection and substitution, which could affect your holding period and the timing, amount and character of income recognized with respect to the notes. The Internal Revenue Service could also assert other characterizations that could affect the timing, amount and character of income or deductions.
Recent tax law developments
On December 7, 2007, the Internal Revenue Service released a Notice indicating that the Internal Revenue Service and the Treasury Department are considering and seeking comments as to whether holders of instruments similar to the notes should be required to accrue income on a current basis over the term of the notes, regardless of whether any payments are made prior to maturity. In addition, the Notice provides that the Internal Revenue Service and the Treasury Department are considering related issues, including, among other things, whether gain or loss from such instruments should be treated as ordinary or capital, whether foreign holders of such instruments should be subject to withholding tax, whether the tax treatment of such instruments should vary depending upon the nature of the underlying asset, and whether such instruments should be subject to the special “constructive ownership rules” contained in Section 1260 of the Code. It is not possible to predict what changes, if any, will be adopted, or when they will take effect. Any such changes could affect the amount, timing and character of income, gain or loss in respect of the notes, possibly with retroactive effect. Holders are urged to consult their tax advisors concerning the impact of the Notice on their investment in the notes. Subject to future developments with respect to the foregoing, Lehman Brothers Holdings Inc. intends to continue to treat the notes for U.S. federal income tax purposes in accordance with the treatment described herein.
Non-United States holders
The following discussion is a summary of the material United States federal tax consequences that will apply to you if you are a non-United States holder of notes. We will not attempt to ascertain whether the Reference Stock would be treated as a United States real property interest within the meaning of Section 897(c)(1) of the Code. If the Reference Stock were so treated, certain adverse United States federal income tax consequences could possibly apply to a non-United States holder upon the sale, exchange or other disposition of the notes. You should refer to information filed with the SEC by the Reference Stock Issuer and consult your tax advisor regarding the possible consequences to you, if any, if the Reference Stock Issuer is or becomes a United States real property holding corporation.
Special rules may apply to you if you are a controlled foreign corporation, passive foreign investment company, a corporation that accumulates earnings to avoid United States federal income tax, or an individual who is a United States expatriate and therefore subject to special treatment under the Code. Also, as discussed above, alternative characterizations of a note for United States federal income tax purposes are possible, which could result in the imposition of United States federal income or withholding tax on the sale, exchange or other disposition of the note or on payments received with respect to the note on the Maturity Date. You should consult your own tax advisors to determine the United States federal, state, local and other tax consequences that may be relevant to you.
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United States federal withholding tax
Based on the treatment of the notes as cash-settled financial contracts, you should not be subject to United States federal withholding tax on payments upon any sale, exchange or other disposition of the notes or on payments received on the Maturity Date in respect of the notes.
United States federal income tax
Based on the treatment of the notes as cash-settled financial contracts, any gain realized upon the sale, exchange or other disposition of the notes or on payments received on the Maturity Date in respect of a note generally will not be subject to United States federal income tax unless (i) the gain is effectively connected with a trade or business in the United States of a non-United States holder or (ii) in the case of a non-United States holder who is an individual, such individual is present in the United States for 183 days or more in the taxable year of the sale, exchange or other disposition or in which the Maturity Date occurs, and certain other conditions are met.
United States federal estate tax
If you are an individual non-United States holder of notes, notes held by you at the time of death may be included in your gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Information reporting and backup withholding
If you are a United States holder of notes, information reporting requirements will generally apply to all payments received by you or upon the sale, exchange or other disposition of a note, unless you are an exempt recipient such as a corporation. Backup withholding tax will apply to those payments if you fail to provide a taxpayer identification number, a certification of exempt status, or if you fail to comply with applicable certification requirements.
If you are a non-United States holder of notes, Lehman Brothers Holdings Inc. generally must report annually to the Internal Revenue Service and to you the amount of all payments paid to you and the amount of tax, if any, withheld with respect to those payments. Copies of the information returns reporting withholding may also be made available to the tax authorities in the country in which you reside under the provisions of an applicable income tax treaty. In general, you will not be subject to backup withholding with respect to payments Lehman Brothers Holdings Inc. makes to you provided that Lehman Brothers Holdings Inc. does not have actual knowledge or reason to know that you are a United States holder and you provide your name and address on an Internal Revenue Service Form W-8BEN and certify, under penalties of perjury, that you are not a United States holder. Alternative documentation may be applicable in some situations. Special certification rules apply to holders that are pass-through entities. In addition, you will be subject to information reporting and, depending on the circumstances, backup withholding regarding the proceeds of the sale of a note made within the United States or conducted through United States-related financial intermediaries, unless the payor receives the statement described above and does not have actual knowledge or reason to know that you are a United States holder, or you otherwise establish an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against your United States federal income tax liability provided the required information is furnished to the Internal Revenue Service.
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UNDERWRITING
The notes are being offered by us through Lehman Brothers Inc., as principal or agent. We and Lehman Brothers Inc. entered into a distribution agreement with respect to the notes. We may sell notes at a discount to the agent, as principal for its own account or for resale to one or more purchasers at varying prices related to prevailing market prices or at a fixed public offering price. Unless otherwise specified in the relevant terms supplement, any note purchased by the agent as principal will be purchased at 100% of the principal amount less a percentage specified in the relevant terms supplement. In addition, the agent may offer and sell notes purchased by it as principal to other dealers. These notes may be sold at a discount which, unless otherwise specified in the relevant terms supplement, will not exceed the discount to be received by the agent. After any initial public offering of notes to be resold to purchasers at a fixed public offering price, the public offering price and any concession or discount may be changed.
Lehman Brothers Inc., as agent, has agreed to use its reasonable best efforts to solicit orders to purchase notes. We will have the sole right to accept orders to purchase notes and may reject proposed purchases in whole or in part. Lehman Brothers Inc., as agent, will have the right to reject any proposed purchase in whole or in part. We will generally pay the agent a commission of up to 0.625% of the principal amount of notes sold through it as agent, depending on the stated maturity, unless otherwise specified in the relevant terms supplement.
We own, directly or indirectly, all of the outstanding equity securities of Lehman Brothers Inc. The underwriting arrangements for this offering comply with the requirements of Rule 2720 of the Conduct Rules of the NASD regarding a FINRA member firm’s underwriting of securities of an affiliate. In accordance with Rule 2720, no underwriter may make sales in this offering to any discretionary account without the prior approval of the customer.
We may appoint other agents (either as principal or agent), other than or in addition to Lehman Brothers Inc., with respect to any issue of notes. Any other agents will be named in the relevant terms supplement and those agents will enter into the distribution agreement referred to above with respect to that issue of notes. The other agents may be our affiliates or our customers and may engage in transactions with and perform services for us in the ordinary course of business. Lehman Brothers Inc. may resell notes to or through another of our affiliates, as selling agent.
Lehman Brothers Inc. or another agent may act as principal or agent in connection with offers and sales of the notes in the secondary market. Secondary market offers and sales will be made at prices related to market prices at the time of such offer or sale; accordingly, the agents or a dealer may change the public offering price, concession and discount after the offering has been completed.
In order to facilitate the offering of the notes, Lehman Brothers Inc. may engage in transactions that stabilize, maintain or otherwise affect the price of the notes. Specifically, Lehman Brothers Inc. may sell more notes than it is obligated to purchase in connection with the offering, creating a naked short position in the notes for its own account. Lehman Brothers Inc. must close out any naked short position by purchasing the notes in the open market. A naked short position is more likely to be created if Lehman Brothers Inc. is concerned that there may be downward pressure on the price of the notes in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, Lehman Brothers Inc. may bid for, and purchase, notes in the open market to stabilize the price of the notes. Any of these activities may raise or maintain the market price of the notes above independent market levels or prevent or retard a decline in the market price of the notes. Lehman Brothers Inc. is not required to engage in these activities, and may end any of these activities at any time.
No action has been or will be taken by us, Lehman Brothers Inc. or any dealer that would permit a public offering of the notes or possession or distribution of this product supplement no. 940-I or the accompanying base prospectus, MTN prospectus supplement or the relevant terms supplement, other than in the United States, where action for that purpose is required. No offers, sales or deliveries
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of the notes, or distribution of this product supplement no. 940-I or the accompanying base prospectus, MTN prospectus supplement or terms supplement or any other offering material relating to the notes, may be made in or from any jurisdiction except in circumstances which will result in compliance with any applicable laws and regulations and will not impose any obligations on us, the agents or any dealer.
Each agent has represented and agreed, and each dealer through which we may offer the notes has represented and agreed, that it, to the best of its knowledge after due inquiry (i) will comply with all applicable laws and regulations in force in any jurisdiction in which it offers or sells the notes or possesses or distributes this product supplement no. 940-I and the accompanying base prospectus, MTN prospectus supplement or terms supplement and (ii) will obtain any consent, approval or permission required by it for the offer or sale by it of the notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such offers or sales. We shall not have responsibility for any agent’s or any dealer’s compliance with the applicable laws and regulations or obtaining any required consent, approval or permission.
The notes are not and will not be authorized by the Comisión Nacional de Valores for public offer in Argentina and may thus not be offered or sold to the public at large or to sectors or specific groups thereof by any means, including but not limited to personal offerings, written materials, advertisements or the media, in circumstances which constitute a public offering of securities under Argentine Law No. 17,811, as amended.
The notes have not been and will not be registered with the “Comissão de Valores Mobiliários” —the Brazilian Securities and Exchange Commission (“CVM”) and accordingly, the notes may not be sold, promised to be sold, offered, solicited, advertised and/or marketed within the Federative Republic of Brazil in an offering that can be construed as a public offering under CVM Instruction n°400, dated December 29, 2003, as amended from time to time.
The notes have not been registered with the Superintendencia de Valores y Seguros in Chile and may not be offered or sold publicly in Chile. No offer, sales or deliveries of the notes, or distribution of this product supplement no. 940-I or the accompanying base prospectus, MTN prospectus supplement or terms supplement may be made in or from Chile except in circumstances which will result in compliance with any applicable Chilean laws and regulations.
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), the agent has represented and agreed, and each underwriter agrees, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of the notes to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of the notes to the public in that Relevant Member State:
(a) in (or in Germany, where the offer starts within) the period beginning on the date of publication of a prospectus in relation to those notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive and ending on the date which is 12 months after the date of such publication;
(b) at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
(c) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than€43,000,000 and (3) an annual net turnover of more than€50,000,000, as shown in its last annual or consolidated accounts; or
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(d) at any time in any other circumstances which do not require the publication by Lehman Brothers Holdings Inc. of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer of the notes to the public” in relation to any notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the notes to be offered so as to enable an investor to decide to purchase or subscribe the notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
The notes have not been, and will not be, registered with the National Registry of Securities maintained by the Mexican National Banking and Securities Commission nor with the Mexican Stock Exchange and may not be offered or sold publicly in the United Mexican States. This product supplement no. 940-I and the accompanying base prospectus, MTN prospectus supplement or terms supplement may not be publicly distributed in the United Mexican States.
Neither this product supplement no. 940-I nor the accompanying base prospectus, MTN prospectus supplement or terms supplement have been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this product supplement no. 940-I, the accompanying base prospectus, MTN prospectus supplement or terms supplement, and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the notes may not be circulated or distributed, nor may the notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
The notes may not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances that do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong. Each Agent has not issued and will not issue any advertisement, invitation or document relating to the notes, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to notes which are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.
The notes may not be publicly offered in Switzerland, as such term is defined or interpreted under the Swiss Code of Obligations. Neither this product supplement no. 940-I, the accompanying base prospectus, MTN prospectus supplement or terms supplement nor any of the documents related to the notes constitute a prospectus in the sense of article 652a or 1156 of the Swiss Code of Obligations.
In addition, notes that fall within the scope of the Swiss Investment Fund Act may not be offered and distributed by means of public advertising in or from Switzerland, as such term is defined or interpreted under the Swiss Investment Fund Act. Such notes will not be registered with the Swiss Federal Banking Commission under the Swiss Investment Fund Act and the corresponding Swiss Investment Fund Ordinance and investors will, therefore, not benefit from protection under the Swiss Investment Fund Act or supervision by the Swiss Federal Banking Commission.
Each agent has represented and agreed that:
(a) in relation to any notes which have a maturity of less than one year, (i) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as
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principal or agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell any notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the notes would otherwise constitute a contravention of Section 19 of the Financial Services and Markets Act 2000 (the “FSMA”) by such agent;
(b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to Lehman Brothers Holdings Inc.; and
(c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any notes in, from or otherwise involving the United Kingdom.
This offering is extraterritorial (non-Venezuelan), directed exclusively to clients of the underwriters and as such, no registrations or authorizations will be required from the Comisión Nacional de Valores.
Unless otherwise specified in the relevant terms supplement, the Settlement Date for the notes will be the third business day following the Trade Date (which is referred to as a “T+3” settlement cycle).
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BENEFIT PLAN INVESTOR CONSIDERATIONS
A fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including entities such as collective investment funds, partnerships and separate accounts whose underlying assets include the assets of such plans (collectively, “ERISA Plans”) should consider the fiduciary standards of ERISA in the context of the ERISA Plans’ particular circumstances before authorizing an investment in the notes. Among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with the documents and instruments governing the ERISA Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit ERISA Plans, as well as individual retirement accounts, Keogh plans and other arrangements subject to Section 4975 of the Code (together with ERISA Plans, “Plans”), from engaging in certain transactions involving “plan assets” with persons who are “parties in interest” under ERISA or “disqualified persons” under the Code (“Parties in Interest”) with respect to such Plans. As a result of our business, we are a Party in Interest with respect to many Plans. Where we are a Party in Interest with respect to a Plan (either directly or by reason of ownership of our subsidiaries), the purchase and holding of the notes by or on behalf of the Plan would be a prohibited transaction under Section 406(a)(1) of ERISA and Section 4975(c)(1) of the Code, unless exemptive relief were available under an applicable class, statutory or administrative exemption (as described below) or there was some other basis on which the transaction was not prohibited.
Accordingly, the notes may not be purchased or held by any Plan, any entity whose underlying assets include “plan assets” by reason of any Plan’s investment in the entity (a “Plan Asset Entity”) or any person investing “plan assets” of any Plan, unless such purchaser or holder is eligible for the exemptive relief available under Prohibited Transaction Class Exemption (“PTCE”) 96-23, 95-60, 91-38, 90-1 or 84-14 issued by the U.S. Department of Labor or there is some other basis on which the purchase and holding of the notes is not prohibited, such as the exemption for certain transactions involving non-fiduciary service providers under Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code (the “Service Provider Exemption”). Each purchaser or holder of the notes or any interest therein, and each person making the decision to purchase or hold the notes on behalf of any such purchaser or holder will be deemed to have represented and warranted in both its individual capacity and its representative capacity (if any), on each day from the date on which the purchaser acquires its interest in the notes to the date on which the purchaser disposes of its interest in the notes, by its purchase or holding of the notes or any interest therein, that (a) its purchase and holding of the notes is not made on behalf of or with “plan assets” of any Plan or Plan Asset Entity or (b) its purchase and holding of the notes will not result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code and neither Lehman Brothers Holdings Inc. nor any of its affiliates is acting as a fiduciary (within the meaning of Section 3(21)) of ERISA in connection with the purchase or holding of the notes and has not provided any advice that has formed or may form a primary basis for any investment decision concerning the purchase or holding of the notes.
Employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA), certain church plans (as defined in Section 3(33) of ERISA) and non-U.S. plans (as described in Section 4(b)(4) of ERISA) are not subject to these “prohibited transaction” rules of ERISA or Section 4975 of the Code, but may be subject to similar rules under other applicable laws or documents (“Similar Laws”). Accordingly, each purchaser or holder of the notes or any interest therein will be deemed to have represented and warranted by its purchase or holding of the notes or any interest therein that such purchase and holding does not violate any applicable Similar Laws or rules.
Due to the complexity of the applicable rules, it is particularly important that fiduciaries or other persons considering purchasing the notes on behalf of or with “plan assets” of any plan consult with their counsel regarding the relevant provisions of ERISA, the Code or any Similar Laws and the availability of exemptive relief under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14, the Service Provider Exemption, or some other basis on which the acquisition and holding is not prohibited.
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Each purchaser and holder of the notes has exclusive responsibility for ensuring that its purchase and holding of the notes does not violate the fiduciary or prohibited transaction rules of ERISA, the Code or any Similar Laws. The sale of any notes to any plan is in no respect a representation by us or any of our affiliates or representatives that such an investment meets all relevant legal requirements with respect to investments by plans generally or any particular plan, or that such an investment is appropriate for plans generally or any particular plan.
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