PRODUCT SUPPLEMENT NO. FX-1 REGISTRATION STATEMENT NO. 333-137215
DATED MAY 19, 2008 RULE 424(B)(3)
TO PROSPECTUS DATED SEPTEMBER 8, 2006
[GRAPHIC]
HARTFORD LIFE INSURANCE COMPANY
PRINCIPAL PROTECTED MEDIUM-TERM NOTES WITH A RETURN LINKED TO THE SPOT RATES
OF ONE OR MORE CURRENCIES.
GENERAL
o Hartford Life Insurance Company may offer and sell from time to time
principal protected, medium-term, currency-linked notes, the return
on which is linked to the United States Dollar ("Dollar") exchange
rate for one or more foreign currency or currencies (each a
"Currency" or collectively, the "Currencies"), as described in the
applicable pricing supplement (herein, "notes"). The Currency or
Currencies used in conjunction with a note will be specified in the
pricing supplement for your notes and are collectively referred to
herein as "Basket". This product supplement describes terms that will
apply generally to the notes, and supplements the terms described in
the accompanying prospectus.
o The notes will be denominated in Dollars. All payments will be made
in Dollars.
o You will receive 100% of the principal amount of your notes at
maturity. You may also receive a Supplemental Payment.
o Unless otherwise specified in the pricing supplement, we will not pay
interest on the notes.
o The amount of the Supplemental Payment, if any, will be based on the
performance of the Basket over the term of your notes (the "Basket
Return"), and the specific terms of the notes as set forth in the
pricing supplement.
o The Basket Return will be linked to the Spot Rates of one or more
Currencies included in the Basket, as described in the pricing
supplement.
o In general, the amount of your Supplemental Payment, if any, will
depend on whether the Currencies either appreciate or depreciate
relative to the Dollar over the term of the notes. The pricing
supplement will describe whether a Supplemental Payment is dependent
on the appreciation or depreciation in the value of the Currencies.
o "Bearish" notes are those that generate a Supplemental Payment if
the Currencies depreciate in value, relative to the Dollar. For
"bearish" notes, the Currency Return is determined using Spot
Rates based upon rates to purchase the relevant Currency with
Dollars.
o "Bullish" notes are those that generate a Supplemental Payment if
the Currencies appreciate in value, relative to the Dollar. For
"bullish" notes, the Currency Return is determined using Spot
Rates based upon rates to purchase Dollars with the relevant
Currency.
See "Currencies and Currency Spot Rates" at page PS-15, below.
o Investing in the notes is not equivalent to investing in the
Currencies directly or investing in securities, demand deposits or
other investments denominated in those Currencies.
o For information about tax considerations relating to an investment in
the notes (including the requirement that, regardless of your method
of tax accounting, you may have to report income currently,
regardless of when or if a corresponding amount of cash is received),
see "Additional Material United States Federal Income Tax
Considerations" beginning on page PS-16.
o The specific terms of your notes will be contained in a pricing
supplement for your notes (herein the "pricing supplement"). A copy
of the pricing supplement will be provided to you along with a copy
of this product supplement. The pricing supplement also may add to,
update, supplement or clarify information in this product supplement
or the prospectus. You should carefully review this product
supplement and the pricing supplement including such additional,
updated, supplemental or clarifying information as may be
incorporated by reference thereto.
PS-1
KEY TERMS
Basket: The Basket will be composed of the Currency or Currencies
specified in the pricing supplement. The pricing supplement
will also specify the respective weightings of each Currency
in the Basket.
Spot Rate: The exchange rate at a point in time to convert a specified
Currency into Dollars or to convert Dollars into a specified
Currency, as described in the pricing supplement. The
pricing supplement will indicate whether the Spot Rates
reflect the purchase of the other Currency with Dollars or
the purchase of Dollars with the other Currency. Spot Rates
reflecting the purchase of the other Currency with Dollars
(e.g., "USD/GBP Spot Rate") are likely to generate a
Supplemental Payment if the other Currency depreciates
against the Dollar. Spot Rates in which the Currency Return
is based upon rates to purchase Dollars with the other
Currency (e.g., "GBP/USD Spot Rate") are likely to generate
a Supplemental Payment if the other Currency appreciates
against the Dollar.
Unless otherwise described in the pricing supplement, the
Calculation Agent will determine the spot rate for each
Currency by observing trades through Electronic Broking
Services, Reuters Dealing 3000 as of the Trade Date
specified in your pricing supplement and as of each
Valuation Date. See "Currencies and Currency Spot Rates"
below.
Initial Spot Rate: For each Currency, the Spot Rate for such Currency on the
Trade Date specified in the pricing supplement.
Ending Spot Rate: For each Currency, the Spot Rate for such Currency on any
Valuation Date, as determined by the Calculation Agent.
Currency Return: On each Valuation Date, the Calculation Agent will determine
the Currency Return for each Currency included in a Basket.
Unless otherwise specified in the pricing supplement, each
Currency Return is calculated as follows:
Currency Return = Ending Spot Rate - Initial Spot Rate
------------------------------------
Initial Spot Rate
The Currency Return measures the appreciation or
depreciation of the particular Currency, relative to the
Dollar. Each Currency Return reflects the performance of the
respective Currency, expressed as a percentage, from the
relevant initial level to the relevant ending level on such
Valuation Day.
Currency Weighting: The percentage weight, expressed as a decimal, that each
Currency is given in the Basket. The Currency Weighting will
be specified in the pricing supplement and will be fixed for
the term of the notes unless otherwise specified in the
pricing supplement. The sum of the Currency Weightings will
always equal 100%.
Basket Closing Level: Unless otherwise specified in the pricing supplement, the
Basket Closing Level at the relevant time of calculation on
any Business Day (defined below) will be calculated as
follows:
100 x [1 + [SIGMA] (each Currency Return x each Currency
Weighting)]
Please see "Description of the Notes - Supplemental Payment
at Maturity" for an example.
Initial Basket Level: Unless otherwise specified in the pricing supplement, the
"Initial Basket Level" for a Basket will equal 100. If the
Basket consists of a single Currency, the Initial
PS-2
Basket Level may equal the Currency's Spot Rate on the
pricing date or such other date specified in the pricing
supplement. If so, the Spot Rate replaces 100 in the
calculation of the Basket Return.
Ending Basket Level: The Basket Closing Level on the Valuation Date, or the
arithmetic average of the Basket Closing Levels on the
Valuation Dates, as specified in the pricing supplement.
Basket Return: Unless otherwise specified in the pricing supplement, on
each Valuation Date, the Calculation Agent will determine
the Basket Return as follows:
Basket Return = Ending Basket Level - 100
-------------------------
100
If, for a single Currency Basket, that Currency's Spot Rate
is used as the Initial Basket Level, then the Basket Return
will equal the arithmetic average of the Currency Return on
each Valuation Date, all determined as described above.
Supplemental Payment: The Supplemental Payment per $1,000 principal amount of your
notes paid at maturity, unless otherwise specified in the
pricing supplement will be:
Supplemental Payment = ($1,000 x Basket Return x
Participation Rate) - Off-Set Amount
PROVIDED that the Supplemental Payment will not be less than
zero or the Minimum Supplemental Payment, if applicable, or
greater than the Maximum Supplemental Payment, if
applicable.
Payment at Maturity: Unless otherwise specified in the pricing supplement, at
maturity you will receive a cash payment for each $1,000
principal amount of your notes of $1,000 plus the
Supplemental Payment. The Supplemental Payment may be zero
or may equal the Minimum Supplemental Payment, if
applicable. In no event will it be greater than the Maximum
Supplemental Payment.
Minimum Supplemental Payment: If the pricing supplement includes a Minimum Supplemental
Payment amount, the Supplemental Payment per $1,000
principal amount of notes will equal at least the amount
specified as the Minimum Supplemental Payment.
Maximum Supplemental Payment: If the pricing supplement includes a Maximum Supplemental
Payment amount, the Supplemental Payment per $1,000
principal amount of notes will equal no more than the amount
specified as the Maximum Supplemental Payment.
Valuation Date(s): A single date, or several dates, as specified in the pricing
supplement, on which the Ending Spot Rate(s), the Currency
Return(s), the Ending Basket Level(s), and Basket Return(s)
are calculated. Any Valuation Date is subject to
postponement in the event of certain Market Disruption
Events and as described under "Description of Notes --
Payment at Maturity."
Participation Rate: The amount set forth in the pricing supplement.
Maturity Date: The stated maturity date specified in the pricing
supplement, subject to the business day convention specified
therein. 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 --
Supplemental Payment at Maturity."
Off-Set Amount: If specified in the pricing supplement, the Dollar or
percentage amount by which any Supplemental Payment will be
reduced.
Periodic Interest Payments: Unless otherwise specified in the pricing supplement, we
will not pay interest on your notes.
PS-3
INVESTING IN THE PRINCIPAL PROTECTED MEDIUM-TERM NOTES INVOLVES A NUMBER OF
RISKS. SEE "ADDITIONAL RISK FACTORS" BEGINNING ON PAGE PS-10 OF THIS PRODUCT
SUPPLEMENT AND "RISK FACTORS" BEGINNING ON PAGE 7 OF THE ACCOMPANYING
PROSPECTUS.
NONE OF THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), ANY STATE
SECURITIES COMMISSION NOR ANY STATE INSURANCE COMMISSION HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PRODUCT SUPPLEMENT, THE
ACCOMPANYING PROSPECTUS OR ANY RELATED PRICING SUPPLEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PS-4
Product Supplement dated May 19, 2008
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE NOTES........................................................................................ PS-5
ADDITIONAL RISK FACTORS......................................................................................... PS-10
CURRENCIES AND CURRENCY SPOT RATES.............................................................................. PS-15
ADDITIONAL MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS............................................. PS-16
PLAN OF DISTRIBUTION............................................................................................ PS-18
ERISA CONSIDERATIONS............................................................................................ PS-18
In making your investment decision, you should rely only on the information
contained or incorporated by reference in this product supplement, the
prospectus and the pricing supplement for your notes. We have not authorized
anyone to give you any additional or different information. If anyone
provides you with different or additional information, you should not rely on
it. Neither we nor any Agent is making an offer to sell the notes in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information contained or incorporated by reference in this product
supplement, the prospectus and the pricing supplement, as well as information
we previously filed with the Securities and Exchange Commission and
incorporated by reference, is accurate only as of its respective date. Our
business, financial condition, results of operations and prospects may have
changed since that date.
In this product supplement and the accompanying prospectus, "we," "us" and
"our" refer to Hartford Life Insurance Company, a life insurance company
organized under the laws of Connecticut, unless the context requires
otherwise.
The notes described in each pricing supplement and this product supplement
are not appropriate for all investors, and involve important legal and tax
consequences and investment risks, which should be discussed with your
professional advisers. You should be aware that the regulations of the
Financial Industry Regulatory Authority 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 pricing supplement, this product supplement and the
accompanying prospectus 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.
DESCRIPTION OF THE NOTES
THE FOLLOWING DESCRIPTION OF THE TERMS OF THE NOTES SUPPLEMENTS THE
DESCRIPTION OF THE GENERAL TERMS OF THE NOTES SET FORTH UNDER THE HEADINGS
"DESCRIPTION OF THE NOTES" IN THE ACCOMPANYING PROSPECTUS. A SEPARATE PRICING
SUPPLEMENT WILL DESCRIBE THE TERMS THAT APPLY SPECIFICALLY TO AN OFFERING OF
THE NOTES, INCLUDING ANY CHANGES TO THE TERMS SPECIFIED BELOW. CAPITALIZED
TERMS USED BUT NOT DEFINED IN THIS PRODUCT SUPPLEMENT HAVE THE MEANINGS
ASSIGNED IN THE ACCOMPANYING PROSPECTUS. FOR THE PURPOSES OF THIS PRODUCT
SUPPLEMENT AND EACH PRICING SUPPLEMENT, THE TERM "NOTE" REFERS TO EACH $1,000
PRINCIPAL AMOUNT OF OUR PRINCIPAL PROTECTED MEDIUM-TERM NOTES WITH A RETURN
LINKED TO THE SPOT RATES OF ONE OR MORE CURRENCIES.
GENERAL
The notes are direct, unsecured, senior obligations of Hartford Life
Insurance Company the principal protected return of which is linked to the
change in value of one or more Currencies (a "Basket") relative to the value
of the Dollar.
The notes will be issued by Hartford Life Insurance Company under an
indenture, dated September 8, 2006, as may be amended or supplemented from
time to time, between us and The Bank of New York Trust Company, N.A., as
successor indenture trustee to JPMorgan Chase Bank, N.A. (the "trustee"). The
notes will all have a stated maturity that is more than one year from their
date of issuance.
We typically hedge our obligations under the notes by entering into a swap
transaction with the lead Agent as the swap counterparty. In turn, the swap
counterparty may hedge its obligations on that swap transaction by purchasing
Currencies or exchange-traded funds or other derivative instruments with
returns linked or related to changes in the trading prices of the Currencies,
and may adjust these hedges by, among other things, purchasing or selling
Currencies or exchange-traded funds or Currencies or other derivative
instruments with returns linked to Currencies at any time. If
PS-5
our swap transaction was to be terminated, we may hedge our obligations by
engaging in any of the hedging activities described above.
If specified in the pricing supplement, the notes may pay interest at a
fixed or floating rate prior to maturity. We will pay you at maturity the
principal amount of $1,000 for each $1,000 principal amount of the notes and,
if specified in the pricing supplement, accrued and unpaid interest. In
addition, at maturity, you may receive a Supplemental Payment, calculated as
set out below.
SUPPLEMENTAL PAYMENT AT MATURITY
The return on your notes is linked to the performance of the Basket over
the term of the notes. The Maturity Date for the notes will be set forth in
the pricing supplement and is subject to adjustment as described below, if
the final Valuation Date is postponed as described below under "Valuation
Date(s)". We will specify, in the pricing supplement, the Participation Rate,
any Minimum Supplemental Payment, any Maximum Supplemental Payment and any
other applicable terms.
At maturity you may receive, in addition to the principal amount of your
note, a Supplemental Payment as described below. This amount may be zero
unless a Minimum Supplemental Payment applies and will be no more than the
Maximum Supplemental Payment, if any. The stated maturity date will be
specified in the pricing supplement. If the stated Maturity Date (as
specified in the pricing supplement) is not a Business Day, then the Maturity
Date will be the next succeeding Business Day following such stated Maturity
Date, but no additional interest will accrue or be payable as a result of the
delayed payment. If, due to a Market Disruption Event, the final Valuation
Date is postponed, the Maturity Date will be postponed by the same number of
days as the final Valuation Date, unless otherwise specified in the pricing
supplement. We describe Market Disruption Events under "Market Disruption
Events."
The "Supplemental Payment" per $1,000 principal amount paid at maturity,
unless otherwise specified in the pricing supplement will be:
Supplemental Payment = ($1,000 x Basket Return x Participation rate) -
Off-Set Amount
PROVIDED that the Supplemental Payment will not be less than zero or the
Minimum Supplemental Payment, if applicable, or greater than the Maximum
Supplemental Payment, if applicable.
The "Participation Rate" will be a percentage, which may be more or less
than 100%, as specified in the pricing supplement.
The "Off-Set Amount", if any, is specified in the pricing supplement, and
reduces the amount of the Supplemental Payment. The Off-Set Amount will be
expressed either as a dollar amount per $1,000 principal amount of notes or
as a percentage of principal amount.
The "Minimum Supplemental Payment," if applicable, will be expressed either
as a fixed dollar amount per $1,000 principal amount of notes or as a
percentage of principal amount, as specified in the pricing supplement.
The "Maximum Supplemental Payment," if applicable, will be expressed either
as a fixed dollar amount per $1,000 principal amount of notes or as a
percentage of principal amount, as specified in the pricing supplement.
On any Business Day (as defined below), the Currency Return for each of the
Currencies included in the Basket is calculated as follows, unless otherwise
specified in the pricing supplement:
Currency Return = Ending Spot Rate - Initial Spot Rate
------------------------------------
Initial Spot Rate
The Currency Return reflects the performance of the respective Currency,
expressed as a percentage, from the relevant initial level to the relevant
closing level on such Business Day. For example, if the Initial Spot Rate for
a Currency was 1.9748 and the Ending Spot Rate for that Currency was 2.2710,
and the note was a "bullish" note, the Currency Return would equal:
Currency Return = [2.2710 - 1.9748] / 1.9748
= 0.2962 / 1.9748
= 15%
PS-6
Unless otherwise specified in the pricing supplement, the Basket Closing
Level on any Business Day (defined below) will be calculated as follows:
Basket Closing Level = 100 x [1 + [SIGMA] (each Currency Return x each
Currency Weighting)]
Unless otherwise specified in the pricing supplement, the "Basket Return,"
as calculated by the Calculation Agent, is the percentage change in the
Currency Spot Rates of the Basket calculated by applying the following
formula to the Basket Closing Level on the Valuation Date, or the arithmetic
average of the Basket Closing Levels on the Valuation Dates, or such other
date or dates as specified in the pricing supplement (the "Ending Basket
Level").
Basket Return = Ending Basket Level - 100
-------------------------
100
The pricing supplement will specify the Currency Weighting of each Currency
in the Basket which, unless otherwise specified will be fixed for the term of
the notes. For example, if the pricing supplement specifies that the Basket
will consist of three Currencies, with the respective Currency Returns and
Weightings as follows:
CURRENCY CURRENCY
CURRENCY WEIGHTING RETURN
-----------------------------------------------------------------------
British Pound (GBP) 30% +15%
Euro (EUR) 50% +12%
Swiss Franc (CHF) 20% -5%
then the Basket Closing Level is:
Basket Closing Level = 100 x [1 + (0.15 x 0.30) + (0.12 x 0.50) + (-0.05 x 0.20)]
= 100 x [1+ 0.045 + 0.06 - 0.01]
= 109.50
A "Business Day" for each Currency is, unless otherwise specified in the
pricing supplement, any day other than a Saturday or Sunday, as determined by
the Calculation Agent, on which banking business is generally conducted in
New York City and in the Principal Financial Center for each Currency, as
specified in the pricing supplement.
The "Valuation Date(s)" will be a single date, or several dates, as
specified in the pricing supplement, on which the Ending Spot Rate(s), the
Currency Return(s), the Ending Basket Level(s), and Basket Return(s) are
calculated.
If a Valuation Date is not a Business Day, the applicable Valuation Date is
postponed to the immediately succeeding Business Day. Further, if there is a
Market Disruption Event on a day that otherwise would be a Valuation Date,
the applicable Valuation Date will be postponed to the next succeeding
Business Day, during which no Market Disruption Event shall have occurred or
is continuing; PROVIDED, however, that in no event will the applicable
Valuation Date be postponed by more than ten scheduled Business Days
following the originally scheduled Valuation Date.
EXAMPLES OF SUPPLEMENTAL PAYMENT AMOUNT DETERMINATION
The Supplemental Payment depends on the Ending Basket Level on the
Valuation Date(s) and, as specified in the pricing supplement, the
Participation Rate and the Off-Set Amount, if applicable. Because the Ending
Basket Level may be subject to different weighting combinations, it is not
practical to present a chart or table illustrating a complete range of
possible payments on the Maturity Date. The examples of HYPOTHETICAL payment
calculations that follow are intended to illustrate the effect of general
trends in the level of the Basket on the Supplemental Payment payable at
maturity for $1,000 principal amount of the notes on the dates and using the
variables as stated. Because these examples are based on HYPOTHETICAL
assumptions, such as the hypothetical specific Ending Basket Level on the
Valuation Date(s), which may not reflect the actual performance of the Basket
during the term of the notes, the returns set forth in the tables may not
reflect the actual returns. Each of the HYPOTHETICAL examples is based upon a
Participation Rate of 90%. The formula to calculate the Supplemental Payment
is as follows:
Supplemental Payment = Principal Amount x [(Basket Return x
Participation Rate) - Off-Set Amount],
subject to any Maximum or Minimum Supplemental Payment per $1,000
principal amount of notes that is specified in the pricing supplement.
PS-7
If the above formula results in a negative number, there is no Supplemental
Payment and you will receive a payment equal to the principal amount of your
note. This formula is illustrated by the following examples:
EXAMPLE 1 -- The hypothetical Ending Basket Level is 50% of the Initial
Basket Level (No Off-Set Amount, Minimum Supplemental Payment, or Maximum
Supplemental Payment):
Initial Basket Level: 100.00
Hypothetical Ending Basket Level: 50.00
[$1,000 x ((50 - 100) x 90%)] - $0.00 = - $450.00
--------
100
As the formula results in a negative number, there is no Supplemental
Payment.
EXAMPLE 2 -- The hypothetical Ending Basket Level is 120% of the Initial
Basket Level (No Off-Set Amount, Minimum Supplemental Payment, or Maximum
Supplemental Payment):
Initial Basket Level: 100.00
Hypothetical Ending Basket Level: 120.00
[$1,000 x ((120 - 100) x 90%)] - $0.00 = $180.00
---------
100
The Supplemental Payment is $180.00.
EXAMPLE 3 -- The hypothetical Ending Basket Level is 110% of the Initial
Basket Level and the Minimum Supplemental Payment per $1,000 principal amount
of notes is $200.00 (No Off-Set Amount or Maximum Supplemental Payment):
Initial Basket Level: 100.00
Hypothetical Ending Basket Level: 110.00
[$1,000 x ((110 - 100) x 90%)] - $0.00 = $90.00
---------
100
As the $90.00 resulting from the formula is less than the Minimum
Supplemental Payment of $200.00 per $1,000 principal amount of notes, the
Supplemental Payment is $200.00.
EXAMPLE 4 -- The hypothetical Ending Basket Level is 150% of the Initial
Basket Level and the Maximum Supplemental Payment per $1,000 principal amount
of notes is $400.00 (No Off-Set Amount or Minimum Supplemental Payment):
Initial Basket Level: 100.00
Hypothetical Ending Basket Level: 150.00
[$1,000 x ((150 - 100) x 90%)] - $0.00 = $450.00
---------
100
As the $450.00 resulting from the formula exceeds the Maximum Supplemental
Payment of $400.00 per $1,000 principal amount of notes, the Supplemental
Payment is $400.00.
EXAMPLE 5 -- The hypothetical Ending Basket Level is 150% of the Initial
Basket Level and the Off-Set Amount is $100 per $1,000 of principal amount
(No Minimum Supplemental Payment or Maximum Supplemental Payment):
Initial Basket Level: 100.00
Hypothetical Ending Basket Level: 150.00
[$1,000 x ((150 - 100) x 90%)] - $100.00 = $350.00
---------
100
After adjusting for the $100 Off-Set Amount, the Supplemental Payment is
$350.00.
PS-8
PERIODIC INTEREST PAYMENTS AND MATURITY DATE
If the pricing supplement specifies that the notes will bear interest, the
notes will bear interest at the rate per annum, or such other rate or rates,
as specified in such pricing supplement and in accordance with the terms of
the accompanying prospectus. No such interest shall accrue on any
Supplemental Payment. If the Maturity Date is adjusted as the result of a
Market Disruption Event or otherwise, the payment of interest due on the
maturity date will be made on the Maturity Date as adjusted, with the same
force and effect as if the Maturity Date had not been adjusted, but no
additional interest will accrue or be payable as a result of the delayed
payment.
CALCULATION AGENT
The Calculation Agent will be as specified in the pricing supplement. The
Calculation Agent will determine, each Initial Spot Rate, each Ending Spot
Rate, each Currency Return, each Basket Closing Level, the Ending Basket
Level, the Basket Return and the Supplemental Payment, if any, and, if the
notes bear interest at a floating rate, the Calculation Agent (or such other
party as set forth in the pricing supplement) will determine such rate in
accordance with the accompanying prospectus. In addition, the Calculation
Agent will determine whether there has been a Market Disruption Event or a
discontinuation of a Currency and whether there has been a material change in
the method of calculation of a Currency Return. All determinations 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, the trustee and on us. We may appoint a different
Calculation Agent, including us or our affiliates, from time to time after
the date of the pricing supplement without your consent and without notifying
you.
Spot Rates for deliverable Currencies are normally determined by the
Calculation Agent as observed through trades through Electronic Broking
Services, Reuters Dealing 3000. Spot Rates for non-deliverable Currencies are
normally determined by the Calculation Agent by reference to an "indicative
survey" for that Currency. The precise "indicative survey" will be identified
in the pricing supplement. The pricing supplement will also indicate the time
during the day that a Spot Rate will be determined. If the normal price
sources are not available, then the Spot Rate is calculated as the arithmetic
mean of the applicable Spot Rate quotations secured by the Calculation Agent
at approximately 10:00 a.m., New York City time, on such date for the
purchase or sale for settlement two Business Days later. If fewer than two
dealers provide such Spot Rate quotations, then such Spot Rate is calculated
as the arithmetic mean of the applicable Spot Rate quotations received by the
Calculation Agent at approximately 10:00 a.m., New York City time, on such
date from three leading commercial banks in New York (selected in the sole
discretion of the Calculation Agent), for the sale by such banks of the
settlement two Business Days later. If these Spot Rate quotations are
available from fewer than three such banks, then the Calculation Agent, in
its sole discretion, shall determine which Spot Rate is available and
reasonable to be used. If no Spot Rate quotation is available, then such Spot
Rate is the rate the Calculation Agent, in its sole discretion, determines to
be fair and reasonable under the circumstances at approximately 10:00 a.m.,
New York City time, on such date.
All calculations with respect to the Initial Spot Rate, Initial Basket
Level, the Ending Basket Level, the Basket Return, Ending Spot Rate, or any
Basket Closing Level 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 the determination of the Supplemental
Payment payable at maturity 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 Spot
Rate of a Currency on any Valuation Date and, as a result, the Calculation
Agent would not be able to calculate the Basket Return and the Supplemental
Payment, if any, payable to you at maturity. We refer to these events
individually as a "Market Disruption Event."
With respect to the Dollar and each Currency or any relevant successor
Currency, a "Market Disruption Event," unless otherwise specified in the
pricing supplement, means:
o a day on which it becomes impossible to obtain a Spot Rate from the
Electronic Broking Services, Reuters Dealing 3000, with respect to a
non-deliverable Currency, or another source specific to such non-
deliverable Currency; or
PS-9
o a day that is declared not to be a Business Day, without prior public
announcement or other public notice that such day shall not be a
Business Day, until a time later than 9:00 a.m. in the Principal
Financial Center for a particular Currency two Business Days prior to
the Final Valuation Date;
in each case as determined by the Calculation Agent in its sole discretion
provided, that with respect to any series of notes, the Calculation Agent
determines, in its sole discretion, that the event(s) described above
materially interfered with our ability or the ability of any of our hedging
counterparty or the affiliates of either to adjust or unwind all or a
material portion of any hedge with respect to such series of notes.
If a Market Disruption Event occurs with respect to one or more Currencies,
the Valuation Date for the affected Spot Rate(s) will be postponed to the
next succeeding Business Day for that Currency on which the Calculation Agent
determines that a Market Disruption Event does not occur or is not
continuing. However, in no event will the Valuation Date for any Currency be
postponed by more than ten scheduled Business Days. If the final Ending Spot
Rate for a Currency cannot be calculated as of the tenth scheduled Business
Day following the originally scheduled Valuation Date, then on such tenth
scheduled Business Day, the Calculation Agent will determine the final Ending
Spot Rate for each such Currency in a commercially reasonable manner in
accordance with general market practice, taking into consideration all
available information that in good faith it deems relevant. If the
determination of the final Ending Spot Rate of a Currency on the Valuation
Date is postponed due to a Market Disruption Event, the Maturity Date for the
notes also will be postponed by the same number of Business Days. If a
Currency is no longer available due to the imposition of exchange controls or
other circumstances beyond our control or is no longer used for settlement of
transactions by financial institutions in the international banking community
or the foreign exchange market, or if there is no Spot Rate for the
applicable Currency, the Calculation Agent will make its determinations
hereunder in good faith and in a commercially reasonable manner taking into
consideration all available information that in good faith it deems relevant.
If a Currency is converted into, or there is substituted for the Currency,
another currency (the "New Currency") pursuant to applicable law or
regulation (the "Relevant law"), the New Currency will be substituted in
place of the Currency at the conversion rate prescribed in the Relevant law
at the time of such substitution.
ALTERNATE SUPPLEMENTAL PAYMENT CALCULATION IN CASE OF AN EVENT OF DEFAULT
Unless otherwise specified in the pricing 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 each $1,000 principal amount of the notes
upon any acceleration of the notes will be equal to $1,000 plus the
Supplemental Payment, if any, which will be calculated as if the date of
acceleration were the final Valuation Date, plus, if applicable, any accrued
and unpaid interest on the notes. If the notes have more than one Valuation
Date, then for each Valuation Date scheduled to occur after the date of
acceleration, the Business Days immediately preceding the date of
acceleration (in such number equal to the number of Valuation Dates in excess
of one) shall be the corresponding Valuation Dates, unless otherwise
specified in the pricing supplement.
ADDITIONAL RISK FACTORS
YOUR INVESTMENT IN THE NOTES WILL INVOLVE CERTAIN RISKS. THE NOTES MAY NOT
PAY INTEREST AT OR PRIOR TO MATURITY UNLESS OTHERWISE SPECIFIED IN THE
PRICING SUPPLEMENT. INVESTING IN THE NOTES IS NOT EQUIVALENT TO INVESTING
DIRECTLY IN ANY OF THE CURRENCIES OR IN OTHER INVESTMENTS DENOMINATED IN
THOSE CURRENCIES. 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 BEFORE YOU DECIDE
THAT AN INVESTMENT IN THE NOTES IS SUITABLE FOR YOU. FURTHER RISK FACTORS
ASSOCIATED WITH A PARTICULAR CURRENCY MAY BE DESCRIBED IN THE PRICING
SUPPLEMENT.
THE NOTES DIFFER FROM CONVENTIONAL DEBT SECURITIES AND MAY NOT PAY MORE THAN
THE APPLICABLE PRINCIPAL AMOUNT AT MATURITY.
The terms of the notes differ from those of conventional debt securities in
that we may not pay interest on the notes or, if we do pay interest, a
significant portion of your total Payment at Maturity may be based on the
performance of the Basket rather than the interest rate we will pay you.
Where the pricing supplement does not provide for interest payments, if the
Ending Basket Level does not equal or exceed the Initial Basket Level, at
maturity you may receive only $1,000 (plus, if specified in the pricing
supplement, the Minimum Supplemental Payment) for each $1,000 principal
amount of the notes. This will be true even if the value of the Basket was
higher than the Initial Basket Level at some
PS-10
time over the term of the notes but later falls below the Initial Basket
Level. If interest payments are made on your notes, they may accrue interest
at a rate lower than that payable for other debt securities with a comparable
maturity.
Therefore, the return on your investment in the notes may be less than the
amount that would be paid on an ordinary debt security. The return at
maturity of only the applicable principal amount of each note (plus the
Minimum Supplemental Payment, if any) will not compensate you for any loss in
value due to inflation and other factors relating to the value of money over
time.
THE ENDING BASKET LEVEL MAY BE LESS THAN THE BASKET CLOSING LEVEL AT OTHER
TIMES DURING THE TERM OF THE NOTES.
Because the Ending Basket Level is calculated based on the Basket Closing
Level on one or more specified Valuation Date(s) during the term of the
notes, the level of the Basket at various other times during the term of the
notes could be higher than the Ending Basket Level. This difference could be
particularly large if there is a significant increase in the level of the
Basket before and/or after the Valuation Date(s) or if there is a significant
decrease in the level of the Basket around the time of the Valuation Date(s)
or if there is significant volatility in the Basket level during the term of
the notes (especially on dates near the Valuation Date(s)). For example, when
the Valuation Date of the notes is near the end of the term of the notes, if
the Basket levels increase or remain relatively constant early in the term of
the notes and then decrease below the Initial Basket Level, near the end of
the term of the note, the Ending Basket Level may be significantly less than
if it were calculated on a date earlier than the Valuation Date. Under these
circumstances, you may receive a lower Payment at Maturity than you would
have received if you had invested in the Currencies or in contracts relating
to the Currencies for which there is an active secondary market.
IF APPLICABLE, THE APPRECIATION POTENTIAL OF THE NOTES WILL BE LIMITED BY ANY
MAXIMUM SUPPLEMENTAL PAYMENT OR ANY OFF-SET AMOUNT.
If the pricing supplement specifies a Maximum Supplemental Payment or an
Off-Set Amount, the appreciation potential of the notes is limited to such
features. Accordingly, the appreciation potential of the notes will be
limited to the Maximum Supplemental Payment even if the Supplemental Payment
calculated with reference to the Basket Return and Participation Rate would
be greater than the Maximum Supplemental Payment. Similarly the Supplemental
Payment will be reduced by any Off-Set Amount.
THE CURRENCIES MAY NOT BE EQUALLY WEIGHTED.
If the Basket is composed of multiple Currencies, each may have a different
weight in determining the value of the Basket based on the Currency
Weightings specified in the pricing supplement. For example, the pricing
supplement may specify that the Currency Weightings are 30%, 50%, and 20%,
respectively. One consequence of such an unequal weighting of the Basket is
that the same percentage change in two of the Currencies may have a different
effect on the Basket Closing Level.
THE WEIGHT OF EACH CURRENCY MAY BE DETERMINED ON A DATE OTHER THAN THE
PRICING DATE.
If so specified in the pricing supplement, the weight of each Currency in
the Basket may be determined on a date or dates other than the pricing date.
For example, the pricing supplement may specify that the weights of the
Currencies in the Basket will be determined based on the relative magnitude
of the Basket Return for each Currency on a specified date. As a result, if
the pricing supplement so specifies, you will not know the weight assigned to
each Currency until a date later than the pricing date, and you may not know
the weight assigned to each Currency in the Basket prior to the final
Valuation Date.
CHANGES IN THE VALUE OF THE CURRENCIES MAY OFFSET EACH OTHER.
If your notes are linked to a Basket composed of several Currencies, price
movements in the respective Currencies may not correlate with each other. At
a time when the value of one or more of the Currencies increase, the value of
the other Currencies may not increase as much or may even decline in value.
Therefore, in calculating the Ending Basket Level, increases in the value of
one or more of the Currencies may be moderated, or more than offset, by
lesser increases or declines in the level of the other Currency or
Currencies, particularly if the Currency or Currencies that appreciate are of
relatively low weight in the Basket. There can be no assurance that the
Ending Basket Level will be higher than the Initial Basket Level. Unless the
pricing supplement provides for interest payments or a Minimum Supplement
Payment, if the Basket Return is flat or negative, you will only receive the
principal amount of your notes at maturity.
PS-11
THE BASKET MAY CONSIST OF ONLY ONE CURRENCY.
In certain cases, only one Currency may compose the entire Basket. If only
one Currency is specified in the pricing supplement, that Currency is
weighted as 100% of the Basket. In such cases, the Basket Closing Level will
be determined with respect to the Spot Rate for that single Currency, as
applicable, and changes in other Currencies will have no effect on the Basket
Closing Level.
IF THE PARTICIPATION RATE IS LESS THAN 100%, THE SUPPLEMENTAL PAYMENT WILL BE
LIMITED BY THE PARTICIPATION RATE.
If the Participation Rate is less than 100% and the Ending Basket Level
exceeds the Initial Basket Level, the Supplemental Payment you receive at
maturity will equal only a percentage, as specified in the pricing
supplement, of the Basket performance above the Initial Basket Level. Under
these circumstances, the Supplemental Payment you receive at maturity will
not fully reflect the performance of the Basket.
THE NOTES ARE DESIGNED TO BE HELD 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 prior to maturity, if at all,
may be at a substantial discount from the principal amount of the notes, even
in cases where the Basket has appreciated since the date of the issuance of
the notes. The hypothetical returns described herein or in the pricing
supplement assume that your notes are held to maturity.
SECONDARY TRADING MAY BE LIMITED.
Unless otherwise specified in the pricing supplement, the notes will not be
listed on a securities exchange or included in any inter-dealer market
quotation system. 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. Moreover, we expect
that transaction costs for a sale of notes in any secondary market would be
high.
The lead Agent 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 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 the Agent is willing to buy the notes. If at any time the lead Agent
does not act as a market maker, it is likely that there would be little or no
secondary market for the notes.
THE INCLUSION IN THE ORIGINAL ISSUE PRICE OF THE COST OF HEDGING OUR
OBLIGATIONS UNDER THE NOTES AND SELLING AGENT COMMISSIONS IS LIKELY TO
ADVERSELY AFFECT THE VALUE OF THE NOTES PRIOR TO MATURITY.
While the Payment at Maturity will be based on the applicable principal
amount of your notes as described in the pricing supplement, the original
issue price of the notes reflects commissions paid to selling agents and the
cost of hedging our obligations under the notes. As a result, assuming no
change in market conditions or any other relevant factors, the price at which
you may be able to sell your notes in a secondary market transaction, if at
all, will likely be lower than the original issue price.
IF WE OR THE LEAD AGENT OR EITHER OF OUR AFFILIATES SERVE AS CALCULATION
AGENT, THE CALCULATION AGENT MAY HAVE ADVERSE ECONOMIC INTERESTS TO THE
HOLDERS OF THE NOTES, PARTICULARLY WHERE WE OR OUR AFFILIATES, AS THE
CALCULATION AGENT, EXERCISE DISCRETION.
As Calculation Agent, we or the lead Agent or either of our affiliates will
determine each Initial Spot Rate, each Ending Spot Rate, each Currency
Return, each Basket Closing Level, the Ending Basket Level, the Basket Return
and the Supplemental Payment, if any, that we will pay you at maturity. The
Calculation Agent is also responsible for determining whether a Market
Disruption Event has occurred, whether any of the Currencies have been
discontinued and whether there has been a material change in the method of
calculation of any of the Spot Rates. In performing these duties, we or our
affiliates may have interests adverse to your interests and, which may affect
your return.
THE MARKET VALUE OF YOUR NOTES MAY BE INFLUENCED BY MANY UNPREDICTABLE
FACTORS.
Many economic and market factors may influence the market value of the
notes, often in complex, interrelated ways. We expect that, generally, the
Spot Rate of the Currencies and interest rates on any day will affect the
market value of the notes more than any other single factor. However, you
should not expect the market value of the notes in the secondary market to
vary in proportion to changes in the level of the Basket. The market value of
the notes will be affected by a number of other factors that may either
offset or magnify each other, including:
o the expected volatility (frequency and magnitude of changes in value)
in the relevant Currencies;
o the time to maturity of the notes;
PS-12
o interest and yield rates in the market generally. In general, if
United States interest rates increase, the trading value of the notes
may decrease. If interest rates increase or decrease in markets based
on the Dollar or the other Currencies, the trading value of the notes
may be adversely affected. Interest rates may also affect the
economies of the United States and the relevant countries and in
turn, the respective Spot Rates, and therefore, the trading value of
the notes;
o economic, financial, political, regulatory or judicial events that
affect the countries of the Currencies and which may affect the
Basket Closing Level on any Valuation Date;
o the Spot Rate and the volatility of the Spot Rate among each of the
Currencies in the Basket. If the volatilities of the relevant
Currencies increase or decrease, the trading value of the notes may
be adversely affected;
o changes in correlation (i.e., the extent to which the Spot Rates
increase or decrease in tandem) between the Spot Rates;
o suspension or disruption of market trading in any or all of the
Currencies' market disruptions (see "Description of the Notes --
Market Disruption Events."); and
o our creditworthiness, including actual or anticipated downgrades of
our credit rating.
These factors will influence the price you will receive if you sell your
notes before maturity. If you sell your note before maturity, you may receive
less than the principal amount of your note.
The future performance of any or all of the Currencies cannot be predicted
based on their historical performance. The Ending Basket Level may be equal
to or below the Initial Basket Level, in which event you will only receive
the applicable principal amount of your notes at maturity unless the pricing
supplement provides for Periodic Interest Payments or Minimum Supplemental
Payments.
THE NOTES ARE SUBJECT TO FOREIGN EXCHANGE RISK.
Currency Spot Rates vary over time, and may vary considerably during the term
of the notes. The value of each Currency is at any moment a result of the supply
and demand for such Currency. Changes in Spot Rates result over time from the
interaction of many factors directly or indirectly affecting economic and
political conditions in the Currencies' countries and economic and political
developments in other relevant countries.
Of particular importance to potential currency exchange risk are:
o existing and expected rates of inflation;
o existing and expected interest rate levels;
o the balance of payments among the countries using a Currency and
between those countries and their major trading partners; and
o the extent of governmental surplus or deficit in the countries using
a Currency.
All of these factors are, in turn, sensitive to the monetary, fiscal and
trade policies pursued by the countries using a Currency and those of other
countries important to international trade and finance.
EVEN THOUGH CURRENCIES TRADE AROUND THE CLOCK, YOUR NOTES WILL NOT, AND THE
PREVAILING MARKET PRICES FOR YOUR NOTES MAY NOT REFLECT THE UNDERLYING
CURRENCY PRICES AND RATES.
The interbank market for the Dollar and many other Currencies is a global,
around-the-clock market. However, the hours of trading, if any, for the notes
may not reflect the hours during which Currencies are traded. Significant
price and rate movements may take place in the underlying foreign exchange
markets that will not be promptly reflected in the market price, if any, of
the notes.
There is no systematic reporting of last-sale information for Currencies.
Reasonable current bid and offer information is available in certain broker's
offices, in bank foreign currency trading offices and to others who wish to
subscribe for this information, but this information will not necessarily be
reflected in the value of the Dollar relative to other Currencies, as determined
by the Calculation Agent. There is no regulatory requirement that those
quotations be firm or revised on a timely basis. The absence of last-sale
information and the limited availability of quotations to individual investors
may make it difficult for many investors to obtain timely, accurate data about
the state of the underlying foreign exchange markets.
PS-13
In addition, certain relevant information relating to the originating
countries for a Currency may not be as well known or as rapidly or thoroughly
reported in the United States as comparable United States developments.
Prospective purchasers of the notes should be aware of the possible lack of
availability of important information that can affect the value of a Currency
and must be prepared to make special efforts to obtain that information on a
timely basis.
THE BASKET IS NOT A RECOGNIZED MARKET INDEX AND MAY NOT ACCURATELY REFLECT
GLOBAL MARKET PERFORMANCE.
The Basket is not a recognized market index. The Basket was created solely
for purposes of the offering of the notes and will be calculated solely
during the term of the notes. The value of the Basket and the Basket
performance, however, will not be published during the term of the notes. The
Basket does not reflect the performance of major securities or Currency
markets, and may not reflect actual global market performance of any
comparable investment.
GOVERNMENT POLICY CAN ADVERSELY AFFECT SPOT RATES AND AN INVESTMENT IN THE
NOTES.
Spot Rates can either be fixed by sovereign governments or floating. Spot
Rates of most economically developed nations are permitted to float in value
relative to the United States dollar. However, governments sometimes do not
allow their Currencies to float freely in response to economic forces.
Governments use a variety of techniques, such as intervention by their
central banks or imposition of regulatory controls or taxes, to affect the
Spot Rates of their respective Currencies. They may also issue a new Currency
to replace an existing Currency or alter the Spot Rate or relative exchange
characteristics by devaluation or revaluation of a Currency. Thus, a special
risk in purchasing the Notes is that their liquidity, trading value and
amounts payable could be affected by the actions of sovereign governments
which could change or interfere with theretofore freely determined Currency
valuation, fluctuations in response to other market forces and the movement
of Currencies across borders. There will be no adjustment or change in the
terms of the notes in the event that Spot Rates should become fixed, or in
the event of any devaluation or revaluation or imposition or exchange or
other regulatory controls or taxes, or in the event of the issuance of a
replacement Currency or in the event of other developments affecting the
applicable underlying Spot Rate.
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 valuing
the Basket Closing Level or the Basket Return on any Valuation Date and
calculating the Payment at Maturity that we are required to pay you. These
events may include disruptions or suspensions of trading in the markets as a
whole. In addition, if we are acting as the Calculation Agent and, in our
sole discretion, we determine that any of these events prevents us or any of
our affiliates from properly hedging our obligations under the notes, it is
possible that one or more of the Valuation Dates and the Maturity Date will
be postponed and the return or the market value of your notes may be
adversely affected. See "Description of the Notes -- Market Disruption
Events."
ANY GAIN UPON THE SALE OF A NOTE WILL BE ORDINARY INCOME FOR U.S. FEDERAL
INCOME TAX PURPOSES.
If you are subject to U.S. federal income tax, any gain you realize upon
the sale of a note generally will not be eligible for treatment as a capital
gain. Rather, you will generally be required to treat any such gain as
interest income for U.S. federal income tax purposes. You are urged to review
carefully the section entitled "Additional Material United States Federal
Income Tax Considerations" in this product supplement and consult your tax
adviser regarding your particular circumstances.
THE NOTES WILL BE CONTINGENT PAYMENT DEBT INSTRUMENTS FOR U.S. FEDERAL INCOME
TAX PURPOSES.
The notes will be treated as "contingent payment debt instruments" for U.S.
federal income tax purposes. As a result, the notes will be treated as issued
with original issue discount and you will be required to accrue such original
issue discount as interest income for such purposes, regardless of your
method of accounting, and thus may have to report income currently,
regardless of when or if a corresponding amount of cash is received.
We will specify in the pricing supplement our determination of the
"comparable yield" for a note, as well as a "projected payment schedule",
which you will need to determine your taxable income, as well as a "tax
accrual schedule" to help you compute your taxable income. If a note does not
pay fixed interest, the projected payment schedule will typically be a single
Payment at Maturity. If fixed interest is paid, the projected payment
schedule will also include those interest payments.
For example, if on May 1, 2008, we issued a five year note with no fixed
interest payments and a comparable yield that we determined to be 4.0200%,
compounded annually, we would use this yield to provide you with a projected
PS-14
payment schedule, per $1,000 of the notes, that consists of one payment of
$1,217.81 on the Maturity Date and we would also provide you with the
following tax accrual schedule:
Cumulative accrued
Calendar Accrued OID per OID per
Year $1,000 note $1,000 note through
Year-end
--------------------------------- --------------- -------------------
2008 (from 5/1) $26.85 $ 26.85
2009 $41.28 $ 68.13
2010 $42.93 $111.06
2011 $44.62 $155.68
2012 $46.51 $202.19
2013 (to 5/1) $15.62 $217.81
A calendar year taxpayer who purchases and holds a $1,000 note to maturity
would generally include the amount in the center column in his or her taxable
income each year. At maturity, if the actual Supplemental Payment exceeds the
projected Supplemental Payment, the excess would be included in income for
2013, the year of maturity. If the actual Supplemental Payment were less than
the projected Supplemental Payment, the difference generally would be an
ordinary loss in 2013 to the extent of previous income inclusions under the
note, and the balance generally would be a capital loss. In addition, if on a
date that is more than six months prior to the Maturity Date the amount of
the Supplemental Payment becomes fixed (or a minimum amount for such payment
becomes fixed), special rules may apply.
NEITHER THE COMPARABLE YIELD NOR THE PROJECTED PAYMENT SCHEDULE CONSTITUTES
A REPRESENTATION BY US REGARDING THE ACTUAL AMOUNT, IF ANY, THAT WE WILL PAY
ON THE NOTES.
You are urged to review carefully the section entitled "Additional Material
United States Federal Income Tax Considerations" in this product supplement
and consult your tax adviser regarding your particular circumstances.
CURRENCIES AND CURRENCY SPOT RATES
A Currency Spot Rate is the rate at which one Currency can be exchanged for
another Currency. In the United States, the term "Foreign Currency Exchange
Rate" or "Foreign Currency Spot Rate" generally means a rate at which United
States Dollars ("Dollars") can be exchanged for another specified Currency.
As used in this Product Supplement, the term "Spot Rate" means either the
rate at which a Currency can be exchanged for Dollars or the rate at which
Dollars can be exchanged for that Currency.
Specific Spot Rates are typically abbreviated using a three letter Currency
abbreviation for the two Currencies being exchanged. The abbreviation for the
Dollar is "USD". It is important to note the order in which Currency
abbreviations are listed when a specific Spot Rate is described. For example,
if the Spot Rate for the Great Britain's pound ("GBP") is expressed as the
"GBP/USD Spot Rate", this is the Spot Rate that reflects the number of
Dollars that can be exchanged for one British pound. On May 1, 2008, the
GBP/USD Spot Rate was 1.9748. If the Spot Rate is expressed as the "USD/GBP
Spot Rate", this is a different Spot Rate that reflects the number of British
pounds that can be exchanged for one Dollar. On May 1, 2008, the USD/GBP Spot
Rate was 0.5064.
If the abbreviation for the Dollar appears first in the description of the
Spot Rates for the note (e.g., "USD/GBP Spot Rate"), the note can be
described as a "bearish" note and is likely to generate a Supplemental
Payment if, over the term of the note, the value of the other Currency
depreciates relative to the value of the Dollar. Conversely, if the
abbreviation for the Dollar appears second in the description of the Spot
Rate for the note (e.g., "GBP/USD Spot Rate"), the note can be described as a
"bullish" note and is likely to generate a Supplemental Payment if, over the
term of the note, the value of the other Currency appreciates relative to the
value of the Dollar. The pricing supplement for a note will describe whether
a Supplemental Payment is dependent on the appreciation of the Dollar or the
depreciation of the Dollar.
The Spot Rates of most economically developed nations, including the United
States, are "floating," meaning they are permitted to fluctuate in value
relative to the Dollar. These Currencies are sometimes referred to as
"deliverable" Currencies. However, governments of other nations, from time to
time do not allow their currencies to float freely in response to economic
forces. Such governments use a variety of techniques, such as intervention by
their central bank or imposition of regulatory controls or taxes, to affect
the Spot Rates of their respective Currencies. Governments may also issue a
new Currency to replace an existing Currency or alter the Spot Rate or
relative exchange characteristics by devaluation or revaluation of a
Currency. These Currencies are sometimes referred to as "non-deliverable"
Currencies.
PS-15
Purchasing a note linked to "non-deliverable" Currencies can involve greater
risk. The liquidity, trading value and amounts payable with respect to these
Currencies could be affected by the actions of such sovereign governments,
which could change or interfere with theretofore freely determined Currency
valuation, fluctuations in response to other market forces and the movement
of Currencies across borders. There will be no adjustment or change in the
terms of a note if a Spot Rate becomes fixed, or if a replacement Currency is
issued.
ADDITIONAL MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the notes
by initial holders of the notes who purchase the notes at their issue price
(i.e., the first price at which a substantial amount of the notes of a series
are sold (ignoring sales to bond houses, brokers or similar persons or
organizations acting in the capacity of underwriters, placement agents or
wholesalers)) and hold the notes as capital assets within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended (the "Code"). This
discussion does not address all of the tax considerations that may be relevant
to holders in light of their particular circumstances or to holders subject to
special rules under U.S. federal income tax laws, such as certain financial
institutions, banks, insurance companies, regulated investment companies, real
estate investment trusts, dealers in securities, traders in securities,
tax-exempt entities, certain former citizens or residents of the U.S., holders
who hold the notes as part of a "straddle," "hedging," "conversion" or other
integrated transaction, holders who mark their securities to market for U.S.
federal income tax purposes or holders whose functional currency is not the
Dollar. In addition, this discussion does not address the effect of any state,
local or foreign tax laws or any U.S. federal estate, gift or alternative
minimum tax considerations.
This discussion is based on the Code, the Treasury Regulations promulgated
thereunder and administrative and judicial pronouncements, all as in effect
on the date hereof, and all of which are subject to change, possibly with
retroactive effect. The statements set forth in this discussion, to the
extent they summarize matters of U.S. federal income tax law or state legal
conclusions with respect thereto, represent the opinion of Debevoise &
Plimpton LLP. This discussion does not describe the tax consequences of
holding a note that does not provide for the repayment in all circumstances
of 100% of principal, a note with a maturity of one year or less or a note
with an issue price in excess of its principal amount. This discussion also
applies only if the present value, at the time of issuance, of the payment of
principal at maturity plus the present value of any interest payments (all of
which are denominated in Dollars) exceeds the present value, at issuance, of
the projected Supplemental Payment (which is determined with reference to
Currencies). A general summary of any materially different federal income tax
considerations relating to any such note will be included in the pricing
supplement.
For purposes of this discussion, the term "U.S. Holder" means a beneficial
owner of a note that is, for U.S. federal income tax purposes, (i) an
individual citizen or resident of the U.S., (ii) a corporation created or
organized in or under the laws of the U.S. or of any state of the U.S. or the
District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source, or (iv) a trust with
respect to which a court within the U.S. is able to exercise primary
supervision over its administration and one or more United States persons
have the authority to control all of its substantial decisions, or certain
electing trusts that were in existence on August 19, 1996 and were treated as
domestic trusts on that date. The term "Non-U.S. Holder" means a beneficial
owner of a note that is neither a U.S. Holder nor an entity treated as a
partnership for U.S. federal income tax purposes, and U.S. Holders and Non-
U.S. Holders are referred to collectively as "holders."
If an entity treated as a partnership for U.S. federal income tax purposes
holds the notes, the tax treatment of such partnership and its partners will
generally depend upon the status and activities of the partnership and its
partners. A prospective purchaser of a note that is treated as a partnership
for U.S. federal income tax purposes should consult its own tax adviser
regarding the U.S. federal income tax considerations to it and its partners
of the purchase, ownership and disposition of the notes.
PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS AS TO
THE U.S. FEDERAL INCOME AND OTHER TAX CONSIDERATIONS RELATING TO THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES, AS WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
U.S. HOLDERS
A note will be treated as "contingent payment debt instrument" for U.S.
federal income tax purposes, with the consequences described below. Under the
original issue discount ("OID") provisions of the Code and the Treasury
PS-16
Regulations, U.S. Holders will be required to accrue as interest income the
OID on the notes as described below, regardless of their method of
accounting, and thus may have to report income currently, regardless of when
or if a corresponding amount of cash is received.
We are required to determine a "comparable yield" for the notes. The
"comparable yield" is the yield at which we could issue a fixed rate debt
instrument with terms similar to those of the notes (including the level of
subordination, term, timing of payments and general market conditions, but
excluding any adjustments for the riskiness of the contingencies or the
liquidity of the notes), but not less than the applicable federal rate
announced by the IRS. Solely for purposes of determining the amount of
interest income that holders will be required to accrue, we are also required
to construct a "projected payment schedule" in respect of the notes
representing a series of payments the amount and timing of which would
produce a yield to maturity on the notes equal to the comparable yield.
We will provide the comparable yield for a particular offering of notes,
and the related projected payment schedule, in the pricing supplement for
your note.
NEITHER THE COMPARABLE YIELD NOR THE PROJECTED PAYMENT SCHEDULE CONSTITUTES
A REPRESENTATION BY US REGARDING THE ACTUAL AMOUNT, IF ANY, THAT WE WILL PAY
ON THE NOTES.
For U.S. federal income tax purposes, a U.S. Holder is required to use our
determination of the comparable yield and projected payment schedule in
determining interest accruals and adjustments in respect of a note, unless
such U.S. Holder timely discloses and justifies the use of other estimates to
the Internal Revenue Service (the "IRS"). Regardless of a U.S. Holder's
method of accounting, the U.S. Holder will be required to accrue as interest
income OID on the notes at the comparable yield, adjusted as described
immediately below.
In addition to interest accrued based upon the comparable yield as
described above, a U.S. Holder will be required to recognize interest income
equal to the amount of any net positive adjustment (i.e., the excess of
actual payments over projected payments) in respect of a note for a taxable
year. A net negative adjustment (i.e., the excess of projected payments over
actual payments) in respect of a note for a taxable year will first reduce
the amount of interest in respect of the note that a U.S. Holder would
otherwise be required to include in income in the taxable year; and any
excess will give rise to an ordinary loss, but only to the extent that the
amount of all previous interest inclusions under the note exceeds the total
amount of net negative adjustments treated as ordinary loss on the note in
prior taxable years.
Any net negative adjustment in excess of the amounts described above will
be carried forward to offset future interest income in respect of the note or
to reduce the amount realized on a sale, exchange, retirement or other
disposition of the note. A net negative adjustment is not subject to the two
percent floor limitation imposed on miscellaneous itemized deductions under
Section 67 of the Code.
In general, a U.S. Holder of a note will have a tax basis in such note
equal to the cost of such note to such U.S. Holder, increased by the amount
includable in income as interest and reduced by any payments made on such
note. Upon a sale, exchange, retirement or other disposition of a note, a
U.S. Holder generally will recognize a gain or loss equal to the difference
between the amount realized on the sale, exchange, retirement or other
disposition and the U.S. Holder's tax basis in such note. A U.S. Holder
generally must treat any gain as interest income and any loss as ordinary
loss to the extent of previous interest inclusions (reduced by the total
amount of net negative adjustments previously taken into account as ordinary
losses), and the balance as capital loss. Such losses are not subject to the
two percent floor limitation imposed on miscellaneous itemized deductions
under Section 67 of the Code. A U.S. Holder that is an individual is entitled
to preferential treatment for net long-term gains; however, the ability of a
U.S. Holder to offset capital losses against ordinary income is limited.
Special rules apply if any contingent payment on the note becomes fixed
more than six months prior to its scheduled date of payment. For this
purpose, a payment will be treated as fixed if (and when) all remaining
contingencies with respect to it are remote or incidental within the meaning
of the Treasury Regulations. Generally, in this case a U.S. Holder would be
required to make adjustments to account for the difference between the amount
so treated as fixed and the projected payment in a reasonable manner over the
remaining term of the note. A U.S. Holder's tax basis in the note and the
character of any gain or loss on the sale of the note could also be affected.
U.S. Holders should consult their own tax advisers concerning these special
rules.
PLEASE ALSO SEE THE DISCUSSION UNDER "MATERIAL UNITED STATES FEDERAL INCOME
TAX CONSIDERATIONS" "--NON-U.S. HOLDERS"; "--BACKUP WITHHOLDING AND
INFORMATION REPORTING"; AND "--DISCLOSURE REQUIREMENTS FOR CERTAIN HOLDERS
RECOGNIZING SIGNIFICANT LOSSES" STARTING AT PAGE 52 OF THE ACCOMPANYING
PROSPECTUS.
PS-17
PLAN OF DISTRIBUTION
Under the heading "Plan of Distribution" in the accompanying prospectus is
a discussion of the plan of distribution of the notes for sale by the
purchasing agent specified in the pricing supplement, in accordance with the
distribution agreement and the terms agreement to be entered into between us
and the agents named therein.
ERISA CONSIDERATIONS
Under the heading "ERISA Considerations" in the accompanying prospectus is
a discussion of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and how it relates to the notes.
PS-18